ASAL Accounting Coursebook Answers

CAMBRIDGE INTERNATIONAL AS & A LEVEL ACCOUNTING: TEACHER'S RESOURCE
Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded may
be different.
Coursebook answers
Most of the answers are in ‘outline’ form indicating the appropriate points and skills that learners need
to include in their answers. They provide the necessary guidance to allow learners to develop and extend
the points for a fuller answer that contains the relevant skills. In many instances, there may be other valid
approaches to answering the question.
Chapter 1
Accounting in context
Keep a record
Learners’ answers may include:
• Some new business owners may employ an accountant but whether they do this or not, it is still useful
to have some basic understanding of aspects of accounting including the need to keep financial records
and documents of receipts and payments of the business, how to calculate revenue, costs, profit and
taxes due, etc.
• Banks benefit from businesses that are well run and can afford to repay bank loans etc. Banks make
their money out of interest charged, plus other fees and charges. Successful businesses are more likely
to use bank services (and pay for them) while unsuccessful businesses may not be able to repay money
that they owe to a bank.
• Government-backed small business advisors and charities.
Activities
Activity 1.1
Bank account
Debit Credit
$ $
Jun 1 Faris – capital 14 000 Jun 2 Equipment 10 000
Jun 1 Prisha – loan 5 000 Jun 3 Rent payable 700
Jun 6 Sales 1 500 Jun 4 Wages 600
Jun 8 Purchase returns 500 Jun 5 Purchases 2 000
Jun 7 Sales returns 300
Jun 9 Drawings 400
Faris – capital account

Debit Credit
$ $
Jun 1 Bank 14 000
Cambridge International AS & A Level Accounting – Hopkins, Malpas, Randall & Seagrove
1 © Cambridge University Press 2021
Prisha – loan account

Debit Credit
$ $
Jun 1 Bank 5 000
Equipment account
Debit Credit
$ $
Jun 2 Bank 10 000
Rent payable account

Debit Credit
$ $
Jun 3 Bank 700
Wages account
Debit Credit
$ $
Jun 4 Bank 600
Purchases account
Debit Credit
$ $
Jun 5 Bank 2 000
Sales account
Debit Credit
$ $
Jun 6 Bank 1 500
Sales returns account

Debit Credit
$ $
Jun 7 Bank 300
Purchase returns account

Debit Credit
$ $
Jun 8 Bank 500
Drawings account
Debit Credit
$ $
Jun 9 Bank 400
Activity 1.2
Name of account Name of account
to debit to credit
1 Pays rent by cheque Rent payable Bank
2 Postage and stationery paid by cheque Postage and stationery Bank
3 Telephone bill paid from the bank account by Telephone Bank
standing order
4 Heating and lighting bill paid from the bank account Heating and lighting Bank
by standing order
5 Pays wages by cheque Wages Bank
6 Rent received directly into the bank account Bank Rent received
7 Bank interest received into the bank account Bank Interest received
8 Business owner takes money out of the bank account Drawings Bank
for personal expenses
9 Loan received from a friend, Lee Bank Lee – loan
10 Loan repayment made on the loan from Lee Lee – loan Bank
11 Purchases paid by debit card Purchases Bank
12 Sells goods and banks the takings Bank Sales
13 Returns goods to supplier and banks the refund Bank Purchase returns
14 Refunds money to customer by cheque for Sales returns Bank
goods returned
15 Carriage inwards paid by cheque Carriage inwards Bank
16 Carriage outwards paid by cheque Carriage outwards Bank
Practice questions
1 B The bank account receives money from rent receivable resulting in a debit entry. A, C and D are
all payments.
2 C Purchases involve carriage inwards. Bank pays/gives, Carriage inwards receives value.
3 D Withdrawing money is recorded as drawings. Drawings receive, Bank gives/pays.
4 Bank account
Debit Credit
$ $
Jun 1 Mira – capital 20 000 Jun 2 Machinery 12 000
Jun 5 Sales 3 500 Jun 3 Rent payable 1 200
Jun 7 Rent receivable 300 Jun 4 Purchases 4 000
Jun 10 Sales 2 050 Jun 4 Carriage inwards 30
Jun 12 Interest received 10 Jun 6 Heating and lighting 200
Jun 8 Machinery 800
Jun 9 Purchases 2 000
Jun 10 Carriage outwards 50
Jun 11 Sales returns 100
Mira – capital account

Debit Credit
$ $
Jun 1 Bank 20 000
Machinery account
Debit Credit
$ $
Jun 2 Bank 12 000
Jun 8 Bank 800
Rent payable account

Debit Credit
$ $
Jun 3 Bank 1 200
Purchases account
Debit Credit
$ $
Jun 4 Bank 4 000
Jun 9 Bank 2 000
Carriage inwards account

Debit Credit
$ $
Jun 4 Bank 30
Sales account
Debit Credit
$ $
Jun 5 Bank 3 500
Jun 10 Bank 2 050
Heating and lighting account

Debit Credit
$ $
Jun 6 Bank 200
Rent receivable account

Debit Credit
$ $
Jun 7 Bank 300
Carriage outwards account

Debit Credit
$ $
Jun 10 Bank 50

Debit Credit
$ $
Jun 11 Bank 100
Interest received account

Debit Credit
$ $
Jun 12 Bank 10
be different.
Coursebook answers
Chapter 2
Buy now, pay later
• 7-Eleven’s customers are the general public. It is common practice to expect the general public to pay
for items immediately. 7-Eleven does not know all its customers hence does not know if they can be
trusted to pay later. Complex systems would need to be put in place to allow customers to pay later,
which would be time consuming and expensive to operate.
• It is common practice when working with regular, business suppliers. 7-Eleven is likely to work with a
much smaller number of suppliers than customers. It is likely to have regular suppliers with whom it
builds up a relationship and trust.
• Similar reasons to answers given in Q2: it is common practice when working with regular, business
suppliers in many industries. Businesses have regular suppliers and customers with whom it builds up
relationships and trust.
Activities
Activity 2.1
Purchases account
Debit Credit
$ $
1 Oct Tina 2 000
8 Oct Lim 2 400
Sales account
Debit Credit
$ $
2 Oct Ali 300
9 Oct Omar 1 100

Debit Credit
$ $
4 Oct 200
10 Oct 100

Debit Credit
$ $
11 Oct Ali 300
Tina account
Debit Credit
$ $
4 Oct Purchase returns 200 1 Oct Purchases 2 000
10 Oct Purchase returns 100
Lim account
Debit Credit
$ $
8 Oct Purchases 2 400
Ali account
Debit Credit
$ $
2 Oct Sales 300 11 Oct Sales returns 300
Omar account
Debit Credit
$ $
9 Oct Sales 1 100
Activity 2.2
Calculations:
1 Nov purchases from Ting: $5 000 − (0.15 × 5 000) = $4 250
10 Nov purchase returns: $500 − (0.15 × 500) = $425
15 Nov purchases from Wei: $4 800 – (0.2 × 4 800) = $3 840
20 Nov payment to Ting: $4 250 − $425 = $3 825
Purchases account
Debit Credit
$ $
1 Nov Ting 4 250
15 Nov Wei 3 840
Sales account
Debit Credit
$ $
5 Nov Li 1 000

Debit Credit
$ $
10 Nov Ting 425
Bank account
Debit Credit
$ $
25 Nov Li 1 000 20 Nov Ting 3 825
20 Nov Wei 3 840
Ting account
Debit Credit
$ $
10 Nov Purchase returns 425 1 Nov Purchases 4 250
20 Nov Bank 3 825
Wei account
Debit Credit
$ $
20 Nov Bank 3 840 15 Nov Purchases 3 840
Li account
Debit Credit
$ $
5 Nov Sales 1 000 25 Nov Bank 1 000
Activity 2.3
to debit to credit
1 Sells goods to Diya on credit Diya Sales
2 Buys machinery for use by the business on credit from Machinery Joints Ltd
Joints Ltd
3 Purchases goods on credit from Alan. Trade Purchases Alan
discount received
4 Returns goods bought on credit to Alan Alan Purchases returns
5 Goods bought on credit returned by Diya Sales returns Diya
6 Returns goods to a supplier and banks refund Bank Purchases returns
7 Refunds money to a customer by cheque for Sales returns Bank
goods returned
8 Paid Joints Ltd for goods bought Joints Ltd Bank

to debit to credit
9 Received full payment from Diya less cash discount Bank Diya
Discounts Allowed (Diya again)
10 Paid Alan for goods bought less cash discount Alan Bank
(Alan again) Discounts received
Activity 2.4
Possible points for discussion:
• Can Zoe trust the business and be confident that it will pay her later? Alternatively, it might result in a
bad debt.
• Will Zoe potentially lose this customer and sales if she says no to the request?
• Zoe will need to consider payment terms for the new customer and other new bookkeeping records and
procedures if she starts selling on credit.
• Zoe’s cash flow might be adversely affected if she has to pay for the goods she is supplying but wait for
the cash to be received.
Practice questions
1 D This is the only option requiring the business to make a payment, hence a credit entry.
2 A In Jose’s books Maria is a supplier, hence Maria is given a discount allowed and her account
is credited.
3 D In Myra’s books this is a credit sale; only the trade discount of $100 is subtracted; hence debit
Zara $900 and credit sales $900.
4 Calculations:
1 Jan purchases from Yun: $800 − (0.15 × 800) = $680
9 Jan owed to Liyna: $900 − 180 = $720; discount received: 720 × 0.02 = $14.40;
payment: 720 − 14.40 = $705.60
Purchases account
Debit Credit
$ $
1 Jan Yun 680.00
5 Jan Liyna 900.00

Debit Credit
$ $
6 Jan Liyna 180.00
Bank account
Debit Credit
$ $
9 Jan Liyna 705.60
23 Jan Yun 680.00
Yun account
Debit Credit
$ $
23 Jan Bank 680.00 1 Jan Purchases 680.00
Liyna account
Debit Credit
$ $
6 Jan Purchases returns 180.00 5 Jan Purchases 900.00
9 Jan Bank 705.60
9 Jan Discounts received 14.40
Discounts received account

Debit Credit
$ $
9 Jan Liyna 14.40
be different.
Coursebook answers
Chapter 3
Cash or card?
• Low value transactions; where purchases/sales are made in person rather than online etc.
• If customers buy goods using cash then small business owners will want to move money regularly into
bank accounts for security. A business owner may also transfer money out of the bank account to
ensure that they have an appropriate float of low denomination notes and coins for change in the till.
Activities
Activity 3.1
Purchases journal
$
Nov 1 Cora 8 000
Nov 2 Prem 14 000
Nov 5 Cora 12 800
Nov 10 34 800
Purchases returns journal

$
Nov 4 Cora 320
320
Cash book
Debit Credit
Disc Cash Bank Discounts Cash Bank
(received)
$ $ $ $ $ $
Nov 9 Cora 1 024 19 456
Nov 9 Prem 14 000
1 024

Debit Credit
$ $
Nov 10 Cash book 1 024
Purchases account
Debit Credit
$ $
Nov 10 Purchases journal 34 800

Debit Credit
$ $
Nov 10 Purchases returns journal 320
Cora account
Debit Credit
$ $
Nov 4 Purchase returns 320 Nov 1 Purchases 8 000
Nov 9 Bank 19 456 Nov 5 Purchases 12 800
Nov 9 Discounts received 1 024
Prem account
Debit Credit
$ $
Nov 9 Bank 14 000 Nov 2 Purchases 14 000
Activity 3.2
Cash book
Debit Credit
(received)
$ $ $ $ $ $
Apr 1 Sales 1 000 Apr 2 Electricity 100
Apr 3 Sales 800 Apr 4 Bank C 1 400
Apr 4 Cash C 1 400 Apr 5 Stationery 20
Apr 6 Bank C 900 Apr 6 Cash C 900
Apr 7 Purchases 600
Activity 3.3
Journal
Date Details Dr Cr
$ $
Motor vehicle 14 000
Paul 14 000
Narrative: Purchase of vehicle from Paul. See Paul invoice no. 73.
Furniture 6 000
Purchases 6 000
Narrative: Correction of an error. Furniture debited to Purchases account in error.
Equipment 6 000
Furniture 3 000
Stationery 1 000
Capital 10 000
Narrative: Opening entries for new business
B Jones 170
C Jones 170
Narrative: Correction of an error. Credit note no. 34 from B. Jones posted to
C. Jones in error.
Practice questions
1 B $950 × 0.8 = $760; note: only the trade discount is deducted.
2 A $200 × 0.9 = $180; credit purchases affect the purchases a/c debit and the supplier’s a/c credit,
so both will be underadded.
3 Purchases journal
$
May 1 Bhanu 900 [1]
May 7 Adya 720 [2]
May 20 Adya 800 [3]
2 420
Notes:
[1] $1 000 less 10% trade discount is $900 ($1 000 × 0.9)
[2] $720 ($900 × 0.8)
[3] $800 ($1 000 × 0.8)
Sales journal
$
May 4 Krish 1 800 [1]
May 22 Nour 1 600 [2]
3 400
Notes:
[1] $1 800 ($2 000 × 0.9)
[2] $1 600 ($2 000 × 0.8)
Purchases returns journal

$
May 14 Bhanu 100
100
Sales returns journal

$
May 19 Krish 120
May 24 Krish 100
220
The journal
Date Details Dr Cr
$ $
May 8 Equipment 4 000
Sanjay 4 000
Narrative: Purchased equipment for business use. Invoice 156.
Cash book
Debit Credit
(received)
$ $ $ $ $ $
May 31 Krish [1] 79 1 501 May 31 Bhanu [3] 40 760
Nour [2] 80 1 520 Adya [4] 76 1 444
Sanjay 4 000
159 116
Notes:
[1] Krish: Sales − sales returns = $1 800 − $220 = $1 580; Cash discount is $79 ($1 580 × 0.05);
Payment is $1 501 ($1 580 − $79)
[2] Nour: Sales are $1 600; Cash discount is $80 ($1 600 × 0.05); Payment is $1 520 ($1 600 − $80)
[3] Bhanu: Purchases − purchase returns are $800; Cash discount is $40 ($800 × 0.05); Payment is $760
($800 − $40)
[4] Adya: Purchases are $1 520; Cash discount is $76 ($1 520 × 0.05); Payment is $1 444 ($1 520 − $76)
Purchases account
Debit Credit
$ $
May 31 Purchases journal 2 420
Sales account
Debit Credit
$ $
May 31 Sales journal 3 400

Debit Credit
$ $
May 31 Purchases returns journal 100

Debit Credit
$ $
May 31 Sales returns journal 220
Bhanu account
Debit Credit
$ $
May 14 Purchase returns 100 May 1 Purchases 900
May 31 Discounts received 40
May 31 Bank 760
Adya account
Debit Credit
$ $
May 31 Discounts received 76 May 7 Purchases 720
May 31 Bank 1 444 May 20 Purchases 800
Krish account
Debit Credit
$ $
May 4 Sales 1 800 May 19 Sales returns 120
May 24 Sales returns 100
May 31 Discounts allowed 79
May 31 Bank 1 501
Nour account
Debit Credit
$ $
May 22 Sales 1 600 May 31 Discounts allowed 80
May 31 Bank 1 520
Sanjay account
Debit Credit
$ $
May 31 Bank 4 000 May 8 Equipment 4 000
Equipment account
Debit Credit
$ $
May 8 Sanjay 4 000

Debit Credit
$ $
May 31 Cash book 116
Discounts allowed account

Debit Credit
$ $
May 31 Cashbook 159
4 Learners’ answers might include:

• The sales journal is the book of prime entry that records sales made on credit only, while the
general journal records many different transactions that are not recorded in other books of prime
entry, for example the correction of errors.
• Entries in the sales journal are made from copies of invoices sent to customers whereas there can be
different sources of information that give rise to a general journal entry. For example, an error found
in the accounts may have an email from the accounts manager explaining the correction needed.
A narrative explaining the entry is only needed for a journal entry not a sales journal entry.
be different.
Coursebook answers
Chapter 4
Know your customers and what they owe
• Capital, drawings, sales, various expenses, e.g. stationery, and various assets, e.g. computers or
engineering equipment.
• Some accounts may have few or infrequent entries, e.g. capital; others may be of low value, e.g.
stationery, postage.
• Depends on the business and what their product(s) or service(s) is. For example, a business that does
not sell on credit will not have many, if any, trade receivables.
Activities
Activity 4.1
Capital account
Debit Credit
$ $
Oct 7 Balance c/d 8 000 Oct 1 Bank 8 000
Oct 8 Balance b/d 8 000
Purchases account
Debit Credit
$ $
Oct 2 Dev 5 000 Oct 7 Balance c/d 5 000
Rent account
Debit Credit
$ $
Oct 2 Bank 1 000 Oct 7 Balance c/d 1 000
Sales account
Debit Credit
$ $
Oct 7 Balance c/d 3 700 Oct 4 Yash 3 000
Oct 4 Cash 700
3 700 3 700
Yash account
Debit Credit
$ $
Oct 4 Sales 3 000 Oct 7 Balance c/d 3 000
Dev account
Debit Credit
$ $
Oct 6 Bank 4 750 Oct 2 Purchases 5 000
Oct 6 Discount received 250
5 000 5 000
Discount received account

Debit Credit
$ $
Oct 7 Balance c/d 250 Oct 7 Cash book 250
Oct 8 Balance b/d 250
Stationery account
Debit Credit
$ $
Oct 6 Cash 30 Oct 7 Balance c/d 30
Cash book
Debit Credit
Disc Cash Bank Disc Cash Bank
$ $ $ $ $ $
Oct 1 Balances b/d 1 000 2 500 Oct 2 Rent 1 000
Oct 1 Capital 8 000 Oct 5 Bank C 500
Oct 4 Sales 700 Oct 6 Dev 250 4 750
Oct 5 Cash C 500 Oct 6 Stationery 30
Oct 7 Balances c/d 1 170 5 250
–0 1 700 11 000 250 1 700 11 000
Oct 8 Balances b/d 1 170 5 250
Activity 4.2
Accounts with debit balances Accounts with credit balances
Cash Sales
Drawings Capital
Assets, e.g. motor vehicles, furniture Purchases returns
Purchases Income, e.g. rent received
Expenses, e.g. rent, wages Loan
Sales returns Trade payables
Trade receivables Discounts received
Discounts allowed
Bank (unless overdrawn)
Note: this is not an exhaustive list.
Practice questions
1 A The bank account receives money – debit, from the owner as capital – credit.
2 D A, B and C are all optional; however, D must occur for a trial balance to be produced.
3 Discounts allowed account
Debit Credit
$ $
Sep 1 Balance b/d 60 Sep 30 Balance c/d 234
Sep 30 Cash book 174
234 234

Debit Credit
$ $
Sep 30 Balance c/d 130 Sep 1 Balance b/d 110
Sep 30 Cash book 20
130 130
J and P Ltd account

Debit Credit
$ $
Sep 8 Purchases returns 240 Sep 1 Balance b/d 700
Sep 29 Bank 500 Sep 15 Purchases 640
Sep 30 Balance c/d 600
1 340 1 340
A and B Ltd account

Debit Credit
$ $
Sep 7 Sales 450 Sep 30 Balance c/d 1 150
Sep 18 Sales 300
Sep 21 Sales 400
1 150 1 150
George account
Debit Credit
$ $
Sep 12 Sales 2 300 Sep 28 Bank 2 208
Sep 28 Discounts allowed 92
2 300 2 300
Motor vehicles account

Debit Credit
$ $
Sep 4 Bank 12 000 Sep 30 Balance c/d 12 000
12 000 12 000
Cash account
Debit Credit
$ $
Sep 4 Capital 800 Sep 7 Stationery 45
Sep 23 Sales 100 Sep 24 Sales returns 20
Sep 26 Wages 200
Sep 30 Balance c/d 635
900 900
Bank account
Debit Credit
$ $
Sep 1 Balance b/d 3 000 Sep 8 Motor vehicles 5 000
Sep 5 Sales 450 Sep 25 Purchases 200
Sep 9 Purchases returns 50 Sep 25 Sales returns 100
Sep 30 Balance c/d 1 800
5 300 5 300

• Credit customer’s (trade receivables) accounts received value before they give value, i.e. the
customer receives the goods before they pay or return goods. During this time delay there will be a
balance on the accounts.
• The opposite is true for suppliers who give the goods before they are paid for. During this time
delay there will be a balance on the accounts.
• Occasionally a customer might have a credit balance. This can occur if the customer overpays in
error or returns goods after paying for them.
• It is also possible for a supplier to have a debit balance. This might occur in error or if the supplier
is paid for goods that are then returned.
be different.
Coursebook answers
Chapter 5
Anyone for coffee?
• More than one year One year or less
Vans Coffee and other ingredients, e.g. milk, sugar
Fridges Coffee cups, stirrers, etc.
Fittings for the vans
Coffee making equipment
• There are many accounts that might be used such as: motor vehicles, fittings, equipment (e.g. fridge,
coffee maker, computer and software), purchases, individual supplier accounts, sales, wages, insurance,
licences (e.g. to trade), motor vehicle expenses, cash, bank, capital.
• If a business has many suppliers, keeping the records together can help the owner to know or quickly
find out who it owes and how much it owes. Businesses might also want to compare suppliers on price
and terms, e.g. credit limits, cash discounts, payment periods.
Activities
Activity 5.1
Account Asset Liability Revenue or Expense
other income
Delivery vehicles ✓
Rent ✓
Loan ✓
Interest received ✓
Interest paid ✓
Trade receivables ✓
Inventory ✓
Discounts allowed ✓
Postage ✓
Bank ✓ [1]
Rent receivable ✓
Account Asset Liability Revenue or Expense

other income
Trade payables ✓
Computer ✓
Wages ✓
Discounts received ✓
Note:
[1] Bank is an asset unless overdrawn
Activity 5.2
Ledger
Motor vehicle General
Capital General or private
A customer who buys goods on credit Sales
Supplier of office equipment Purchases
Bank Cash book
Wages General
Sales General
Activity 5.3
a The purchases ledger contains the accounts of suppliers from whom the business buys on credit
b The heating and lighting account is stored in the general ledger and is an example of a(n)
expense account.
c Goods bought on credit are recorded in the sales ledger.
d A non-current asset is bought for use in the business for a long period of time.
Practice questions
1 A The money that the owner takes from a business is confidential.
2 B Discounts allowed to customers are an expense, discounts received from suppliers are a reduction
in cost, hence they are treated as income.
• It’s useful because the accounts are grouped into those with similar features, for example
transactions that will be treated in a similar way. This reduces the likelihood of bookkeepers
getting mixed up and making mistakes.
• Wages, rent, stationery, heating and lighting, etc. are all expenses. As such, transactions in any
of these accounts are debit entries and the accounts have debit balances. Again, this reduces the
chance of errors.
• Motor vehicles, equipment, property, etc. are all non-current assets. As such, transactions in any
of these accounts are debit entries and the accounts have debit balances.
• The balances from some types of account are all put in the statement of profit or loss and others
all go into the statement of financial position. This helps owners, lenders and other stakeholders to
see all relevant information in one place.
• Sales and purchases ledgers are useful if a business buys and/or sells on credit as it keeps all of
one type of account together. They improve organisation and provide useful information to
the business.
• Using a cashbook means that it is easier to see the business’s cash and bank balances
simultaneously and make decisions based on the money readily available.
• Separate ledgers can be controlled by different bookkeepers with specialist knowledge, e.g. a sales
ledger accounts assistant and a purchases ledger accounts assistant.
• Private ledgers may be important to some business owners so that their capital, drawings and
profits are not readily available information for others to see.
• The bigger the business and the more accounts a business has, the more helpful it can be to group
similar accounts together to aid organisation and find errors if they occur.
be different.
Coursebook answers
Chapter 6
Big business needs accurate accounting
• Fraud is deception such as pretending a business made more sales than it actually did.
• Incorrect balancing; mixing up debits and credits; forgetting to enter a transaction or one side of the
double entry; entering transactions in the wrong account and/or book of prime entry; entering the
wrong amount.
• Errors will lead to inaccurate reporting of profits, sales and asset values, etc. Financial information is
used to make decisions about the business (e.g. pricing, whether the business can afford to buy a new
asset), so if the figures are wrong the decisions are more likely to be wrong; errors can make it more
difficult to find fraud or stolen money as you may not know that it is missing.
Activities
Activity 6.1
Trial balance extracted from the books at 31 March 2021
Account Debit Credit
balances balances
$ $
Property 100 000
Motor vehicles 18 000
Office furniture 14 000
Computer 2 000
Sales 40 000
Sales returns 600
Purchases 6 000
Purchases returns 500
Motor vehicle expenses 4 000
Advertising 1 600
Office expenses 1 000
Stationery 400
Cash 200
Bank 300
Capital 110 000
Drawings 3 000
150 800 150 800
Activity 6.2
Type of error
1 A customer’s invoice has been omitted from the sales journal. Omission
2 A purchase of goods for $100 has been entered in the purchases Original entry
journal as $1 000.
3 Discount received from Marie has been debited to Maya’s account. Commission
4 Payment of advertising has been debited to the bank account and Complete reversal of entries
credited to the advertising account.
5 Entries were $100 too high (overadded) on both the heating and Compensating errors
lighting account and the sales account.
6 Entries were $50 too high (overadded) on the heating and lighting Compensating errors
account and $50 to low (underadded) on the rent payable account.
7 The purchase of office furniture has been debited to the office Principle
expenses account.
Activity 6.3
Trial balance at 31 December 2021
$ $
Plant and machinery 50 000
Loan from David 10 000
Office equipment 10 000
Wages 9 400
Rent and rates 3 000
Cash 1 200
General expenses 2 200
Sales 97 000
Purchases 60 000
Discounts allowed 460
Discounts received 360
Bank 3 000
Trade receivables 11 000
Trade payables 6 000
Purchases returns 600
Sales returns 800
Rent receivable 1 400
Capital 70 000
Drawings 34 300
185 360 185 360
Practice questions
1 A J. Smith and A. Smith are accounts of the same class.
2 C The debit in the DR a/c is overadded; the credit balance on the DR a/c is underadded.
3 C Increasing sales depends on business decisions affecting the future; the trial balance provides
historical information and has no direct bearing on future sales.
4 Trial balance extracted from the books of Lee at 31 December 2021

Debit Credit
balances balances
$ $
Sales 120 000
Sales returns 1 800
Purchases 76 000
Purchases returns 3 000
Wages and salaries 30 000
Heating and lighting 4 400
Rent payable 8 000
Rent receivable 2 000
Travelling expenses 3 400
Telephone expenses 2 400
Discounts allowed 1 000
Discounts received 700
Plant and machinery 60 000
Cash 400
Bank 3 200
Loan from Ting 10 000
Drawings 6 000
Capital 63 400
214 600 214 600
be different.
Coursebook answers
Chapter 7
Cycle sales
• A sole trader is someone who owns their business and runs it alone.
• A sole trader might want to run their own business because:
• They want to work for themselves rather than have an employer
• They can make their own decisions about how the business is run
• They may wish to run a business that is linked to one of their hobbies or interests
• They may feel that they can earn a larger income than if they were employed by someone else.
• Profit is the amount by which the income earned by the business exceeds the expenses. If the expenses
exceed the income, then a loss has been made.
• ‘Unlimited liability’ means that the business owner is personally responsible for any debts and losses
suffered by the business. If the business does not have enough assets to pay off those debts, then any
assets owned by the sole trader may be taken by those people owed money (this could include houses,
cars and other personal possessions).
Activities
Activity 7.1
Statement of profit or loss for Shola for the year ended 31 March 2020
$ $
Revenue 134 520
Less: Sales returns (3 040)
131 480
Less: Cost of sales
Purchases 57 210
Less: Purchase returns (1 605)
Cost of sales 55 605
Gross profit 75 875
Less: Expenses
Delivery costs 8 645
Total expenses (98 680)
Loss for the year 22 805
Activity 7.2
Statement of profit or loss for Bikram for the year ended 31 March 2020
$ $ $
Revenue 354 987
351 002
Less: Cost of sales
Opening inventory 34 096
Purchases 245 110
Carriage inwards 2 305
Less: Purchase returns (5 620) 241 795
275 891
Less: Closing inventory (29 143) (246 748)
Gross profit 104 254
Discount received 2 067
106 321
Less: Expenses
Carriage outwards 1 234
Heat and light 3 765
Insurance 4 760
Motor expenses 5 269
Profit for the year 7 896
Activity 7.3
Statement of profit or loss for Samarah for the year ended 30 April 2020
$ $ $
Revenue 40 800
Less: Sales returns (320)
40 480
Less: Cost of sales
Purchases 22 600
Carriage inwards 220
Less: Purchase returns (510) 22 310
24 410
Gross profit 19 830
Commission received 2 340
Discount received 50
22 220
Less: Expenses
Carriage outwards 310
Electricity 1 180
Motor expenses 660
Rent and rates 480
Exam-style questions
1 C This is a reduction in the owner’s capital not an expense.
2 A Carriage outwards and discounts allowed are expenses while discounts received are added to
gross profit.
3 B 17 500 − 1 800 + 6 200 – 4 100 = $17 800.
4 Statement of profit or loss for Umi for the year ended 31 March 2020
$ $ $
Revenue 394 201
388 971
Less: Cost of sales
Purchases 253 142
Carriage inwards 4 128
277 954
Less: Drawings (2 775)
135 953
Less: Expenses
Carriage outwards 5 077
Heat and light 7 256
Loss for the year 8 543
be different.
Coursebook answers
Chapter 8
Sunil revisited
• A statement of financial position is a list of a business’s assets, liabilities and capital at a particular
point in time. In simple terms, it gives an idea of the health and value of that business.
• Assets, liabilities and the owner’s capital (it also includes the profit or loss figure from the statement of
profit or loss as this is used to update that capital figure).
• The value of its assets, liabilities and the capital as well as giving the owner an idea of how healthy the
business is at that time.
Activities
Activity 8.1
Capital account
Debit Credit
$ $
Mar 31 Drawings 22 720 Apr 1 Balance b/d 89 350
Mar 31 Balance c/d 93 020 Mar 31 Statement of profit or loss 26 390
115 740 115 740
Apr 1 Balance b/d 93 020
Capital at April 1 2019 89 350

Plus: Profit for the year 26 390
115 740
Less: Drawings (22 720)
93 020
Activity 8.2
Statement of financial position for Raza at 31 May 2020
$ $
Non-current assets:
Premises 197 600
Fixtures and fittings 44 125 241 725
Current assets:
Inventory 51 340
Cash and cash equivalents 3 755 91 180
332 905
Capital at June 1 2019 169 945
Less: Loss for the year (9 145)
160 800
Less: Drawings (33 450) 127 350
Non-current liabilities:
Bank loan (repayable 2024) 144 150
Current liabilities:
Bank loan (repayable 2020) 28 330 61 405
Total capital and liabilities 332 905
Activity 8.3
Statement of financial position for Samarah at 30 April 2020
$ $
Non-current assets:
Motor vehicle 7 400
Fixtures and fittings 2 530 9 930
Current assets:
Inventory 3 760
Cash and cash equivalents 620 7 780
17 710
Capital at May 1 2019 7 980
Add: Profit for the year 9 830
17 810
Less: Drawings (4 000) 13 810
1 B Inventory will be based on whatever is recorded from the counting of the inventory at the end of
the year – this amount will not have changed just because we are aware of a removal. Capital will
be too large because the removal of inventory is drawings and has not been recorded.
2 A Total net assets = 275 000 + 54 000 − 28 000 = 301 000 − loan 67 000 = capital at the end of the
year = $234 000 (the opening capital would have been 234 000 + 42 000 − 31 000 = 245 000)
3 C The others are all correct.
4 Statement of financial position for Xand at 31 December 2019
$ $
Non-current assets:
Equipment 42 190
Fixtures and fittings 29 234
Motor vehicles 17 459 88 883
Current assets:
Inventory 35 331
159 059
Capital at January 1 2019 71 400
122 156
Less: Drawings (51 500) 70 656
be different.
Coursebook answers
Chapter 9
Sunil’s confusion
• The problems that could arise if accountants are allowed to use their judgement when preparing
financial accounts are:
• It is likely that accountants would express different opinions about how to deal with particular
issues (like valuing inventory or other assets). This would mean that if the same information
were provided to a number of accountants, there could be wide differences in profit figures in
the statement of profit or loss and the value of assets and liabilities in the statement of financial
position depending on who had prepared the financial statements.
• Different accountants adopting different approaches might make it difficult to draw meaningful
comparisons between two sets of financial statements.
• People deciding whether to trade with a business or lend it money might find it difficult to
make the right decision if they felt that they could not be sure the financial statements had been
prepared in a standard way.
• The profit figure might be distorted by the choice of accounting method and this would affect the
amount of tax that a business might pay.
• The possible variations in profit or asset valuation might cause the business owner to make
different decisions, which might turn out to be wrong.
• Ethically, producing a profit figure to achieve a particular objective, e.g. getting a loan or paying
less tax, is completely dishonest and a breach of the principle of ‘integrity’. Legally, both situations
represent illegal acts as:
• Obtaining a financial advantage (e.g. getting a bank loan) through mis-stating the profit figure
is fraud (one of the three main headings in the UK Fraud Act of 2006 is ‘Misrepresentation of
Facts’) – this would be true in most countries.
• Reducing profit figures just to pay less tax is simple ‘tax evasion’, which is a criminal offence.
Activities
Activity 9.1
Under ‘money measurement’, the value is $50 million because a football club actually paid that for that
player. Whether you (or the rest of the crowd) think that was a wise purchase is irrelevant!
If the newspapers referred to ‘the $50 million-rated goalkeeper’ or stated that the selling club would
consider offers ‘in the region of $50 million’, this would not be a valid valuation as no money has changed
hands – it is just speculation.
1 A Recording the transaction in this way means that repairs relating to an asset that does not belong
to the business are not affecting the business by being recorded as an expense, which would affect
the profit figure.
2 B This is ensuring that only the $600 of insurance consumed during this year is recorded as
the expense.
3 B The business is recognising the probable loss as soon as it has become a possibility – the asset is
also being valued at a level that reflects what the business owner thinks.
4 D The owner cannot record the sale (and anticipate any profit) until the transaction has
definitely happened.
be different.
Coursebook answers
Chapter 10
A matter of timing?
• Not paying the electricity and telephone bills until next year will make absolutely no difference to
the profit figure. The matching concept requires that profit be based on the expense incurred during a
particular period. Whether the business owner pays the bill or not does not alter the fact that electricity
has been consumed and telephone calls made.
• If the business owner had paid for a full year’s insurance, three months before the end of the year, the
effect would be that the bank balance would be worse than if they had paid monthly. However, the
business owner is wrong in thinking that paying for nine months’ worth of insurance in advance has
damaged their profit figure. The matching concept will demand that the profit be adjusted to reflect the
fact that only three months’ worth of that insurance has been used during the year.
• The only benefit the business owner would get from not paying the bills would be that the business’s
bank balance would be better.
Activities
Activity 10.1
Rent account
Debit Credit
$ $
Various Bank 14 200 1 Apr Balance b/d 3 430
31 Mar Balance c/d 2 180 31 Mar Statement of profit or loss 12 950
16 380 16 380
1 Apr Balance b/d 2 180
Activity 10.2
Motor expenses account
Debit Credit
$ $
1 Jan Balance b/d 1 180 31 Dec Statement of profit or loss 9 540
Various Bank 7 605
31 Dec Balance c/d 755
9 540 9 540
1 Jan Balance b/d 755
Activity 10.3
2
Situation 1: Prepayment of 3 × $720 = $480 (January and February have been paid early)
1
Situation 2: Accrual of 3 × $1 140 = $380 (December has been paid late)
1
Situation 3: Prepayment of 6 × $2 730 = $455 (January has been paid early)
Activity 10.4
Rent received account
Debit Credit
$ $
30 Jun Statement of profit or loss 7 375 1 Jul Balance b/d 840
30 Jun Balance c/d 1 725 Various Bank 8 260
9 100 9 100
1 Jul Balance b/d 1 725
Commission received account

Debit Credit
$ $
1 Jul Balance b/d 315 Various Bank 5 120
30 Jun Statement of profit or loss 5 165 30 Jun Balance c/d 360
5 480 5 480
1 Jul Balance b/d 360
1 C The payment on 13 April covered February, March and April 2020 and so at 31 March, the first
two months were owing.
2 B June was prepaid at 31 May and as $420 covered 3 months, this represents $140
Total paid 1 510 − prepaid expense $140 = $1 370
3 A Accrued expenses are added (to the expenses) and so would reduce profit, which is over-stated.
Current liabilities are under-stated as this one is missing. Accrued expenses have nothing to do
with current assets so these will not change.
4 Statement of profit or loss for Xand for the year ended 30 June 2020
$ $ $
Revenue 320 857
319 148
Less: Cost of sales
Purchases 217 044
233 166
Rent received (8 712 – 1 450) 7 262
115 715
Less: Expenses
Motor expenses 17 437
Office expenses (26 759 – 1 100) 25 659
Wages and salaries (64 122 + 3 280) 67 402
Statement of financial position for Xand at 30 June 2020

$ $
Non-current assets:
Premises 160 000
Office equipment 19 240 204 840
Current assets:
Inventory 20 170
Other receivables 1 100 34 714
239 554
Capital at 1 Jul 2019 117 640
121 103
Less: Drawings (20 000) 101 103
Mortgage (repayable 2027) 118 467
Bank overdraft 4 188
Other payables (3280 (3) + 1450 (4)) 4 730 19 984
be different.
Coursebook answers
Chapter 11
Sunil’s new van
• Sunil’s van would lose large amounts of value because:
• It will wear out, become less efficient and cost more in servicing and repairs.
• The number of km that it has travelled is a major influence on the resale value.
• The manufacturer will eventually bring out a newer model of the van.
• All of these factors will reduce the resale value of the van.
• These factors would certainly apply to most other non-current assets equipment or machinery.
There is also the possibility that the business might stop making a particular product or the market
for that product will change. In this case, specialist equipment might (if it cannot be adapted to
another use) change from being something valuable to being scrap metal – in which case, its value
will drop dramatically.
The same would be true if technology advanced and someone invented equipment or machinery that
produced the product quicker and at a lower cost.
• The matching concept states that any loss or expense is incurred in the same period as it helps to
make a profit. So the loss or expense should be accounted for when calculating profit. In addition, the
decrease in the value of the non-current asset should be shown in the statement of financial position
not least because it would be wrong to overstate the value of the business’s assets.
Activities
Activity 11.1
a Year Machine A ($12 000) Machine B ($16 000) Total
2018 40% × $12 000 = $4 800 (leaves $7 200) No depreciation $4 800
2019 40% × $7 200 = $2 880 (leaves $4 320) 40% × $16 000 = $6 400 (leaves $9 600) $9 280
2020 40% × $4 320 = $1 728 (leaves $2 592) 40% × $9 600 = $3 840 (leaves $5 760) $5 568
Machinery at cost account

Debit Credit
$ $
15 Jan 18 Bank 12 000 31 Dec 18 Balance c/d 12 000
12 000 12 000
1 Jan 19 Balance b/d 12 000

13 Apr 19 Bank 16 000 31 Dec 19 Balance c/d 28 000
28 000 28 000
1 Jan 20 Balance b/d 28 000 31 Dec 20 Balance c/d 28 000

28 000 28 000
Accumulated depreciation on machinery account

Debit Credit
$ $
31 Dec 18 Balance c/d 4 800 31 Dec 18 Statement of profit or loss 4 800
4 800 4 800

14 080 14 080

19 648 19 648
b Statement of financial position at 31 December …

Cost Accumulated Net book
depreciation value
$ $ $
2018: Machinery 16 000 4 800 11 200
2019: Machinery 28 000 14 080 13 920
2020: Machinery 28 000 19 648 8 352
Activity 11.2
Year 1 40% × $18 000 = $7 200 (leaves $10 800)
Year 2 40% × $10 800 = $4 320 (leaves $6 480)
Year 3 40% × $6 480 = $2 592 (leaves $3 888) Total $14 112
Motor vehicles at cost

Debit Credit
$ $
1 Jan Balance b/d (given) 42 900 30 Apr Disposals 18 000
30 Apr Balance c/d 24 900
42 900 42 900
1 May Balance b/d 24 900
Accumulated depreciation on motor vehicles

Debit Credit
$ $
30 Apr Disposals 14 112 1 Jan Balance b/d (given) 27 200
30 Apr Balance c/d 13 088
27 200 27 200
1 May Balance b/d 13 088
Disposals of motor vehicles

Debit Credit
$ $
30 Apr Motor vehicles at cost 18 000 30 Apr Accumulated depreciation 14 112
30 Apr Statement of profit or loss 512 30 Apr Bank (insurance company) 4 400
18 512 18 512
Activity 11.3
Machinery at cost
Debit Credit
$ $
1 Jan Balance b/d (given) 101 300 31 Mar Disposals (1) 31 700
31 Mar Disposals (3) trade-in [1] 5 000
31 Mar Bank (5) [1] 43 000 31 Mar Balance c/d 117 600
149 300 149 300
Note:
[1] The new machinery cost $48 000. The trade-in value of $5 000 left the business with $43 000 to pay.
Accumulated depreciation on machinery

Debit Credit
$ $
31 Mar Disposals (2) 29 500 1 Jan Balance b/d (given) 65 800
31 Mar Balance c/d 36 300
65 800 65 800
Disposals of machinery
Debit Credit
$ $
31 Mar Machinery at cost (1) 31 700 31 Mar Accumulated depreciation (2) 29 500
31 Mar Statement of profit or loss (4) 2 800 31 Mar Equipment at cost (3) 5 000
34 500 34 500
1 B It will enable the business to match the asset’s loss in value to the periods in which that asset
helped to generate revenue.
2 $3 528
Year ended 31 December 2017: 30% × $24 000 = $7 200
3 $4 350
Net book value = 21 500 − 15 400 = $6 100
Proceeds = 6 100 − 1 750 = $4 350
4 a Different types of non-current asset lose value at different rates during their useful life or may give
different amounts of benefit at different stages of their useful life. For example:
• Items like fixtures and fittings may lose value at a constant rate and provide consistent
amounts of benefit – so the straight-line method might be more appropriate.
• Items like motor vehicles lose large amounts of value early in their useful lives – so the
reducing balance method might be most appropriate.
• Some equipment or machinery might be at its most efficient and provide most benefit early in
its useful life – so the reducing balance method might be most appropriate.
Motor vehicles at cost

Debit Credit
$ $
1 Jan Balance b/d 54 000 30 Jun Disposals 16 300
30 Jun Balance c/d 37 700
54 000 54 000
1 Jul Balance b/d 37 700
Provision for depreciation on motor vehicles

Debit Credit
$ $
30 Jun Disposals 14 800 1 Jan Balance b/d 37 200
30 Jun Balance c/d 22 400
37 200 37 200
1 Jan Balance b/d 22 400
Disposals of motor vehicles

Debit Credit
$ $
30 Jun Motor vehicles at cost 16 300 30 Jun Provision for depreciation 14 800
30 Jun Statement of profit or loss 1 000 30 Jun Bank 2 500
17 300 17 300
be different.
Coursebook answers
Chapter 12
Can’t pay or won’t pay
• An irrecoverable debt is a debt where the money owed is not going to be paid. Irrecoverable debts
happen for a number of reasons including:
• The customer has gone out of business and cannot pay.
• The customer is dishonest and will not pay – and may have moved away so that the business
cannot find him or her.
• The customer is disputing the amount or the quality of goods and has decided not to pay.
• Even the most thorough of credit checks will only establish previous problems and while people
who have had problems previously are (statistically) more likely to have future problems, there is no
guarantee that people with a perfect credit history will not encounter problems in the future because of
factors like an economic recession.
• Irrecoverable debts are a problem to a business owner like Ricardo because:
• Ricardo might have been relying on that money to pay his suppliers and other day-to-day
expenses. Failure to pay these will lead to poor relationships with suppliers who may refuse to
supply more goods, staff who refuse to work for no wages and providers of services like electricity
who decide to cut Ricardo off.
• Ricardo may face legal action if he cannot pay what he owes to his payables – this could result in
his business failing.
• Irrecoverable debts are an expense and so will reduce his profit figure.
• Ricardo may have spent lots of time and effort chasing up payment, which prevented him from
being able to concentrate on the day-to-day running of his business.
Activities
Activity 12.1
a Irrecoverable debts
Debit Credit
$ $
31 Dec 17 SLCA 1 630 31 Dec 17 Statement of profit or loss 1 630
Allowance for doubtful debts

Debit Credit
$ $
31 Dec 17 Balance c/d 590 31 Dec 17 Statement of profit or loss 590
590 590
31 Dec 18 Statement of profit or loss 100 1 Jan 18 Balance b/d 590

31 Dec 18 Balance c/d 490
590 590
1 Jan 19 Balance b/d 490

31 Dec 19 Balance c/d 600 31 Dec 19 Statement of profit or loss 110
600 600
1 Jan 20 Balance b/d 600
b Statement of profit or loss expenses

Irrecoverable debts Change in allowance for Total expense
doubtful debts
2017 1 630 + 590 = 2 220
2018 1 575 – 100 = 1 475
2019 2 350 + 110 = 2 460
c Statement of financial position

2017 $ $
Less: Provision for doubtful debts (590) 11 210
2018
2019
Activity 12.2
a At 31 March Total Doubtful Provision
receivables debts Specific General Total
$ $ $ $ $
2018 21 000 2 200 2 200 470 2 670
2019 26 400 4 400 4 400 550 4 950
2020 28 300 3 500 3 500 620 4 120
b Allowance for doubtful debts

Debit Credit
$ $
31 Mar 18 Balance c/d 2 670 31 Mar 18 Statement of profit or loss 2 670
2 670 2 670
1 Apr 18 Balance b/d 2 670

31 Mar 19 Balance c/d 4 950 31 Mar 19 Statement of profit or loss 2 280
4 950 4 950
31 Mar 20 Statement of profit or loss 830 1 Apr 19 Balance b/d 4 950

31 Mar 20 Balance c/d 4 120
4 950 4 950
Activity 12.3
a b
Revised trade receivables figure 29 640 − 840 = $28 800 29 640 − 880 = $28 760
Revised irrecoverable debts figure 1 186 + 840 = $2 026 1 186 + 880 = $2 066
The revised allowance for doubtful 3% × 28 800 = $864 1 200 + (2% × 27 560) = $1 752
debts figure A decrease of $536 An increase of $352
The total irrecoverable debts expense 2 026 − 536 = $1 490 2 066 + 352 = $2 418
a b
$ $ $ $
Trade receivables 28 800 28 760
Allowance for doubtful debts (864) 27 936 (1 752) 27 008
1 C Matching – the loss that won’t be seen until the next accounting year relates to a sale that was
made during this period.
Prudence – the business is accounting for the loss at the earliest opportunity, even though it may
be months before the irrecoverable debt is actually written off.
2 D As the allowance for doubtful debts is deducted from the total trade receivables figure, this will
lead to an increase in the remaining trade receivables figure and so increase the current assets.
3 C The new allowance for doubtful debts = 4% × 25 400 = $1 016, which is an increase of $96 and an
extra expense that reduces profit. However, the recovery of $635 that had previously been written
off is shown as an addition to gross profit, so this will increase the profit for the year.
The overall increase in profit = 635 – 96 = $539
4 Statement of profit or loss for Tait for the year ended 30 June 2020
$ $ $
Revenue 765 430
759 450
Less: Cost of sales
Purchases 428 990
487 550
Less: Expenses
Administration costs 71 685
Business rates (45 630 – 3 510) 42 120
Depreciation on equipment (30% × 44 800) 13 440
Depreciation on office furniture (25% × 45 000) 11 250
Heat and light (13 890 + 4 275) 18 165
Irrecoverable debts (11 420 + 3 600 + 155) 15 175
Statement of financial position for Tait at 30 June 2020

depreciation value
$ $ $
Non-current assets:
Land and buildings 270 000 0 270 000
Equipment 64 000 32 640 31 360
Office furniture 45 000 22 500 22 500
379 000 55 140 323 860
Current assets:
Inventory 78 615
Trade receivables (37 800 – 3 600) 34 200
Allowance for doubtful debts (855) 33 345
439 330
Capital at 1 July 2019 164 865
256 480
Less: Drawings (75 000) 181 480
Mortgage (repayable 2029) 217 500
Other payables 4 275 40 350
be different.
Coursebook answers
Chapter 13
Where’s my money gone?
• There are many reasonable explanations why Jules and his bank have such a different view of the
balance on his bank account including:
• There may be cheques written that are in the cashbook but have not yet cleared – the bank cannot
include these on the statement when it does not yet know about them. The same is true of monies
paid into Jules’ account.
• Someone receiving one of Jules’ cheques may not have paid it in yet or Jules may have recorded
money given to him in the cashbook but he has not yet paid it into his bank account.
• There may be electronic payments and receipts, including standing orders and direct debits, that
are on the statement but Jules has not yet entered them into the cashbook.
• Jules or the bank may have made a mistake – someone may have recorded the wrong figures
for example.
• It is possible that the difference is due to a mistake, but unless that is the case, Jules is right in thinking
he has money but the bank is also right in thinking that he is overdrawn. Under the conditions of
having a bank account, it is Jules’ responsibility to ensure that he doesn’t go overdrawn in the eyes of
the bank.
Unless he has ‘free banking’ (very rare for business customers), Jules cannot complain if the bank
applies interest and bank charges as long as it is in accordance with the agreed scale of charges. Jules
needs to manage his cash flow more carefully.
Activities
Activity 13.1
Debit Credit
Date Details $ Date Details $
1 Jun Balance b/d 9 720 2 Jun Rawson (158) 1 746 ✓
3 Jun Catley 2 531 ✓ 6 Jun Motor expenses (159) 423 ✓
8 Jun Gill 1 475 ✓ 11 Jun Dinnes (160) 2 872 ✓
17 Jun Williams 1 684 ✓ 13 Jun Office expenses (161) 564 ✓
30 Jun Curtis 871 17 Jun Gray (162) 3 523
21 Jun Drawings (163) 2 750 ✓
24 Jun Smith (164) 1 245 ✓
30 Jun Wages and salaries (165) 4 511
7 Jun S/O – Rent and rates 350 ✓
30 Jun Balance c/d 1 730 29 Jun Bank charges and interest 27 ✓
18 011 18 011
1 Jun Balance b/d 1 730
Bank reconciliation statement as at 30 June 2020

$ $
Balance per bank statement 5 433
Add receipts unpresented:
Name: Curtis 871
Total to add 871
Less payments unpresented:
Name: Gray 3 523
Name: Wages and salaries 4 511
Total to subtract (8 034)
Balance as per cash book (1 730)
Activity 13.2
The bank statement balance is:
$2 345 − $1 305 + $3 010 = $4 050 (a credit balance on the bank statement)
Activity 13.3
$ $
Bank (−5 760 − 4 115 + 2 390 − 940) 8 425
Trade payables (11 285 − 940) 10 345
Trade receivables (8 435 − 2 390) 6 045
1 A The cashbook balance indicates money in the account and the bank statement balance also
indicates that there is money in the account.
A debit balance means that the business is dealing with an asset and so there must be money in the
account. However, money in a business bank account means that the business has effectively lent
the bank money. The bank is showing a credit balance meaning that it has a liability – which also
means that there is money in the account.
2 B Omitted items are those on the bank statement that have not been entered in the cashbook – the
business may have forgotten them or, in the case of the bank charges and interest, not been able to
record them until they knew their value (which only happened when the statement was received).
3 A Working on the principle that debits are positive and credits are negative, the corrections are
3 060 − 550 + (860 − 680) − 210 = $2 480
4 $ $
Bank (12 163 − 2 189 + 4 010 + 375 − 1 274 − 87 − 329) 12 669
Bank charges and interest (231 + 87) 318
Rental income (2 150 + 375) 2 525
Trade payables (13 027 − 1 274) 11 753
Trade receivables (16 728 − 4 010 + 329) 13 047
be different.
Coursebook answers
Chapter 14
Guiseppe’s garage
• Giuseppe cannot find his total trade receivables figure easily because he has over 50 balances to total
up. It does also mean that unless he finds a solution, the trial balance is going to be very congested and
long as it will have over 50 balances that just relate to his credit customers.
• Guiseppe is only finding out about errors when he has an embarrassing encounter with a credit
customer because there doesn’t appear to be any way of reconciling or cross-checking his balances –
this chapter will provide a solution.
• If this situation continues, there could be a number of unfortunate consequences including:
• Loss of customers – accusing customers of non-payment or claiming that they owe more than they
do, may lead to disputes and customers taking their business elsewhere.
• Loss of money – some customers may be chased for too little money and may not be honest
enough to point out the problem. Other customers may not be chased for any payment at all if the
error results in sales not being recorded in their account at all – these might not let Guiseppe know,
preferring not to pay at all.
Activities
Activity 14.1
Sales ledger control account
Debit Credit
$ $
Balance b/d 8 133 Sales returns 992
Sales 10 817 Cash book 11 009
Dishonoured cheques 1 314 Discounts allowed 805
Irrecoverable debts 724
Contra (set-off) 650
Balance c/d 945 Balance c/d 7 029
21 209 21 209
Balance b/d 7 029 Balance b/d 945
The balance on the sales ledger control account does agree with the sum of the individual ledgers.
Activity 14.2
Debit Credit
$ $
Sales 21 072 Sales returns 1 485
Dishonoured cheques 1 239 Cash book 23 006
Contra (set-off) 350
Balance c/d 195 Balance c/d 13 624
40 776 40 776
Purchases ledger control account

Debit Credit
$ $
Balance b/d 772 Balance b/d 11 263
Purchases returns 693 Purchases 12 568
Cash book 11 248
Discounts received 1 071
Contra (sales ledger control) 350
Balance c/d 10 301 Balance c/d 604
24 435 24 435
Balance b/d 604 Balance b/d 10 301
Activity 14.3
a $
Total of individual sales ledgers 25 270
Error 1: 3 250 – 2 350 = Subtract (900)
Error 2: 2 × 230 = Subtract (460)
Error 3 Add 85
Error 4 Subtract (620)
Revised total to agree with control account 23 375
b Sales ledger control account

Debit Credit
$ $
Original balance b/d 24 350 Error 6: Cash book 1 000
Error 5 120 Error 7: Irrecoverable debts 95
Revised balance c/d 23 375
24 470 24 470
Revised balance b/d 23 375
c The original allowance for doubtful debts was 6% × 24 350 = $1 461

The new allowance for doubtful debts is 6% × 23 375 = $1 403
$
Original profit figure 12 600
Add: The reduction in allowance for doubtful debts 58
Revised profit figure 12 658
d The trade receivables figure that would appear in the statement of financial position is:
$ $
Less: Allowance for doubtful debts (1 403) 21 972
1 C i and iii reduce the liability and so are debits whereas ii increases the liability and is a credit.
2 B 81 630 − 1 125 − 830 = $79 675
Adjustments to allowances for doubtful debts do not appear in the control account.
3 A Both statements are false.
i Errors of omission will not cause a discrepancy as no entries have been made.
ii While there would be two customers with the wrong balance, the sum totals of all of the sales
ledgers would still add up to the same total.
4 a Learners’ answers may include:
• The business has overpaid a purchase invoice.
• The business has paid in advance or paid a deposit before the delivery of the goods and the
creation of the invoice.
• The business has paid the invoice in full but a problem discovered later has resulted in a credit
note being received.
b Sales ledger control account
Debit Credit
$ $
Balance b/d 15 375 Error 1: Discounts allowed 1 280
Error 3: Cash book 450 Error 4: Irrecoverable debt 425
Error 5: Sales 600
Revised balance c/d 13 520
15 825 15 825
Revised balance b/d 13 520
c $
Original total of individual sales ledgers 14 205
Error Workings add/subtract
2 2 × 220 = subtract (440)
4 subtract (425)
6 865 – 685 = add 180
Revised total to agree with control account 13 520
d There are types of error that can be made that will cause problems but will not cause the
balance on the control account to disagree with the total of the balances on the individual
sales ledgers including:
• Errors of omission: If a transaction is not recorded in the book of prime entry at all, it will
not appear in either the individual sales ledger or the control account – both records will be
wrong but the reconciliation will still agree.
• Errors of original entry: If a transaction is entered incorrectly in a book of prime entry, the
error will be repeated in both the individual ledger and the control account – both records will
be wrong but the reconciliation will still agree.
• Compensating errors: It is possible (and highly unfortunate) that several unrelated errors have
been committed which cancel each other out – a variety of accounts may be incorrect but the
totals will still agree.
be different.
Coursebook answers
Chapter 15
Errors in the trial balance
• There could be several types of error causing this problem:
• When entries have been entered into the ledgers by the client’s employee, it is possible that the
value of debit entries made did not agree with the value of credits for each transaction. Examples
of this might include:
• Only one entry being made – either a debit or a credit
• Two entries being made on the same side
• The debit entry being a different value from the credit entry.
• It is possible that Olivia may have made the same sort of mistakes in entering the journals to
record the end-of-year adjustments although she should always ensure that the journals balance
before she even thinks about making entries in the ledgers themselves.
• There may be balancing-off errors by the client’s employees (or even Olivia herself), which means
that some of the ledger balances may be over-stated or under-stated.
• It is possible that one or more accounts have been missed off the trial balance.
• If Olivia goes ahead and produces a first draft of the financial statements while the trial balance does
not balance, then there is no way that the financial statements will balance either.
It will also represent a waste of time if an investigation into the errors means that a large number of
figures will have to be changed. Olivia should devote her energies to identifying where the errors have
occurred and correcting them – it is hoped that the problems were not the result of Olivia rushing her
work just to impress her manager.
Activities
Activity 15.1
$ $
1: Principle Motor expenses 425
Motor vehicles at cost 425
2: Omission Purchases 2 450
Bank 2 450
3: Original entry Sales ledger control account 540
Discount allowed 540
4: Original entry Purchases ledger control account 900
Bank 900
5: Commission Wages and salaries 1 800
6: Reversal Bank 2 290
Sales ledger control account 2 290
Activity 15.2
a $ $
1 Bank charges 38
Suspense 38
Narrative: Correction of the omission of the bank
charges from the bank charges expense account.
2 Suspense 2 500
Purchases 2 500
Narrative: Correction of an over-cast and therefore
overadded balance on the purchases account.
3 Discounts received 1 700
Suspense 3 400
Narrative: Correction of a discount allowed that had
been incorrectly credited to the discounts received
account.
4 Bank 396
Suspense 396
Narrative: Correction of an incorrect entry
(transposition error) relating to a cash sale in the bank
account.
5 Suspense 6 280
Bank 6 280
Narrative: Correction of an entry relating to the
purchase of machinery that had been incorrectly made
on the debit side of the bank account.
6 Purchases ledger control account 290
Suspense 290
Narrative: Correction of an entry relating to a discount
received that had been incorrectly made on the credit
side of the purchase ledger control account.
b Suspense account
Debit Credit
$ $
2 Purchases 2 500 Balance per trial balance 4 656
5 Bank 6 280 1 Bank charges 38
3 Discounts allowed/received 3 400
4 Bank 396
6 PLCA 290
8 780 8 780
Activity 15.3
a $ $
1 Suspense 680
Bank 680
Narrative: Correction of an entry
relating to the payment of a supplier
that had been incorrectly debited to
the bank account.
2 Discounts allowed 45
Suspense 45
Narrative: Correction of an incorrect
entry (transposition error) of a
discount given to a credit customer in
the discounts allowed account.
3 Bank 970
Sales ledger control account 970
Narrative: Correction of an error of
reversal relating to a bank receipt
from a credit customer.
4 Purchase returns 1 000
Suspense 1 000
Narrative: Correction of the
overstating of the purchase returns
account.
5 Bank 360
Sales ledger control account 360
Narrative: Correction of an error of
original entry (transposition error)
relating to both entries recording
a payment received from a credit
customer.
6 Sales returns 630
Suspense 630
Narrative: Correction of an entry
relating to a sales return that had been
posted to the credit side of the sales
returns account.
7 Motor vehicle 800

Motor expenses 800
Correction of an error of principle
where the purchase of a motor
vehicles had been posted to the motor
expenses account.
8 Suspense 560
Bank 560
Correction of an omission of the
entry in the bank account relating to a
cheque payment made to a supplier.
b Suspense account
Debit Credit
$ $
Balance per trial balance 435 2 Discounts allowed 45
1 Bank 680 4 Purchases returns 1 000
560 6 Sales returns 630
1 675 1 675
c Calculation of corrected profit for the year ended 31 May 2020

Increase Decrease
$ $ $
Profit per draft statement of profit or loss 8 745
Error 1 No effect on profit
Error 2 Increase in discounts allowed 45
Error 4 Decrease in purchase returns 1 000
Error 6 Increase in sales returns 630
Error 7 Decrease in motor expenses 800
800 1 675 (875)
Revised profit for the year 7 870
Activity 15.4
a $ $ $
Current assets:
Inventory at 30 April 2020 9 210
Trade receivables (SLCA) 11 024
Bank 2 196
Cash 437
Prepaid expenses 715 23 582
Trade payables (PLCA) 9 163
Accrued expenses 342 9 505
Net current assets 14 077
b $ $ $
Current assets:
Inventory at 28 April 2020 9 210
Trade receivables (SLCA) 11 024 – 961 + 180 = 10 243
Bank 2 196 + 961 – 425 = 2 732
Cash 437 – 54 = 383
Prepaid expenses 715 23 283
Trade payables (PLCA) –9 163 + 1 342 = 7 821
Accrued expenses –342 – 283 625 8 446
c Calculation of Net current assets at 28 April 2020

Decrease Increase
Dr Cr
$ $ $
Net current assets per draft statement of financial position 14 077
Error 1 Increase in bank account 961

Error 1 Decrease in trade receivables (SLCA) 961
Error 2 Increase in accrued expenses 283
Error 3 Decrease in cash 54
Error 4 Decrease in PLCA 1 342
Error 5 Increase in SLCA 180
Error 6 Decrease in bank 425
2 483 1 723 760
Revised Net current assets 14 837
1 C This is an error of principle and will reduce the profit for the year if not corrected.
The purchases has included $4 000 that should not be there. Purchases increase the cost of sales and
reduce the gross profit and the profit for the year; it will also leave non-current assets underadded.
2 D The bank account has already been debited and so cannot be touched, which means the suspense
account needs to be debited. The sales ledger control account must be credited, which is what
should have been done in the first place.
3 C ii is simply an error of reversal so the correction just involves making the correct entry twice.
iii is an error in the book of prime entry and so the incorrect figure has been entered in both the
purchases returns account and the purchases ledger control account. In both of these cases,
the debit entries were equal in value to the credit entries, so no suspense account is required.
4 a $ $
1 Discounts allowed 160
Suspense 160
2 Suspense 3 000
3 Wages and salaries 300
Office expenses 300
4 Fixtures and fittings 2 100
Purchases 2 100
5 Suspense 1 020
Sales ledger control account 1 020
6 Drawings 900
Bank 900
7 Bank 45
Motor expenses 45
8 Purchases ledger control account 1 320
Suspense 1 320
b Suspense account
Debit Credit
$ $
2 Wages and salaries 3 000 Balance per trial balance 2 540
5 SLCA 1 020 1 Discounts allowed 160
8 PLCA 1 320
4 020 4 020
c Calculation of corrected profit for the year

Increase Decrease
$ $ $
Loss per draft statement of profit or loss (3 295)
Error 1 Increase in discounts allowed 160
Error 2 Decrease in wages and salaries 3 000
Error 4 Decrease in purchases 2 100
Error 7 Decrease in motor expenses 45
5 145 160 4 985
Revised Net current assets 1 690
d Calculation of net current assets

Decrease Increase
$ $ $
Net current assets per draft statement of financial 7 160
position
Error 5 Decrease in SLCA 900
Error 6 Decrease in bank 1 020
Error 7 Increase in bank 45
Error 8 Decrease in PLCA 1 320
1 365 1 920 (555)
Revised profit for the year 6 605
be different.
Coursebook answers
Chapter 16
Filling in the gaps
• Many self-employed small business owners do not maintain full double-entry accounting
systems because:
• they do not have bookkeeping expertise and so are unable to do so
• they are too busy to spend much time on administration.
• This is likely to cost them a lot of money because:
• Accounting firms need to make a profit and it is likely that time is charged out at a rate that
represents several times the hourly wage rate – the more of the work the accountant has to do, the
higher the fee the client will pay.
• If the business owner fails to keep adequate records, the tax office may make a very high
assessment of how much tax the client has to pay. It is also possible that income might be over-
added or expenses under-stated and the profit figure might be higher than it should be, but the
client won’t know or be able to prove this.
• If the client is late in submitting a tax return and paying what they owe, they may face large
interest charges or penalties.
• Small business owners can save money by:
• Learning basic bookkeeping skills and doing a lot of the basic work themselves.
• Hiring a bookkeeper to do much of the work – the more work that can be done, the more money
can be saved.
• There are lots of simple to use accounting packages – some can be linked to smartphones –
which enable the small business owner to do a lot of the work, even basic financial statements
themselves. This means that the role of qualified accountants is limited to the final stages,
which will save money.
Activities
Activity 16.1
Debit Credit
$ $
Opening balance b/d 11 905 Sales returns 7 160
Sales 200 430 Receipts 187 640
Irrecoverable debts 3 280
Closing balance c/d 12 150
212 335 212 335
Closing balance b/d 12 150

Debit Credit
$ $
Purchases returns 4 985 Opening balance b/d 24 110
Payments 67 900 Purchases 69 415
93 525 93 525
Motor expenses control account

Debit Credit
$ $
Opening balance b/d 890 Opening balance b/d 260
Bank 9 015 Expense for the year 9 520
Closing balance c/d 440 Closing balance c/d 565
10 345 10 345
Closing balance b/d 565 Closing balance b/d 440
Activity 16.2
Receipts and payments account
Debit Credit
Cash Bank Cash Bank
$ $ $ $
Opening balance b/d 395 Opening balance b/d 4 210
Sales/takings 12 065 33 080 Paid into bank 7 650
Cash banked 7 650 Suppliers 3 305 11 475
Wages 6 600
Electricity 1 140
Administrative expenses 1 265
Drawings (52 × 400) 20 800
Closing balance c/d 6 345 Closing balance c/d 240
12 460 47 075 12 460 47 075
Closing balance b/d 240 Closing balance b/d 6 345
Activity 16.3
Situation 1:
Cost has increased to 18 600 + 23 400 = $42 000
Opening accumulated depreciation = 18 600 − 5400 = $13 200
Closing accumulated depreciation = 42 000 − 19 700 = $22 300
Depreciation for the year = 22 300 − 13 200 = $9 100
depreciation value
Motor vehicles 42 000 22 300 19 700
Situation 2:
(65 000 − 11 000)
Depreciation on Machine A = = $6 750
8
(36 000 − 4 000) 9
Depreciation on Machine B = × = $4 800
5 12
Total depreciation for the year = $11 550
Cost of machines = 65 000 + 36 000 = $101 000
Accumulated depreciation = 47 100 + 11 550 = $58 650
depreciation value
Motor vehicles 101 000 58 650 42 350
1 C The capital introduced was 12 000 + 5 000 = $17 000 (the other items do not effect capital).
2 C Opening capital = 73 000 − 18 000 = $55 000
Closing capital = 84 000 − 23 000 = $61 000
61 000 = 55 000 + 20 000 + profit – 42 000
61 000 = 33 000 + profit … so profit = 61 000 − 33 000 = $28 000
3 D 37 840 + 246 540 − 4 445 − 6 860 − 41 430 = amount paid = $231 645
Practice question
4 a Artur
Statements of affairs
July 2019
$ $
Bank 2 465
Inventory 11 085
Motor vehicles (Net book value) 13 125
Office furniture (Net book value) 7 440
Prepaid expenses – Insurance 1 375
44 335
Less:
Accrued expenses – rent 700
Trade payables 5 210 (5 910)
Net assets (= capital) 38 425
b Receipts and payments (bank) account

Debit Credit
$ $
1 Jul 19 Balance b/d 2 465 30 Jun 20 Cash purchases 27 145
30 Jun 20 Credit sales 81 230 Drawings 21 305
Trade receivables 50 095 Insurance 2 910
Office furniture 4 800
30 Jun 20 Balance c/d 3 145
133 790 133 790
1 Jul 20 Balance b/d 3 145
c Sales ledger control account

Debit Credit
$ $
1 Jul 19 Balance b/d 8 845 31 Jun 20 Bank 50 095
30 Jun 20 Credit sales [1] 54 020 Sales returns 1 420
62 865 62 865
Note:
[1] + cash sales of 81 230 = total sales $135 250

Debit Credit
$ $
30 Jun 20 Bank 49 165 1 Jul 19 Balance b/d 5 210
Purchases returns 2 400 30 Jun 20 Purchases [1] 52 500
57 710 57 710
Note:
[1] + cash purchases of 27 145 = total purchases $79 645
d Rent and rates

Debit Credit
$ $
31 Mar 20 Bank 8 600 1 Jul 19 Balance b/d 700
31 Mar 20 Balance c/d 750 31 Mar 20 Expenses 8 650
9 350 9 350
1 Apr 20 Balance b/d 750
Insurance
Debit Credit
$ $
1 Apr 19 Balance b/d 1 375 31 Mar 20 Expenses 2 745
31 Mar 20 Bank 2 910 31 Mar 20 Balance c/d 1 540
4 285 4 285
e Depreciation on motor vehicles (whole year) = 20% × 17 500 = 3 500

Depreciation on office furniture (whole year) = 15% × 9600 = 1 440
9
(9 months) = × 15% × 4 800 = 540 1 980
12
Total = $5 480
f Statement of profit or loss for Artur for the year ended 31 June 2020
$ $ $
Revenue 135 250
133 830
Less: Cost of sales
Purchases 79 645
Less: Purchases returns (2 400) 77 245
88 330
Gross profit 58 710
59 925
Less: Expenses
Depreciation 5 480
Insurance 2 745
g Statement of financial position for Artur at 30 June 2020

depreciation value
$ $ $
Non-current assets:
Motor vehicles 17 500 7 875 9 625
Office furniture 14 400 4 140 10 260
31 900 12 015 19 885
Current assets:
Inventory 13 210
Bank 3 145
47 545
Opening capital 38 425

Net profit 24 745
63 170
Drawings (21 305) 41 865
Other payables 750 5 680
47 545
be different.
Coursebook answers
Chapter 17
Finding the missing purchases figure
• The accountant needs a purchases figure – together with opening and closing inventory valuations – in
order to be able to calculate the cost of sales figure. This will in turn enable a gross profit and a profit
or loss for the year to be calculated.
• Even if the accountant manages to produce some financial statements, the lack of evidence to support
these figures might make it difficult to prove the validity of any profit figure should the tax office
question it.
The client said that he charges double what he pays for goods, so this might give some indication of
what the cost of sales might be. But again, how accurate the client’s statement is cannot be verified
because of a lack of evidence.
• The accountant might also be worried about where the client is getting his inventory from – the lack
of receipts/invoices might suggest that the client is buying his inventory from dubious sources (or
even stolen).
Activities
Activity 17.1
Business A Business B
$ $ $ $
Revenue 56 700 Revenue 73 120
Less: Cost of sales: Less: Cost of sales:
Opening inventory 7 200 Opening inventory 8 350
Purchases 35 600 Purchases 40 335
42 800 48 685
Closing inventory (8 300) (34 500) Closing inventory (9 875) (38 810)
Gross profit 22 200 Gross profit 34 310
Business C Business D
$ $ $ $
Revenue 69 135 Revenue 91 505
51 305 45 435
Gross profit 27 050 Gross profit 54 110
Activity 17.2
Business A
$ $ % Fraction
10
Revenue 300 000 100%
10
Less: Cost of sales:
Purchases 204 000
232 000
Closing inventory (22 000)
7
Cost of sales (210 000) 70%
10
3
Gross profit 90 000 30%
10
Business B
$ $ % Fraction
4
Revenue 180 000 100%
4
Purchases 133 000
144 000
3
4
1
4
Business C
$ $ % Fraction
20
Revenue 500 000 100%
20
Purchases 269 000
293 000
11
20
9
20
Activity 17.3
Situation 1:
$ $ %
Revenue 75 600 100%
Purchases 49 560
59 560
Closing inventory (14 200) (45 360) 60%
Situation 2:
$ $ %
Revenue 213 800 160%
Purchases 129 435
143 625
Closing inventory (10 000) (133 625) 100%
Activity 17.4
Item Number Valuation Total Value Comments
per unit $ $
Tables 15 230 3 450 Cost is lower than net realisable value
Chairs 30 70 2 100 Cost is lower than net realisable value of
140 – 20 = $120
Cupboards 12 250 3 000 Net realisable value is lower than cost
Wardrobes (good) 16 175 2 800 Cost is lower than net realisable value
Wardrobes 2 160 320 Net realisable value is lower than cost on
these two items
Total 11 670
1 A Net realisable value = 550 – 90 = $460
2 A 4 400 + 3 100 + 4 300 = $11 800
3 a $ $
Revenue 137 940
Purchases 76 900
102 770
Closing inventory (30 170) (72 600)
Gross profit 65 340
Inventory destroyed = 30 170 – 4 600 = $25 570

b IAS 2 states that inventory should be valued at the ‘lower of cost and net realisable value’.
c With mark-up, the profit made on the goods is expressed as a percentage of the cost of those
goods. However, the margin expresses the profit as a percentage of the selling price.
It is possible to have a mark-up of more than 100%, but it is not possible to have a profit margin
that exceeds 100%.
Practice question
4 a Statement of affairs
1 Dec 2019
$ $
Assets:
Fixtures and fittings 24 000
Inventory 12 540
Bank 2 305
Prepaid expenses 655
46 370
Liabilities:
Accrued expenses 1 050 (10 940)
Capital 35 430
b Trading account ....

$ $
Revenue 347 040
Purchases 215 345
227 885
Closing inventory (10 985) (216 900)
c Sales ledger control account

Debit Credit
$ $
1 Dec 19 Balance b/d 6 870 30 Nov 20 Receipts 342 010
30 Nov 20 Sales 347 040 30 Nov 20 Discounts allowed 1 725
30 Nov 20 Irrecoverable debts 2 070
30 Nov 20 Balance c/d 8 105
353 910 353 910
1 Dec 19 Balance b/d 8 105
Purchase ledger control account

Debit Credit
$ $
30 Nov 20 Payments 213 200 1 Dec 19 Balance b/d 9 890
30 Nov 20 Discounts received 990 30 Nov 20 Purchases 215 345
30 Nov 20 Balance c/f 11 045
225 235 225 235
1 Dec 20 Balance b/d 11 045
d Rent, rates and insurance account

Debit Credit
$ $
1 Dec 19 Balance b/d 655 1 Dec Balance b/f 1 050
30 Nov 20 Bank 10 260 30 Nov Expense 9 575
30 Nov 20 Balance c/d 580 30 Nov Balance c/f 870
11 495 11 495
1 Dec 20 Balance b/d 870 1 Dec 20 Balance b/d 580
e Bank account
Debit Credit
$ $
Opening balance b/d 2 305 Payments to suppliers 213 200
Receipts from trade receivables 342 010 Motor vehicles 13 000
Wages 56 985
Rent, rates and insurance 10 260
Electricity 4 570
Drawings 32 600
344 315 344 315
f Depreciation on fixtures and fittings = 20% × 30 000 = $6 000

Accumulated depreciation on fixtures and fittings = 6 000 + 6 000 = $12 000
6
Depreciation on motor vehicles = × 25% × 13 000 = $1 625
12
Accumulated depreciation on motor vehicles = $1 625 (new item)
g Statement of profit or loss for Toure for the year ended 31 November 2020
$ $ $
Revenue 347 040
Less: Cost of sales
Purchases 215 345
227 885
Discount received 990
131 130
Less: Expenses
Depreciation (6 000 + 1 625) 7 625
Electricity 4 570
Irrecoverable debts (2 070 + 260) 2 330
Rent, rates and insurance 9 575
Statement of financial position for Toure at 30 November 2020

depreciation value
$ $ $
Non-current assets:
Fixtures and fittings 30 000 12 000 18 000
Motor vehicles 13 000 1 625 11 375
43 000 13 625 29 375
Current assets:
Inventory 10 985
Trade receivables (8 105 – 260) 7 845
Bank 13 700
Other receivables 870 33 400
62 775
Opening capital 35 430

Profit for year 48 320
83 750
Drawings (32 600) 51 150
62 775
be different.
Coursebook answers
Chapter 18
Mahendra’s clothing company
• Operating as a sole trader can be hard work and stressful because:
• Responsibility for all decisions rests with the sole trader and, if the business fails, it may well be the
sole trader’s fault and any employees will lose their jobs.
• Sole traders have unlimited liability, which means that if the business fails, they may lose personal
possessions like their home if the assets of the business are insufficient to cover debts and losses.
• Sole traders may work long hours and may feel that they cannot take time off ill or go on holiday
as there will be no-one to run the business.
• Sole traders may have certain skills but are unlikely to be good at everything – how do they cover
the areas where they lack the expertise?
• If sole traders wish to expand, they may find it more difficult to raise finance than other (larger)
types of organisation.
• The benefits of forming a partnership might include:
• The partners may cover a wider range of skills and knowledge.
• Partnerships may be able to raise more finance – indeed, there may be partners who wish to invest
large amounts of money into a business without, necessarily, wanting to be actively involved in the
day-to-day running of that business.
• The partners can share the workload, which makes taking time off more possible.
• The partners can discuss ideas and this may lead to better decision making.
• The partnership may enable access to wider markets – each partner may have contacts that would
not have been available to the other partners.
• There may be cost savings as duplicated activities and expenditure can be eliminated.
• Some of the disadvantages of forming a partnership might include:
• Sole traders have complete control over decision making whereas partners will have to agree on
things. If they have different views on how the business is run, this can lead to conflict.
• The rules about how the partnership will operate and the roles/responsibilities of each partner
need to be agreed – this can be time-consuming and difficult.
• There needs to be complete trust between the partners. Ordinary partnerships still involve
unlimited liability and if, say, one partner runs off with all of the money (leaving debts and losses
behind them), the remaining partners will almost certainly have to make up the deficit – which can
cost them their personal possessions.
Activities
Activity 18.1
a Sasha, Fatima and Roop appropriation account
$ $
Add: Interest on drawings:
Sasha (8% × 14 000) 1 120
Fatima (8% × 10 000) 800
Roop (8% × 18 000) 1 440 3 360
17 360
Less: Appropriation of profit
Interest on capital:
Sasha (5% × 100 000) 5 000
Fatima (5% × 25 000) 1 250
Roop (5% × 65 000) 3 250 (9 500)
7 860
Salaries: Sasha 9 000
Fatima 13 000 (22 000)
Loss for distribution (14 140)
Loss share (50:30:20):
Sasha (50% × 14 140) 7 070
Fatima (30% × 14 140) 4 242
Roop (20% × 14 140) 2 828 14 140

–
b Current accounts
Sasha Fatima Roop Sasha Fatima Roop
$ $ $ $ $ $
Opening balance b/d 1 500 Opening balance b/d 12 500 4 800
Drawings 14 000 10 000 18 000 Interest on capital 5 000 1 250 3 250
Interest on drawings 1 120 800 1 440 Salaries 9 000 13 000
Loss share 7 070 4 242 2 828
Closing balance c/d 4 310 Closing balance c/d 2 292 14 218
26 500 16 542 22 268 26 500 16 542 22 268
Closing balance b/d 2 292 14 218 Closing balance b/d 4 310
c Capital section of the statement of financial position

$
Capital and liabilities: Sasha Fatima Roop
Capital accounts: 100 000 25 000 65 000 190 000
Current accounts: 4 310 (2 292) (14 218) (12 200)
Trade payables ?
Activity 18.2
a Statement of profit or loss for Saami and Tulu for the year ended 31 March 2020
$ $ $
Revenue 226 983
Less: Cost of sales
Purchases 127 601
151 618
Gross profit 98 957
Less: Expenses
Depreciation (motor vehicles 5 754, office equipment 2 648) 8 402
Interest on loan 1 960
Motor expenses (12 828 – 210) 12 618
Office expenses (19 710 + 545) 20 255
b Add: Interest on drawings:
Saami (8% × 19 500) 1 560
Tulu (8% × 23 100) 1 848 3 408
17 460
Saami (10% × 47 400) 4 740
Tulu (10% × 31 800) 3 180 (7 920)
9 540
Salaries: Saami 18 000 (18 000)
Profit available for distribution (8 460)
Profit share:
1
Saami ∙3 × 8 460∙ (2 820)
2
Tulu ∙ × 8 460∙
3
(5 640) 8 460

–
c Current accounts
Saami Tulu Saami Tulu
$ $ $ $
Opening balance b/d Opening balance b/d 7 175 22 970
Interest on drawings 1 560 1 848 Interest on capital 4 740 3 180
Drawings 19 500 23 100 Interest on loan 1 960
Loss share 2 820 5 640 Salaries 18 000
Closing balance c/d 6 035 Closing balance c/d 2 478
29 915 30 588 29 915 30 588
Closing balance b/d 2 478 Closing balance b/d 6 035
d Statement of financial position for Saami and Tulu at 31 March 2020

depreciation value
$ $ $
Non-current assets:
Motor vehicles 27 400 13 974 13 426
Office equipment 13 240 7 944 5 296
40 640 21 918 18 722
Current assets:
Inventory 23 592
Bank 40 172
Total assets 119 511
Capital and liabilities:

Saami Tulu
Capital accounts 47 400 31 800 79 200
Current accounts 6 035 (2 478) 3 557
82 757
Loan – Tulu 28 000
1 B Interest on drawings reduces the partner’s current account and so is a debit. The partnership made
a loss so the profit share is actually a loss share, which again is a debit as it reduces the current
account balance. ii and iii are credits as they increase the current account balance.
2 D Moore gets interest on capital (6% × 80 000) = 4 800. Connery gets 1 200 leaving 30 000.
Moore also gets a quarter of the remaining profit of 30 000 = 7 500. So, 7 500 + 4 800 = $12 300.
3 C Dalton gets a salary of 12 000 plus 40% of the remaining 27 000 = 10 800, giving a total of $22 800.
4 a i Sven and Steve
$ $
Add: Interest on drawings:
Sven (10% × 16 000) 1 600
Steve (10% × 23 000) 2 300 3 900
78 900
Sven (6% × 60 000) 3 600
Steve (6% × 40 000) 2 400 (6 000)
72 900
Salaries:
Sven 20 000 (20 000)
Profit available for distribution 52 900
Profit share (25:75):
Sven (25% × 52 900) (13 225)
Steve (75% × 52 900) (39 675) (52 900)

–
ii Current accounts
Sven Steve Sven Steve
$ $ $ $
Drawings 16 000 23 000 Opening balance b/d 11 000 16 000
Interest on drawings 1 600 2 300 Interest on capital 3 600 2 400
Closing balance c/d 30 225 32 775 Salaries 20 000
Profit share 13 225 39 675
47 825 58 075 47 825 58 075
Closing balance b/d 30 225 32 775
iii Capital section of the statement of financial position

$ $
Capital and liabilities:
Sven Steve
Current accounts 30 225 32 775 63 000
163 000
Trade payables ?
Total capital and liabilities ?
b Sven may do most of the day-to-day work in operating the partnership and wishes to be rewarded
for that work.
Profit shares are also ‘loss shares’ – if Sven opts for a larger profit share and the business makes a
loss, he will have a greater responsibility for making good those losses by losing more of his capital
stake in the business.
c Benefits from being in a partnership include:
• Raising finance – Sven and Steve were able to raise more finance than a sole trader might
have done. They may have had more (joint) savings or other resources that they could bring to
the partnership.
• Skills and expertise – the partners may have had a wider range of skills and expertise together
than they would have had as individuals.
• Coverage for illnesses or holidays – if one of the partners is ill or goes on holiday, the other
partner is able to run the business.
• Problems can be discussed – which may lead to better decisions being made than might have
been the case had they been facing the problems alone.
be different.
Coursebook answers
Chapter 19
Sweets and cakes
part from a love of making cakes and sweets (or something similar), the sort of characteristics that Nushi
A
and Rani might be looking for include:
• ew ideas – this might relate to widening the range of products, e.g. adding savoury snacks or pies to
N
the cakes and sweets.
• Marketing, selling and IT skills – in order to expand, the business needs to identify:
• new markets and new customers
• new ways of selling their products (e.g. going online).
• Money and resources – expansion is going to cost money, particularly if the partnership is going to use
a commercial premises and industrial-scale equipment rather than, say, operating from Nushi’s and
Rani’s kitchens.
• Good organisational/administrative skills – as the business gets bigger, there is likely to be more
paperwork required and the ability to operate an accounting system may be very useful.
Activities
Activity 19.1
a Revaluation account
$000 $000
Property – old value 125 Property – new value 180
Plant and machinery – old value 55 Plant and machinery – new value 41
Inventory – old value 21 Inventory – new value 17
Trade receivables – old value 33 Trade receivables – new value 28
Trade payables – new value 13 Trade payables – old value 17
Profit on revaluation – Ernst 27
Profit on revaluation – Irma 9
283 283
b Capital accounts
Ernst Irma Ernst Irma
$000 $000 $000 $000
Balance c/d 147 84 Balance b/d 120 75
Profit on revaluation 27 9
147 84 147 84
Balance b/d 147 84
c Statement of financial position for Ernst and Irma

$000 $000
Non-current assets:
Property 180
Plant and machinery 41
221
Current assets:
Inventory 17
Trade receivables 28
45
Total assets 266
Capital and liabilities
Ernst Irma
Capital accounts 147 84 231
Current accounts 3 19 22
Trade payables 13
Total capital and liabilities 266
Activity 19.2
a Statements of affairs
1 July 2020
$ $
Inventory 12 435
Land and buildings 114 000
Office equipment 27 600
Prepaid expenses 730
193 315
Less:
Accrued expenses 1 105
Trade payables 5 830 (11 025)
Net assets (= capital) 182 290
b In the opinion of the partners, goodwill is valued at 250 000 − 182 290 = $67 710

(both partners might be credited with $33 855).
Activity 19.3
Goodwill account
$ $
Capital – Alana 12 500 Capital – Alana 10 000
Capital – Harry 12 500 Capital – Harry 10 000
Capital – Roberta 5 000
25 000 25 000
Capital accounts
Alana Harry Roberta Alana Harry Roberta
$ $ $ $ $ $
Goodwill 10 000 10 000 5 000 Balance b/d 25 000 35 000
Balance c/d 27 500 37 500 15 000 Goodwill 12 500 12 500
Bank 20 000
37 500 47 500 20 000 37 500 47 500 20 000
Balance b/d 27 500 37 500 15 000
Activity 19.4
a Goodwill account
$ $
Capital – Donata 45 000 Capital – Eugene 54 000
Capital – Eugene 27 000 Capital – Frederica 36 000
Capital – Frederica 18 000
90 000 90 000
b Capital accounts
Donata Eugene Frederica Donata Eugene Frederica
$ $ $ $ $ $
Goodwill 54 000 36 000 Balance b/d 80 000 50 000 70 000
Current – Donata 4 120 Goodwill 45 000 27 000 18 000
Loan – Donata 120 880
Balance c/d 23 000 52 000
125 000 77 000 88 000 125 000 77 000 88 000
Balance b/d 23 000 52 000
c Current accounts
Donata Eugene Frederica Donata Eugene Frederica
$ $ $ $ $ $
Balance b/d 4 120 Balance b/d 3 875 6 090
Balance c/d 3 875 6 090 Capital – D 4 120
4 120 3 875 6 090 4 120 3 875 6 090
Balance b/d 3 875 6 090
d Loan – Donata
$ $
Capital – Donata 120 880
1 D Assets have increased in value by 15 000 − 3 000 = 12 000 and partner A’s profit share is 60%,
so $7 200 is added to the previous capital balance of $64 000.
1 1
2 B D’s capital is 30 000 + ∙2 × 21 000∙ − ∙3 × 21 000∙ = $33 500
1 1
E’s capital is 40 000 + ∙2 × 21 000∙ − ∙3 × 21 000∙ = $43 500
1
F’s capital is 50 000 − ∙3 × 21 000∙ = $43 000.
1
3 B K receives 3 × 75 000 on creation of goodwill (net credit of $25 000)
1 1
L and M each receives 3 × 75 000 on creation but lose 2 × 75 000 on elimination of goodwill
(net debit of $12 500).
4 a Revaluing the business just before admitting Sakata will mean that Auric and Gert will benefit
from the profit on revaluation, which is fair as they have spent time building the business and are
entitled to the rewards. It will also give everyone, including Sakata, a more accurate idea of what
the business that he is being admitted to is worth.
b i Revaluation account
$000 $000
Property – old value 80 Property – new value 145
Inventory – old value 17 Inventory – new value 14
Trade receivables – old value 21 Trade receivables – new value 19
Profit on revaluation – Auric 30
Profit on revaluation – Gert 30
178 178
ii Capital accounts
Auric Gert Sakata Auric Gert Sakata
$000 $000 $000 $000 $000 $000
Goodwill 20 20 10 Balance b/d 60 70
Balance c/d 95 105 50 Revaluation 30 30
Goodwill 25 25
Bank 60
115 125 60 115 125 60
Balance b/d 95 105 50
c The treatment of goodwill ensures that the partners who have built up the characteristics that
make the business profitable (e.g. good reputation, strong brand identity) are rewarded for their
work. In all probability, these goodwill characteristics are likely to result in greater profits than
might have been made had they not been there. Auric and Gert are reducing their share of this
profit and should be compensated for this – the increase in their capital account balances does
this. Sakata is benefiting from an increased share of the profits (0 to 20%) and has paid $10 000 in
reduced capital account balance for this.
be different.
Coursebook answers
Chapter 20
Accounting for chocolate
• Most of these businesses were involved in the buying and selling of goods. There was very little
evidence of the business doing much to the goods prior to selling them so it was reasonable to include
purchases in the calculation of the cost of sales figure.
• Julia’s company is involved in manufacturing chocolates and so the purchase of the raw materials
is just the starting point of a production process. The company will use factory labour to make the
chocolates and there will be a range of indirect overhead costs that will need to be absorbed into
(included in) the cost of production.
Making chocolate may take time so it may be that not all the cost has been incurred in making
chocolates that are finished at the end of the period, so further adjustments need to be made to ensure
that the figure being used in the statement of profit or loss represents only the ‘cost of completed
goods’, which is probably what Julia saw.
All of this process is carried out using a manufacturing account and it is here that all of the purchases
(of raw materials) that Julia deals with will be recorded.
Activities
Activity 20.1
a Manufacturing account for Romesh for year ended 30 April 2020
$ $
Opening inventory of raw material 49 780
Add: Purchases of raw materials 849 789
Less: Purchase returns of raw materials (3 500) 846 289
Less: Closing inventory of raw materials (48 340)
Cost of raw materials consumed 847 729
Direct labour 750 199
Royalties 19 000
Prime cost 1 616 928
Factory overheads 399 245
Factory manufacturing cost 2 016 173
Add: Opening work-in-progress 23 640
Less: Closing work-in-progress (20 119)
Factory cost of completed goods 2 019 694
b Trading account for Romesh for year ended 30 April 2020

$ $
Revenue 3 241 000
Less: Cost of sales
Opening inventory (finished goods) 40 210
Factory cost of completed goods 2 019 694
2 059 904
Closing inventory (finished goods) (38 461) (2 021 443)
Gross profit 1 219 557
Activity 20.2
a Year ended: Unrealised holding profit in $000
∙ ∙
25
30 April 2018 × 350 = 70
125
∙125∙ × 325 = 65
25
30 April 2019
∙125∙ × 380 = 76
25
30 April 2020
b Provision for unrealised profit account

Debit Credit
$000 $000
30 Apr 18 Balance c/d 70 30 Apr 18 Statement of profit & loss 70
70 70
30 Apr 18 Statement of profit & l 5 1 May 18 Balance b/d 70
30 Apr 19 Balance c/d 65
70 70
1 May 19 Balance b/d 65
30 Apr 20 Balance c/d 76 30 Apr 20 Statement of profit or loss 11
76 76
1 May 20 Balance b/d 76
Activity 20.3
Statement of financial position for Ezekiel at 30 June 2020
depreciation value
$000 $000 $000
Non-current assets:
Premises 760 38 722
Plant and equipment 345 216 129
Office equipment 82 54 28
1 187 308 879
Current assets: Inventory
Raw materials 41
Work-in-progress 23
Completed goods 56
Less: Unrealised profit (16) 40
Less: Allowance for doubtful debts (3) 59
Other receivables (Prepaid expenses) 8 171
1 050
Opening capital 321

Net profit 95
416
Drawings (80) 336
Bank loan 654
Trade payables 36
Bank overdraft 19
Other payables (Accrued expenses) 5 60
1 050
1 D The profit is 1 920 000 − 1 440 000 = 480 000, which is 25% of the transfer selling price (480 000 is
actually a 33.33% mark-up).
2 B Carriage inwards can be charged on purchases of raw materials. Depreciation on warehouse
machinery is a factory overhead.
15
3 A × 736 000 = $96 000
115
The unsold inventory contains unrealised profit = 30% × 96 000 = $28 800
4 a Yateley Limited
Total cost Prime cost Factory Admin
overheads
$ $ $ $
Administration expenses [1] 284 000 – – 284 000
Depreciation – machinery [2] 136 500 – 122 850 13 650
Depreciation – motor vehicles [2] 18 000 – 7 200 10 800
Depreciation – office equipment [2] 9 500 – 1 900 7 600
Heat, light and power 80 000 8 000 52 000 20 000
Maintenance and repairs 70 000 – 49 000 21 000
Rent, rates and insurance [3] 85 000 – 51 000 34 000
Wages and salaries 560 000 252 000 140 000 168 000
Total 1 243 000 260 000 423 950 559 050
Notes:
[1] Admin costs = 270 000 + 14 000 = $284 000
[2] Depreciation:
Machinery 15% × 910 000 = $136 500
Motor vehicles 25% × (128 000 − 56 000) = $18 000
Office equipment 10% × 95 000 = $9 500
[3] Rent, rates and insurance = 90 000 − 5 000 = 85 000
b Year ended: Unrealised holding profit
∙ ∙
15
31 July 2019 × 83 490 = $10 890
115
∙115∙ × 73 255 = $9 555

15
31 July 2020
Provision for unrealised profit account

Debit Credit
$000 $000
31 Jul 20 Statement of profit or loss 1 335 1 Aug 19 Balance b/d 10 890
31 Jul 20 Balance c/d 9 555
10 890 10 890
1 Aug 20 Balance b/d 9 555
c Current assets: Inventory

Raw materials X
Work-in-progress X
Completed goods 73 255
Less: unrealised profit (9 555) 63 700
d Using transfer pricing can be a good thing because it:

• Gives recognition to the factory for its contribution towards helping the business to make a
profit. There may be bonus schemes attached to the level of factory profit that ensures that the
workers are rewarded for good performance.
• The sales people are not getting all of the credit for just selling the goods when the factory has
actually done most of the work in producing products that the customers want.
Using transfer pricing can be a bad thing if:
• It is part of a scheme to avoid/evade paying tax. If the factory is in a different country (where
tax levels are lower) from the administration part of the business, transferring the profit will
reduce the overall amount of tax payable. Ultimately, the business may spend a great deal of
time and money defending itself against legal action taken by unhappy tax authorities!
• It causes resentment between the production part of the business and the selling part of
the business who believe that the factory is ‘stealing’ some of the profit they are making –
particularly if the factory profit is high.
• It breaches accounting concepts and IAS 2 and so requires adjustments to be made in the
financial statements for factory profit to remove unrealised profits from inventory valuations.
This can be time consuming and costly.
be different.
Coursebook answers
Chapter 21
Volkswagen
• People buy shares in (public) limited companies for a number of reasons including:
• Dividends: shareholders will hope to receive income from dividend payments – if the company
makes large profits, it is likely that bigger dividends will be paid and shareholders will receive a
larger return on their investments compared to, say, depositing their money in an interest-bearing
deposit account.
• Capital gain: shareholders may hope that if they buy the shares at a certain value, they will later be
able to sell the shares at a higher price and make a profit (capital gain).
• Voting rights: shareholders have the right to attend and vote at the company’s AGM (annual
general meeting). While small shareholders may not win a vote, they can have their voices heard.
• Discounts: shareholders may be entitled to discounts from the price of the company’s goods,
which is useful if they are a regular user of those goods and services. In the 1980s, Debenhams
(a former chain of department stores in the UK) gave shareholders a 12.5% discount on goods
bought from their stores.
• News announcements like this are not good news for the shareholders because:
• It suggests that Volkswagen’s profits will be reduced or completely eliminated – so the likelihood of
any dividend (and therefore return on an investment) is reduced or removed entirely.
• The lack of dividend may cause lots of shareholders to transfer their funds to an alternative form
of investment. The excess demand will cause the price of the shares to fall, which will result in
shareholders losing money.
• If the company ultimately fails, then the shares will be worthless and the shareholders will lose all
of their money.
• Shareholders may feel unhappy that they have placed their faith in a company that might be
judged to have acted in an unethical and immoral way.
Activities
Activity 21.1
a Patel Limited
Total Cost of sales Admin Distribution
$ $ $ $
Closing inventory of finished goods (41 000) (41 000) – –
Depreciation of office equipment 36 000 5 400 21 600 9 000
Depreciation of motor vehicles 57 000 11 400 34 200 11 400
Depreciation of machinery 124 000 99 200 12 400 12 400
Heat, light and power 26 000 18 200 3 900 3 900
Management/director salaries 414 000 138 000 138 000 138 000
Office expenses 115 000 – 115 000 –
Opening inventory of finished goods 33 000 33 000 – –
Raw materials consumed 356 000 356 000 – –
Rent, rates and insurance 19 000 11 400 3 800 3 800
Wages and salaries – factory workers 207 000 207 000 – –
Wages and salaries – office staff 152 000 – 152 000 –
Wages and salaries – sales people 97 000 – – 97 000
Warehouse costs – raw materials 102 000 102 000 – –
Warehouse costs – finished goods 125 000 – – 125 000
Total 1 822 000 940 600 480 900 400 500
b Statement of profit or loss for Patel Ltd for year ended 31 August 2020
$
Revenue 2 142 000
Cost of sales (940 600)
Gross profit 1 201 400
Distribution costs (400 500)
Administrative expenses (480 900)
Profit from operations 320 000
Other income 19 700
Other expenses (26 100)
Finance costs (33 600)
Profit before tax 280 000
Tax (58 800)
Activity 21.2
Statement of financial position for Patel Limited at 31 August 2020
$
Non-current assets:
Property, plant and equipment 8 457 400
Current assets:
Inventories 41 000
Trade and other receivables (88 500 + 2 000) 90 500
Cash and cash equivalents 112 900
244 400
Total assets 8 701 800
Equity and liabilities:
Equity:
Share capital 7 000 000
Retained earnings (812 400 + 221 200 – 97 600) 936 700
Total equity 7 936 700
Non-current liabilities
Bank loan 480 000
Trade and other payables (209 300 + 17 000) 226 300
Tax payable 58 800
285 100
Total liabilities 765 100
Total liabilities and equity 8 701 800
Activity 21.3
a Debit Credit
$000 $000
Bank 1 850
Share capital (3 000 000 × 0.50) 1 500
Share premium 350
Dividends paid (15 000 000 × 0.03) 450

Bank 450
Property, plant and equipment (1 200 000 – 820 000) 380

Revaluation reserve 380
Retained earnings 300

General reserve 300
b $000 $000
Revised balances:
Property, plant and equipment (2 120 + 380) 2 500
Share capital (6 000 + 1 500) 7 500
Bank (449 + 1 850 – 450) 1 849
Dividends paid (360 + 450) goes to retained earnings 810
Share premium account (610 + 350) 960
General reserves (500 + 300) 800
Retained earnings (1 630 + 873 – 810 – 300) 1 393
Profit for the year (goes to retained earnings) 873
Activity 21.4
Statement of changes in equity for the year ended 30 September 2020
Share Share Revaluation General Retained Total equity
capital premium reserve reserve earnings
$000 $000 $000 $000 $000 $000
Balance at 1 Oct 19 11 000 500 635 1 100 879 14 114
Changes in equity:
Profit for the year 2 258 2 258
Revaluation 2 460 2 460
Dividends (1 300) (1 300)
Transfer to reserves 400 (400) –
Issues of shares 2 000 200 2 200
Balance at 30 Sep 20 13 000 700 3 095 1 500 1 437 19 732
150 000
1 C = 600 000 shares × 0.03 = $18 000
0.25
2 A 42 000 − 24 000 = 18 000 that can be distributed without reducing retained earnings
18 000 − 9 000 debenture interest leaves 9 000 available for dividends
9 000
shares = $0.03 per share
300 000
3 A Statement of changes in equity only shows changes in equity, and debentures are a
long-term liability.
Practice question
4 a Statement of profit or loss for Doominie Limited for year ended 30 September 2020
$000
Revenue 7 143
Cost of sales (435 + 2 168 – 312) (2 291)
Gross profit 4 852
Admin expenses and distribution costs (3 769 + 24) (3 793)
Finance costs (100)
Profit before tax 959
Tax (192)
Profit for the year 767
b Statement of financial position for Doominie Limited at 30 September 2020

$000
Assets
Non-current assets: (4 708 + 4 500) 9 208
Current assets:
Inventories 312
Trade and other receivables 621
933
Total assets 10 141
Equity and liabilities:

Equity:
Share capital 6 000
Share premium 1 110
Retained earnings (1 146 + 767 – 690 – 500) 723
General reserves 500
Total equity 8 333
Bank loan 1 000
1 000
Trade and other payables (307 + 24 + 50) 381
Tax payable 192
Bank (–445 + 4 710 – 4 500) 235
808
Total liabilities 1 808
Total liabilities and equity 10 141
c Statement of changes in equity for the year ended 30 September 2012

Share Retained Share Revaluation General Total
capital earnings premium reserve reserve equity
$000 $000 $000 $000 $000 $000
Balance at 1 Oct 19 2 400 1 146 – – – 3 546
Changes in equity:
Dividends (690) (690)
Transfer to reserves (500) 500 –
Issues of shares 3 600 1 110 4 710
Balance at 30 Sep 20 6 000 723 1 110 – 500 8 333
d Differences between shares and debentures include:

• Shareholders are members (owners) of the company whereas debenture holders are creditors
of the company.
• Share capital is shown in the statement of financial position under ‘equity’ whereas debentures
are shown in the statement of financial position as non-current liabilities unless they are due
for redemption within one year, when they must be shown as current liabilities.
• Shares only attract dividends if there is a profit and the directors decide to pay a dividend,
whereas interest on debentures must be paid even if the company has not made a profit.
• Dividends on shares are an appropriation of profit whereas the interest on the debentures is an
expense that is shown under ‘finance costs’ in the statement of profit or loss.
• Shareholders tend to be the last people to get paid if the company is wound up and are
certainly behind the debenture holders in the queue for payment.
e ‘Going concern’ is the concept that requires the accountant to apply accounting treatments to
items on the assumption that the business will continue for the foreseeable future. Even if there is
doubt over the future of a company, going concern takes priority over ‘prudence’.
One main reason for this is that if assets were to be valued at their residual value or market value,
then this could result in significant downward valuations that might well cause the shareholders
and other investors to panic. Creditors might demand the repayment of loans while shareholders
would look to sell their shares causing the market price to fall … all of which might make the
collapse of the company more likely!
be different.
Coursebook answers
Chapter 22
Curton PLC
• Does she have the money available? These shares will cost $2 500.
• Whether the company has been making profits recently/has paid out a good dividend recently.
• Whether the company expects to make good profits in the future/shareholders expect to receive a good
dividend soon.
• Whether share prices are expected to rise or fall – this will be influenced by expectations of profitability
and future dividends.
• Whether better returns are available on alternative investment opportunities.
• Mia is a risk-taker – would she prefer to invest her money somewhere that is risk-free?
Activities
Activity 22.1
19 732
Asset value per share = = $0.7589 or $0.76 per share
26 000
Activity 22.2
a Detail Dr Cr
$000 $000
Share premium 300
Share capital 400
Narrative: 1-for-2 bonus issue
Statement of financial position

$000
Non-current assets: 1 600
Net current assets 400
2 000
Equity:
Share capital (ordinary shares of $0.50 each) 1 200
General reserve 100
2 000
b Detail Dr Cr
$000 $000
Bank 600
Share capital 400
Share premium 200
Narrative: 1-for-2 rights issue
Statement of financial position

$000
Non-current assets: 1 600
2 600
Equity:
Share capital (ordinary shares of $0.50 each) 1 200
Share premium 500
General reserve 100
2 600
1 A These are non-current liabilities.
2 C After the bonus issue, there are 300 000 new shares giving 900 000 in total.
The 2-for-3 means that 600 000 new shares are issued at $0.80.
Total new shares = 900 000 @ $0.50 each = $450 000
3 C 300 000 shares @ $1.80 = $540 000 (the bonus issue makes no difference)
4 a $ $
Bank 275 000
Share capital (400 000 × $0.50) 200 000
Share premium 75 000
Narrative: a 1-for-4 rights issue of ordinary shares sold at a premium.
b Statement of profit or loss for Compton for year ended 30 November 2020
$000
Revenue 13 915
Cost of sales (1 074 + 8 233 – 987) (8 320)
Gross profit 5 595
Distribution costs (941 + 16) (957)
Administrative expenses (3 345 – 37) (3 308)
Finance costs (54)
Profit before tax 1 276
Tax (288)
Profit for the year from continuing operations 988
c Statement of changes in equity for Compton for year ended 30 November 2020
Share Retained Share Revaluation General Total
capital earnings premium reserve reserve equity
$000 $000 $000 $000 $000 $000
Balance 1 Dec 2019 800 720 400 – 300 2 220
Changes in equity:
Profit for year 988 320 1 308
Dividends (430) (430)
Transfer to reserves (200) 200 –
Issues of shares 200 75 275
Balance 30 Nov 2020 1 000 1 078 475 320 500 3 373
d Answers may include:

• Rights issues involve the company receiving money—which may be the main reason for the
issue—whereas bonus issues do not.
• With a rights issue, shareholders can refuse to take up their allocation of shares, whereas with
a bonus issue they automatically get their extra shares.
• Rights issues can lead to a diluted ownership (reduced proportion of shares owned by
shareholders who do not take up their allocation), but with bonus issues everyone still has the
same proportion of the total shares.
• Bonus issues see the share price fall in proportion to the number of extra shares issued,
whereas rights issues may not have anything like as much effect on share prices.
• Bonus issues involve reductions in reserves whereas rights issues can actually increase them –
particularly if they are issued at a premium.
e Learners’ answers may include:

• Bank loans mean that ownership is acquired when the money is used to make the purchase
whereas a normal lease is just a rental and the ownership may never change hands.
• Responsibility for repairs and maintenance belongs to the company buying the asset
with a loan whereas the leasing agreement may make the lessor responsible for repairs
and maintenance.
• Using a bank loan to acquire the asset creates a liability and only the interest part of the
repayments is recorded in the statement of profit or loss (the rest reduces the liability), whereas
all payments under a normal leasing agreement are treated as expenses.
• Assets acquired using a loan are shown in the statement of financial position and attract
depreciation, whereas assets used under normal leasing agreements are not capitalised.
be different.
Coursebook answers
Chapter 23
Oldcastle Cricket Club
• The main objectives of Oldcastle Cricket Club could include:
• Providing cricketing activity for men, women and children – this could consist of cricket matches,
training and coaching.
• Providing other social activities for its members, their families and friends and members of the
local community.
The main objective of most of Majid’s clients at work is to maximise their profit and this will represent
most of all of the personal income whereas organisations like Oldcastle Cricket Club exist to provide
facilities. The success of the teams in terms of winning championships and getting promoted to a
higher standard of cricket will also be important.
• It is important that the financial affairs of organisations like Oldcastle Cricket Club be kept tightly
under control because although profit is not the main objective, the club needs to generate enough
money to be able to pay the day-to-day running costs and occasionally purchase non-current assets,
e.g. practice nets or bowling machines to replace or improve those that have reached the end of their
useful lives. The club may even want to expand and this might involve building extensions to pavilions
or changing rooms.
• Oldcastle Cricket Club may need to produce full and accurate financial statements because:
• It is a requirement if the club is registered as a charity.
• The members have a right to see whether club officials are looking after the resources of the
club properly.
• The club may be applying for loans or grants – funding bodies or lenders may need to see evidence
of sound financial management before they award any money.
• The fact that information will be in the public domain may act as a deterrent to dishonest club
members who might be tempted to steal from the bar or the club shop (if it has one).
Activities
Activity 23.1
a Subscriptions account
Debit Credit
$ $
1 Jan 19 Balance b/d 1 950 1 Jan 19 Balance b/d 2 275
31 Dec 19 Income and expenditure 58 500 31 Dec 19 Bank 56 550
(180 × 325)
31 Dec 19 Balance c/d 1 300 31 Dec 19 Balance c/d 2 925
61 750 61 750
1 Jan 20 Balance b/d 2 925 1 Jan 20 Balance b/d 1 300
b The closing debit balance is an asset and represents the nine members whose subscriptions were still
outstanding at the year end. The credit balance is a liability and represents four members who had paid
their subscriptions in advance at the year end.
Activity 23.2
a Subscriptions account
Debit Credit
$ $
1 Apr 19 Balance b/d 3 000 1 Apr 19 Balance b/d 1 440
31 Mar 20 Income and expenditure 36 000 31 Mar 20 Receipts and payments 37 320
31 Mar 20 Balance c/d 2 040 31 Mar 20 Balance c/d 2 280
41 040 41 040
1 Apr 20 Balance b/d 2 280 1 Apr 20 Balance b/d 2 040
b Life subscriptions account

Debit Credit
$ $
31 Mar 20 Income and expenditure 2 454 1 Apr 19 Balance b/d 3 870
31 Mar 19 Balance c/d 9 816 31 Mar 20 Bank 8 400
12 270 12 270
c Bar trading account Shop trading account

$ $ $ $
Revenue (takings) 23 195 Revenue (takings) 18 045
Opening inventory 585 Opening inventory 3 105
15 825 25 415
Closing inventory (710) (15 115) Closing inventory (2 875) (22 540)
Bar profit 8 080 Shop loss (4 495)
d Income and expenditure account

$ $ $
Income:
Subscriptions: General 36 000
Life 2 454 38 454
Bar profit (income and expenditure account) 8 080
Dinner dance – ticket sales 5 820
Dinner dance – catering costs (1 960)
Dinner dance – cost of band (545) 3 315
Quiz income 3 215
Quiz cost of prizes (890) 2 325
52 174
Expenditure:
Shop loss 4 495
Heat and light (2 065 + 720) 2 785
Water rates 1 790
Rent, rates and insurance (5 240 – 1 420) 3 820
Depreciation – equipment and furniture 2 740
Depreciation – motor vehicles 1 625
Motor expenses 6 835 (42 690)
Surplus of income over expenditure 9 484
Activity 23.3
a Statement of affairs
$ $
Assets:
Bank 1 830
Bar inventory 585
Equipment and furniture (27 400 – 18 200) 9 200
Motor vehicles (16 100 – 9 600) 6 500
Shop inventory 3 105
Subscription (in arrears) 3 000
24 220
Liabilities:
Life subscriptions 3 870
Subscriptions (in advance) 1 440 (5 310)
Accumulated fund 18 910
b Statement of financial position

depreciation value
$ $ $
Non-current assets:
Equipment and furniture 27 400 20 940 6 460
Motor vehicles 16 100 11 225 4 875
43 500 32 165 11 335
Current assets:
Bar inventory 710
Subscriptions owing 2 280
Bank 22 350
Total assets 40 970
Accumulated fund at 1 April 2019 18 910
Add: Surplus of income over expenditure 9 484
Accumulated fund at 31 March 2020 28 394
Subscriptions prepaid 2 040
Total accumulated fund and liabilities 40 970
Activity 23.4
a Statement of affairs
$ $
Assets:
Bank 3 480
Bar inventory 1 245
Equipment (24 170 – 13 255) 10 915
Motor vehicles (17 600 – 12 200) 5 400
Premises 130 000
Prepaid expenses 1 125
Subscription (in arrears) 1 050
155 280
Liabilities:
Accrued expenses 325
Subscriptions (in advance) 760 (6 205)
Accumulated fund 149 075
b Receipts and payments account

Debit Credit
$ $
Opening balance b/d 3 480 Administration costs 16 430
Bar takings 13 295 Bar purchases 8 735
Club lottery income 3 080 Club lottery prizes 1 415
Events: ticket sales 7 230 Events: costs 8 160
General subscriptions 18 210 Heat, light and insurance 6 595
Life subscriptions 4 930 Purchase of equipment 4 500
Shop takings 11 010 Shop purchases 9 485
61 235 61 235
Closing Balance b/d 5 915
c General subscriptions account

Debit Credit
$ $
1 Apr 19 Balance b/d 1 050 1 Apr 19 Balance b/d 760
31 Mar 20 Income and expenditure 18 620 31 Mar 20 Receipts and payments 18 210
31 Mar 20 Balance c/d 940 31 Mar 20 Balance c/d 1 640
20 610 20 610
Life subscriptions account

Debit Credit
$ $
31 Mar 20 Income and expenditure 2 010 1 Apr 19 Balance b/d 5 120
31 Mar 19 Balance c/d 8 040 31 Mar 20 Receipts and payments 4 930
10 050 10 050
d Bar Shop
$ $ $ $
Revenue (takings) 13 295 Revenue (takings) 11 010
9 980 11 550
Bar profit 5 075 Shop profit 1 750
e Heat, light and insurance account

Debit Credit
$ $
31 Mar 20 Receipts and payments 6 595 31 Mar 20 Income and expenditure 7 035
31 Mar 20 Balance c/d 510 31 Mar 20 Balance c/d 870
8 230 8 230
1 Apr 20 Balance b/d 870 1 Apr 20 Balance b/d 510
f Income and expenditure account

$ $ $
Income:
Life 2 010 20 630
Bar profit (income and expenditure account) 5 075
Shop profit 1 750
Club lottery – ticket sales 3 080
Club lottery – cost of prizes (1 415) 1 665
29 120
Expenditure:
Administration costs 16 430
Depreciation – equipment[1] 5 734
Depreciation – motor vehicles[2] 1 620
Events: costs 8 160
Events: ticket sales (7 230) 930
Heat, light and insurance 7 035 (31 749)
Surplus of expenditure over income 2 629
Notes:
[1] Depreciation: equipment = 20% × (24 170 + 4 500) = $5 734
[2] Motor vehicles = 30% × (17 600 − 12 200) = $1 620
g Statement of financial position

depreciation value
$ $ $
Non-current assets:
Premises 130 000 – 130 000
Equipment 28 670 18 989 9 681
Motor vehicles 17 600 13 820 3 780
176 270 32 809 143 461
Current assets:
Bar inventory 1 760
Subscriptions owing 1 640
Bank 5 915
Accumulated fund at 1 April 2019 149 075
Less: Surplus of expenditure over income (2 629)
Accumulated fund at 31 March 2020 146 446
Subscriptions prepaid 940
Total accumulated fund and liabilities 155 936
1 B Members of a club are not allowed to draw out money for their own use.
2 B The club owes money for an expense that it has already had the benefit of
The club has received money that it has yet to earn – the member is ‘owed their money back’ until
they have had the membership that they have paid for.
3 C $ $
Sales of equipment to members 3 650
Opening inventory of equipment 680
Purchases of equipment 2 430
Closing inventory of equipment (540) (2 570)
Profit on equipment sales 1 080
Income = 12 600 + 1 080 = 13 680

Expenses 5 200
Surplus of income 8 480
4 a Subscriptions account
Debit Credit
$ $
1 Jun 19 Balance b/d 240 1 Jun 19 Balance b/d 320
31 May 20 Income and expenditure 4 320 31 May 20 Receipts and payments 4 360
31 May 20 Balance c/d 440 31 May 20 Irrecoverable debts 40
31 May 20 Balance c/d 280
5 000 5 000
1 Jun 20 Balance b/d 280 1 Apr 20 Balance b/d 440
b Snack bar account

$ $
Revenue (takings) 9 211
Opening inventory 327
Purchases 4 298
4 625
Closing inventory (285) (4 340)
Gross profit 4 871
Wages (2 250)
c Income and expenditure account

$ $ $
Income:
Snack bar profit (income and expenditure account) 2 621
Presentation night – ticket sales 3 215
Presentation night – costs (1 963) 1 252
Raffles – ticket sales 2 039
Raffles – cost of prizes (1 321) 718
8 911
Expenditure:
Administrative expenses 1 842
Depreciation – equipment [1] 1 070
Loss on disposal of equipment 220
Travelling expenses 1 329 (4 461)
Surplus of expenditure over income 4 450
Notes:
[1] Depreciation
$
Opening net book value 7 420
Purchases 2 210
Less: Disposal (370)
9 260
Less: Closing net book value (8 190)
Depreciation for the year 1 070
[2] Depreciation
$
Net book value of equipment disposal 370
Proceeds from disposal (150)
Loss on disposal of equipment 220
d Differences include:
• Not-for-profit organisations refer to a ‘surplus of income over expenditure’ rather than the
‘profit for the year’ for the trading business.
• Not-for-profit organisations have an ‘accumulated fund’ rather than ‘owner’s capital’ for the
trading business.
• The owner of a trading business takes drawings from her or his business whereas members of
a club do not tend to remove money for their own use.
e If a life membership scheme is introduced, the club will instantly receive potentially large sums
from those members who can afford it and this might be useful if the club is looking to make a
major purchase or do building work on a clubhouse.
However, the club will not receive any further subscriptions from these life members and so, long
term, may lose out on future income. New members would be needed to keep the club going.
Pricing a life membership may be difficult. If it is set too high, no-one will take up this option.
If it is too low, there will be lots of takers, which will not only harm future income but may upset
those who are only willing or able to pay yearly.
Unless there is an urgent need for funds that can be raised in no other way, the club should not
consider introducing a life membership.
be different.
Coursebook answers
Chapter 24
Roger’s engineering company
• Cash flow refers to the physical inflows and outflows of money, whereas profitability refers to the difference
between the revenue earned and expenses incurred and is subject to the accruals or matching concept.
• A number of items will appear or be treated differently in the statement of profit or loss and the bank
account, including:
Item Profitability Bank/Cash flow

Sales/purchases Recorded when goods transferred or Recorded when money received or paid
invoices issued
Expenses Amount incurred for the period The amount of money changing hands
Drawings Not included – no effect on profit Will be an outflow of cash
Dividends Not included – no effect on profit Will be an outflow of cash
Loan repayments Interest part is an expense Whole repayment is recorded
Taking out of loan No effect on profitability Will increase bank balance
Non-current assets Only depreciation is shown as Amount paid for asset is shown
an expense (depreciation is not a movement of cash)
Irrecoverable debts An expense No effect – not a movement of cash
Activities
Activity 24.1
a Reconciliation of profit from operations to net cash from operating
activities for Starman Ltd for the year ended 30 June 2020
$
Net cash inflow from operating activities:
Depreciation for year 18 300
Adjustment in respect of inventories 7 200
Adjustment in respect of trade receivables 2 000
Adjustment in respect of trade payables 6 000
Cash generated by operations 52 500
Interest paid (4 000)
Tax paid (3 200)
Net cash from operating activities 45 300
b Statement of cash flows for Starman Ltd for the year ended 30 June 2020
$ $
Investing activities:
Purchases of property, plant and equipment (52 000)
Net cash used in investing activities (52 000)
Financing activities:
Proceeds of share issue 15 000
Taking out of bank loans 15 000
Dividends paid (11 000)
Net cash from financing activities 19 000
Net increase in cash and cash equivalents 12 300
Cash and cash equivalents at the start of the year (6 200)
Cash and cash equivalents at the end of the year 6 100
Activity 24.2
Original Accumulated Net book Profit or Proceeds
cost depreciation value loss
$ $ $ $ $
Equipment 30 650 23 490 7 160 Profit 3 500 10 660
Machinery 54 000 41 800 12 200 Loss 2 450 9 750
Motor vehicles 28 100 22 450 5 650 Profit 1 190 6 840
Office furniture 11 200 8 330 2 870 Loss 2 120 750
Activity 24.3
a $000
Opening balance (net book value) 1 323
+ Purchases 519
1 842 = 1 701 + 314 + 127 – 300
+ Revaluations 300
– Disposals (net book value) (127) = 396 – 269
– Depreciation expense (314)
= Closing balance (net book value) 1 701
b Proceeds = 127 000 − 42 000 = $85 000
1 A Working backwards, we have to do the opposite of what we would have done in preparing this
section of the statement of cash flows:
40 000 − 18 000 − 7 000 − 2 000 + 6 000 = $19 000
If we had been given the profit from operations of $19 000, we would have had:
19 000 + 18 000 + 7 000 + 2 000 − 6 000 = $40 000
2 D The depreciation figures are completely irrelevant here – it is all about the cost, which has
increased by $25 000. However, $14 000 cost was removed by the disposal so the answer is:
(70 000 – 45 000) + 14 000 = $39 000
3 B Share issue raised 100 000 (400 000 − 300 000) plus the premium 30 000 (80 000 − 50 000) = 130 000
Debentures redeemed 20 000 (50 000 − 30 000)
Dividends paid = 15 000
So cash inflow will be 130 000 − 20 000 − 15 000 = $95 000
4 a Net cash inflow from operating activities:

Depreciation for year [2] 29 400
Gain on disposals of property plant and equipment [1] (900)
Adjustment in respect of inventories (6 300)
Adjustment in respect of trade receivables 7 300
Adjustment in respect of trade payables 100
Cash generated by operations 56 300
Interest paid (2 000)
Tax paid [3] (11 000)
b Statement of cash flows for Kanu Ltd for the year ended 30 April 2020
$ $
Investing activities:
Purchases of property, plant and equipment [4] (64 000)
Proceeds on disposal of property, plant and equipment 7 900
Net cash used in investing activities (56 100)
Financing activities:
Proceeds of share issue 30 000
Dividends paid (8 000)
Net cash from financing activities 22 000
Net increase in cash and cash equivalents 9 200
Cash and cash equivalents at the start of the year 1 500
Cash and cash equivalents at the end of the year 10 700
Notes:
[1] Disposals: Motor Equipment [2] Depreciation: Motor Equipment
vehicles vehicles
$ $ $ $
Cost 18 000 9 000 Opening balance 27 600 17 900
Accumulated depn (13 200) (6 800) Add depreciation 19 100 10 300
Net book value 4 800 2 200 46 700 28 200
Proceeds 6 400 1 500 Less disposals (13 200) (6 800)
Profit or loss on $1 600 $700 Closing balance 33 500 21 400
disposal Profit Loss
[3] Tax: Tax [4] Purchases: Motor vehicles Equipment

$ $ $
Opening liability 11 000 Opening Balance 52 000 66 000
Add amount for year 13 000 Plus Purchases 45 000 19 000
Closing liability (13 000) 97 000 85 000
Amount paid 11 000 Less Disposals (18 000) (9 000)
Closing Balance 79 000 76 000
c Answers may include:

• Limited companies like Kanu Limited are required by law to produce one as part of their
financial statements.
• There is a difference between liquidity and profitability – not least because profitability
is calculated using the accruals concept and so large items like capital expenditure (and
depreciation) are treated very differently. It is possible for a company to make a large profit
but have very bad cash flow.
• Shareholders may be confused by the apparent contradiction (e.g. good profit, poor cash flow)
and the statement of cash flows will explain where the money has gone.
• The statement of cash flows accounts for (large) non-profit-related items like loans and the
buying and selling of non-current assets, which may have a major impact on the cash and cash
equivalents while not have much, if any, impact on profit.
• Being able to pay day-to-day bills and settle debts when due is essential to a business’s survival
(more so than profit) and the statement of cash flows will enable managers to identify reasons
why cash flow has suffered and be able to take appropriate action.
be different.
Coursebook answers
Chapter 25
Discom PLC
• Directors are needed to run the company on a day-to-day basis. Discom PLC is likely to have many
thousands of shareholders and it would be impossible to get them all together regularly and quickly
enough to enable effective decisions to be made. Getting an agreement with so many people involved
would also be difficult.
• Directors are responsible for the effective management of the business, which will include:
• Making day-to-day decisions to ensure that the resources owned by the company (and therefore its
shareholders) are being managed effectively.
• Ensuring that the company complies with relevant legislation.
• Ensuring the financial accounts are prepared in accordance with legislation and
accounting regulations.
• Deciding on the amount of dividends that can be paid to the shareholders.
• The EGM would have been called for by the company’s shareholders – often the constitution of the
company will state that shareholders representing a specified percentage of total share capital are
needed to call the meeting.
• Shareholders may call for the dismissal of directors for a number of reasons including:
• Unreasonable lack of dividends being paid.
• Incompetence or misconduct, e.g. fraud or illegal behaviour.
• The company being led in unethical or immoral directions – major decisions might not meet with
the approval of the shareholders.
• Directors might be acting beyond their authority as set out in the company’s constitution (acting
‘ultra vires’ or beyond their powers is the legal term).
• Shareholders may suspect financial mismanagement or fraud and want the auditors to investigate – it
may be that they want the problems to be identified or sorted out so that the new board of directors
knows what it is inheriting!
Activities
Activity 25.1
a An internal auditor is an employee of the company, responsible to the directors of the company for
the performance of their day-to-day duties. Their work will involve looking at the financial systems in
place in the company, ensuring the proper day-to-day management of the company finances. They may
also have some involvement in the preparation of the financial statements of the company on behalf of
the directors.
External auditors are not employees of the company and the process of auditing is separate from the
preparation of the financial statements. They are appointed by the shareholders to act on their behalf.
Their role is to consider whether the financial statements prepared by the directors and presented to
the ordinary shareholders are free from any material misstatement or error and to report their findings.
b A true and fair view means that the financial statements are free from any material misstatement and
error and faithfully represent the financial performance of the business for the period under review.
c The auditors must consider the materiality of the proposed adjustments in deciding what action to
take. If adjustments are considered to be material (significant) and necessary to ensure that a true and
fair view is given but are not made, then a qualified audit report is required. If the adjustments are
deemed not to be material then an unqualified report is still possible.
Activity 25.2
1 Overadded inventory: this should be adjusted under IAS 8 as it would appear to be a (large) material
error. It has also come to light before the accounts have been approved.
2 Directors’ bonuses: this is an adjustable event under IAS 10 because the conditions existed at the
year-end – the directors were always going to be paid a bonus, it was just the size that was unknown.
The change can be made before the accounts are approved.
3 Irrecoverable debt: this is not an adjusting event because it happened after the accounts were approved
on 31 August 2020. It is of course possible that the expense has been accounted for if the company
had made this customer the subject of a specific allowance for doubtful debts but the actual balance of
$61 000 cannot be formally written off.
4 Factory in France: this is not an adjusting event because the conditions did not exist at 31 March 2020
so any financial impact of buying the factory will need to be recorded in the accounts for the
following year.
5 Legal proceeding: this is not an adjusting event because the conditions did not exist at 31 March 2020
– the faulty goods had not yet been bought. So any financial impact of starting legal proceedings will
need to be recorded in the accounts for the following year.
1 B The company may be large enough that the external auditors carry out their work throughout the
year. In some cases, there might be a continuous presence to ensure that the work is completed.
2 D This will go into the following period’s financial statements. In the cases of A, B and C, it is likely
that the conditions leading to these events existed at the year end.
3 D The likelihood of losing the case is more than the 50% required in the case of contingent liabilities
for a provision to be made.
4 a Adjustments?
i Under IAS 10: Post Balance Sheet Events, the irrecoverable debt can be included because
the conditions existed at the year-end date even though the amounts or timing might have
been uncertain. The change needs to have been actioned before the directors authorised the
accounts. In any event, including the irrecoverable in the 2020 accounts before it had officially
occurred is a fairly classic application of the prudence concept (and is often seen applied
through the creation or adjustment of the allowance for doubtful debts).
ii The court cases are dealt with by IAS 37: Provisions, Contingent Liabilities &
Contingent Assets.
• The first court case deals with a possible liability. If losing the court case was more than
a 50% probability with reasonable quantifiable damages, then we would need to make a
provision for the liability. However, neither is the case and so we will create a contingent
liability note to the accounts.
• The second court case satisfies the 50% likelihood rule but is not quantifiable. Even if
it were, IAS 37 will only allow us to make a contingent asset note to the accounts (the
prudence concept does not allow even virtually certain and virtually quantifiable cases to
feature in the statement of profit or loss or in the statement of financial position).
iii Under IAS 8: Accounting Policies, assuming that the amount is considered material, the
inventory figure does need to be adjusted. As the lower selling price existed at the year end,
there is more justification for reducing the inventory value by $12 000. Furthermore, as was
covered in the chapter on Manufacturing accounts, IAS 2: Inventories states that inventory
should be shown at the ‘lower of cost and net realisable value’.
iv Under IAS 8: Accounting Policies, assuming that the amount is considered material, errors
need to be corrected and so the revenue figure needs to be reduced by $27 000.
v Under IAS 10: Post Balance Sheet Events, the bonuses should be adjusted because the
conditions existed at the year-end date – the directors were always going to get bonuses – it
was just the size of those bonuses that was uncertain. As employees, the directors’ bonuses do
represent an expense that must be reduced.
Note: had any of these issues become known once the accounts had been approved/authorised,
then no adjustments would have been allowed.
b Adjusted profit figure:

$
Original profit 421 000
Irrecoverable debt [1] (18 000)
Reduction of inventory (12 000)
Duplicated sale (27 000)
Reduction of directors’ bonuses 11 000
Revised profit 375 000
Note:
[1] This assumes that there has been no specific allowance for doubtful debt provision made in
respect of this customer, in which case the expense may already have been accounted for.
be different.
Coursebook answers
Chapter 26
Tyrion Limited
1 and 2 The directors should not make these changes because:
• Valuing inventory at selling price would contradict the ‘realisation concept’ – it is anticipating profit
that has not been made from selling the inventory.
• Valuing the property that has not been valued professionally will contradict the ‘realisation concept’ –
it is anticipating profit that has not been made from selling the inventory.
• It can be argued that inflating the value of assets without a good reason is fraudulent behaviour as it
represents a misrepresentation of the facts.
• While it may be true that the good reputation is a valuable asset (goodwill) that will give the
company an advantage, the valuation is a matter of opinion and so contradicts the ‘money
measurement’ concept.
Activities
Activity 26.1
a Tents Number Value Total value
$ $
Small tents 20 80 1 600
Medium tents 12 115 1 380
Large tents 24 185 4 440
Total value of tents 7 420
b Camp beds Number Costs Net Total value

incurred realisable price
value
$ $
Single camp beds 50 30 75 – 12 = 63 1 500
Double camp beds 10 40 55 – 20 = 35 350
Total value of camp beds 1 850
c The $900 items should be valued at 55% × 900 = $495 (a reduction of $405)
Value of ‘small camping equipment’ = 3 800 − 405 = $3 395
Activity 26.2
142 000 − 30 000
a Initial depreciation expense = = $11 200 per year
10
b Net book value of the machinery after four years = 142 000 − (4 × 11 200) = $97 200
Impairment = 97 200 − 88 000 = $9 200, so the depreciation-related expense for year
4 = 11 200 + 9 200 = $20 400
88 000 – 20 000
c Revised depreciation charge per year = = $13 600 per year
5
Activity 26.3
a b
Value in financial Impairment
statements required
$ $
Asset D 71 400 –
Asset E 91 700 10 900 (102 600 – 91 700 = $10 900)
Asset F 63 400 –
Total 226 500 10 900
1 D This is taken directly from IAS 2.
2 B LIFO must be ignored as it is not allowed to be used for inventory valuation under IAS 2.
Product H 2190 + Product J 4240 + Product K 1780 = $8210.
3 B Equipment A: No impairment as the benefits from use valuation is higher than the net book value.
Equipment B: Impairment – both alternative valuations are lower than net book value.
Equipment C: No impairment as resale value is higher than net book value.
For B, impairment takes the value down to the larger of the two alternative valuations, in this case
benefits from use.
Impairment = 31 600 − 28 300 = $3 300.
4 a $000
Non-current assets:
Tangible (2 400 – 180) 2 120
Current assets:
Inventory (211 – 6) 205
Trade receivables (47 – 15) 32
Total current assets: 237
Total assets 2 357
Equity and liabilities
Share capital and reserves:
Share capital 1 500
Revaluation reserve (650 – 180 – 270) 200
General reserve 175
Retained earnings (416 – 6 – 15) 395
Total equity 2 270
Trade payables 50
Bank overdraft 37
Total current liabilities 87
Total equity and liabilities 2 357
b Answers may include:

• The land and buildings should not include the $180 000 revaluation as this is a valuation
that has been provided by a trainee. IAS 16 requires that any valuation be carried out by a
qualified professional.
• The goodwill is a matter of opinion and should not be included in the accounts – only
purchased goodwill is valid under IAS 38.
• As a result of these two adjustments, these two items should be removed from the revaluation
reserve, which is now $200 000.
• Under IAS 2, inventory should be valued at the ‘lower of cost and net realisable value’ – so the
inventory must be reduced by $6 000. This will increase cost of sales, and reduce gross profit
and profit for the year, which will reduce retained earnings.
• The trade receivables should be written off, which will represent an expense that will reduce
profit for the year by $15 000 and therefore retained earnings.
be different.
Coursebook answers
Chapter 27
Ursa Limited
• opying across information: Having to copy across information is not only time consuming but
C
is likely to lead to mistakes and corruption of data. Someone entering their information on the
spreadsheet might accidentally delete or over-write the work of one of their colleagues.
• Reliance on information from colleagues: Each employee’s part of the system relies on the provision
of information from colleagues. The receivables clerk will, for example, need to know which customers
have paid what they owe and when. This information may not be provided quickly (say, if someone is
ill or on holiday) or may not be accurate.
• Lack of coverage: If only one employee is able to perform each function, work will be delayed by
illness or holidays.
• Dishonesty and fraud: Assuming that only one employee has access to her own systems, there is little
to stop someone committing fraud. The information that they transfer onto the spreadsheet might not
reflect what is really happening.
• Cost: Having the accountant sort out problems is likely to be very expensive. Having office managers
and directors involved in sorting out problems is a waste of their valuable time.
Activities
Activity 27.1
a Computer shop
Advantages:
• Local – it may be possible to develop a good working relationship with the shop owner who has to
provide good customer service to compete with larger more impersonal organisations. It may be
possible to discuss needs in detail – this is not always possible online.
• Repairs/maintenance – the local shop may be able to provide a good repairs service.
• Upgrades – these may be available.
Disadvantages:
• Choice and availability of products – there may be a limited range and the shop may only be
contractually allowed to recommend products from particular suppliers. Some products may have
to be ordered in, which can take time.
• Price – a small local shop may be more expensive because it has overheads and does not sell in
bulk like a large online provider.
• Product knowledge – the shop owner may know about IT in general but not the precise details of
how accounting packages work.
b Online provider
Advantages:
• Choice and availability of products – every supplier of accounting software will have a website and
assuming items are in stock, will have distribution systems that will ensure speedy delivery.
• Price – selling in bulk, being in direct competition with other online companies and not having
large overheads enables companies to charge lower prices.
• Upgrades – may be able to offer online upgrades (subject to some sort of subscription).
• Product knowledge – choice of the right website will enable contact with specialists to be made.
Disadvantages:
• Customer service – could be impersonal as many firms just want to sell the product and so there
may be no backup services offered if the system breaks down or crashes. Service contracts may be
expensive if offered at all.
Activity 27.2
a External training courses
Advantages:
• The training will be delivered by experts who are highly experienced in delivering training on that
accounts package.
• The training provider should have good facilities that have been designed to be used for delivering
that type of training – this may include equipment and practice activities.
• It may be possible for small numbers of students to join courses that are already planned by the
training providers and which have already enrolled some students, which may keep costs low.
Disadvantages:
• There may not be courses available when Ursa Limited needs the training to be delivered.
Ursa Limited may not be able to wait several months for a new course to start.
• The training may be delivered over weeks or months. Ursa Limited may need people to be
trained quickly.
• Commercial providers exist to make a profit and so may charge high prices. If there is a fixed price
per course and Ursa Limited only has a few people that need to be trained then the cost per person
may be high.
• Allowing people to take time off work and having to pay travelling expenses may be inconvenient
and costly.
b Visiting trainers
Advantages:
• The training will be delivered by experts who are highly experienced in delivering training on that
accounts package.
• The training is likely to take place over a short time-scale and so interruptions to Ursa Limited’s
day-to-day operations can be planned and all staff should be functional by a particular point-
in-time.
• Travel costs etc. can be minimised.
Disadvantages:
• There may not be trainers available when Ursa Limited needs its staff to be trained.
• Ursa Limited may not have the facilities (e.g. a training room full of computers) to enable the
training to be delivered to all employees at the same time – the problem will be greater if staff
work in different rooms.
• Commercial providers exist to make a profit and so may charge high prices. If there is a fixed price
per course and Ursa Limited only has a few people that need to be trained then the cost per person
may be high.
• Some employees may not be confident or may not have mastered all of the skills and knowledge
required to operate the new system and after the training is over, there may be no follow-up
supports for them.
c In-house training
Advantages:
• Cheap – if the trainer is already employed by the company, costs are significantly reduced.
Disadvantages:
• Expertise – there is no guarantee that Ursa Limited will have anyone with the experience or
expertise to deliver the training to the required depth or level.
• Training materials/facilities – given that untrained staff cannot be allowed to practise on the real
system, activities on a practice site (provided by external trainers) will need to be designed, which
could be time-consuming or costly.
• Acceptance – employees at Ursa Limited may have less faith in training provided by one of
their friends/colleagues than they would have, had the training been presented by someone
from outside.
Activity 27.3
• trong passwords: It is essential that passwords are not obvious (‘strong’) – for example, they should
S
not be based on employee initials or dates of birth that might be known by other people. Passwords
should be regularly changed to prevent illegal access to systems.
• Restricted access: Employees should only have access to parts of the system that they need to perform
their roles. This will not only limit the number of people who might have the opportunity to steal data
but can help to narrow down the number of suspects if there has been a problem.
• When employees leave their jobs, they should have their access rights removed immediately in order to
reduce the risk of that member of staff committing some malicious action after they have gone.
• Automatic lockdown or logging out: Settings should be adjusted so that a computer automatically
locks after only 2 or 3 minutes of inactivity. People should not leave their computers unattended
but often do and don’t always lock or log out of the system. Automatic lockdowns will reduce the
opportunity for other people to access information that they do not have a right to.
• Installing up-to-date antivirus packages: Computer viruses are constantly evolving that can steal data,
corrupt data or lock whole systems down (ransomware). Up-to-date antivirus packages can help to
prevent viruses from accessing the system.
• Saving and backing-up of work: Computers systems can crash, sometimes because of a basic problem
like a power failure or because of viruses. Saving work regularly will mean less time is wasted as less
work will have been lost, while backing up work provides insurance against whole files (or systems)
being corrupted or wiped clean by say a virus.
• Encrypted USB-drives: USB-drives (sometimes called ‘thumb-drives’ or ‘memory-sticks’) are small and
so easy to steal or lose. Encryption will make it more difficult for someone obtaining a USB-drive that
they are not entitled to have, to access the information on it.
• Restricted use of USB-drives: Some businesses will insist on employees only using USBs issued by
the company that have an encryption password on them and may ban staff from bringing USBs into
work or taking them out of the office. This can reduce the risk of people bringing computer viruses
into work (the USB may have been plugged into an infected computer), illegally removing sensitive
information or providing public access to the information if the memory is lost by the employee while
outside the office.
• Introduce an acceptable use policy: Many organisations have an acceptable use policy that sets out
what its employees should and shouldn’t be doing. If an employee only accesses websites relevant to
work, they are far less likely to introduce viruses to the system or allow access to hackers.
• Staff training: Courses covering issues like cyber-awareness, company policies and procedure, and
acceptable use of IT can be provided to new employees or as regular training for existing employees.
This can provide useful information on how staff can avoid opening suspicious emails or taking
actions that could expose the system to hackers and viruses.
• Staff handbook: The company should provide clear guidance of its IT policies and procedures and
employees should be required to sign a declaration that they have read and understood it. This might
help to ensure that employees are aware of what they should, or more importantly what they shouldn’t,
be doing.
• Disciplinary process: There should be a clear process for dealing with employees that fail to follow
the rules and it is essential all employees know that failure to comply with the rules will result in firm
action if a thorough investigation correctly finds them guilty of having committed an offence. This will
hopefully mean that employees will be more likely to follow the rules and not endanger the system.
• Compliance audits and tracking: Management should carry out unannounced audits to ensure that
people are following the rules and many systems enable management to identify what files are being
downloaded, who is accessing which websites and how the email system is being used. If employees
know that their offences could be discovered, they are less likely to commit them.
1 B A computerised accounting system that has built-in safeguards will ensure that the accounts
cannot commit errors.
While the system will make it more difficult to make errors, e.g. not allowing a journal to be input
if it doesn’t balance, it is likely that errors like original entry or reversal or commission/principle
could still happen.
2 Learners’ answers may include:
Advantages:
• saves time in processing data – initial entries made, all relevant ledgers instantly updated as the
computer completes the double-entry.
• saves storage space – no longer any need for books and ledgers.
• should be more accurate than a manual system – as system will refuse to accept obvious errors like
journals that don’t balance.
Disadvantages:
• initial cost of buying the system including training and installation.
• training inconvenience – when, where and how to get everyone trained for a particular launch date.
• possible hacking and viruses – from external sources.
• fraud and malicious action by employees.
3 The integrity of the data depends on two elements – input/reconciliation and backing up of work.
Input and reconciliation work:
• Steps must be taken to ensure that the data entered into the new system is accurate, which involves:
• trial balance being extracted from the old system (this is effectively the closing balances on the
statement of financial position) and this must be verified and, where necessary, reconciled.
If there have been late adjustments, these need to be actioned.
• Certain items such as trade receivables and trade payables need special attention. For effective
credit control and payables management to be possible, extra details need to be provided so
that an aged receivables and payables analysis can be prepared. The total of these individual
accounts must be reconciled back to the totals appearing in the statement of financial
position. Only when all of the individual balances agree with the totals in the control accounts
can the details be entered onto the new system.
• Other items like the bank, cash and petty cash need to be reconciled to ensure that the
balances are accurate and up-to-date.
Backing-up/running parallel:
• Work needs to be backed up regularly so that information is not lost or deleted if:
• the system crashes
• someone makes a mistake or deliberately changes/corrupts the data.
• Running an old and a new system in parallel means that the validity of the information provided
by the new system can be verified. Differences can be investigated and corrections can be made.
This does, of course, assume that there are no major problems with the old system.
• Installing up-to-date antivirus packages: Antivirus packages can be installed that can repel viruses
or warn people that there is an attempt being made to access the system through a suspicious
looking email or a suspect URL link. However, as new viruses are constantly being developed by
cyber-criminals, it is essential that any business continues to use the most up-to-date
antivirus packages.
• Strong passwords and restricted access: Ensuring that passwords are not obvious (‘strong’) and
are regularly changed can help to prevent illegal access to systems. Restricting employee access to
only the parts of the system that they need to perform their roles will not only limit the number
of people who might have the opportunity to steal data but can help to narrow down the number
of suspects if there has been a problem. Departing employees have their access rights removed
immediately to reduce the risk of that member of staff committing some malicious action.
• Automatic lockdown or logging out: Computer settings could be adjusted so that a computer
automatically locks after only 2 or 3 minutes of inactivity, then the risk of someone accessing a
colleague’s computer when they are not at their desk is reduced.
• Saving and backing-up of work: Saving work regularly will mean less time is wasted as less work
has been lost if the system crashes, while backing up work provides insurance against whole files
(or systems) being corrupted or wiped clean by say a virus.
• Encrypted or restricted USB-drives: Insisting that employees only use encrypted USBs and
banning them from bringing USBs into work or taking them out of the office will reduce the risk
of people bringing computer viruses into work (the USB may have been plugged into an infected
computer), illegally removing sensitive information or providing public access to the information if
the memory is lost by the employee while outside the office.
• Introduce an acceptable use policy: This will set out what its employees should (and more
importantly what they shouldn’t) be doing. If an employee only accesses websites relevant to work,
they are far less likely to introduce viruses to the system or make life easy for hackers.
• Staff training: Many businesses will insist that their employees complete regular courses in cyber-
awareness, which will not only emphasise the need to follow the procedures used by the business
but will provide useful practical tips on how to spot suspicious-looking emails that might be
harmful if opened.
• Disciplinary process: The business could ensure that the consequences of not following the rules
and procedures set out in a staff handbook or acceptable IT use policy are widely known. This
could be reinforced by staff training. If employees know that failure to comply with the rules will
result in firm action, then they are more likely to follow the rules.
• Compliance audits and tracking: Carrying out and tracking what employees are doing when
logged into their computers will identify who is complying with the rules and who isn’t. The
thought that they are being watched may deter them from IT behaviours that could expose the
business to risk.
be different.
Coursebook answers
Chapter 28
Selling clothes
• The advantages to Benjamin and Florence of selling their business are:
• They no longer have to spend their time on or worry about managing it in the future – they have
been thinking about retirement and may do this or get a job with less stress.
• They will be issued with shares in Roundwindow PLC on which they can expect to receive
dividends in the future – if the company performs well, not only will there be dividends but the
market price of the share may rise.
• There could be several disadvantages:
• It may be that they receive less in dividends on the shares in Roundwindow PLC than the profit
their business previously earned and they may not receive any dividends at all if profits are not
large enough.
• They will also have no involvement in the management of their business – which might be
upsetting, particularly if the company decides to run it in a different way, e.g. less ethically or with
less regard to environmental factors.
Activities
Activity 28.1
a Garrett Zhi
$ $
Non-current assets: 120 000 61 000
Current assets:
Garrett Zhi
Inventory 9 000 7 000
Trade receivables 12 000 3 000 21 000 10 000
25 000 19 000
Total assets 145 000 80 000
Capital and liabilities
Capital accounts 127 000 69 000
Trade payables 18 000 11 000
Total capital and liabilities 145 000 80 000
b Garrett Zhi
$ $
Net assets at valuation 127 000 69 000
Goodwill created (agreed by the partners) 30 000 50 000
157 000 119 000
Goodwill written off (new profit sharing ratio) (40 000) (40 000)
Revised capital account balances 117 000 79 000
c Statement of financial position at 1 January 2021

$
Non-current assets: ($120 000 + 61 000) 181 000
Current assets:
Inventory ($9 000 + 7 000) 16 000
Trade receivables ($12 000 + 3 000) 15 000
Cash and cash equivalents ($4 000 + 9 000) 13 000
44 000
Garrett Zhi
Trade payables ($18 000 + 11 000) 29 000
Activity 28.2
a The numbers in brackets refer to the steps in the chapter.
Capital accounts
Debit Credit
Pavel Magda Li Pavel Magda Li
$000 $000 $000 $000 $000 $000
Goodwill [4] 24 24 12 Balance b/d 96 114
Balance c/d [5] 142 125 50 Revaluation [1] 30 15
Goodwill [2] 40 20
Assets introduced [3] 62
166 149 62 166 149 62
Balance b/d 142 125 50
b [6] $000
Non-current assets: (165 + 45 + 47) 257
Current assets: (90 + 15) 105
Total assets 362
Pavel Magda Li
Capital accounts 142 125 50 317
Current accounts (3) 20 – 17
334
Current liabilities: 28
Total capital and liabilities 362
Activity 28.3
a Debit Credit
Detail $000 $000
Land and buildings 190
Plant and machinery 55
Office furniture and equipment 19
Inventory 26
Goodwill (460 – 285) 175
Trade payables 18
Cash and cash equivalents 40
Ordinary share capital 300
Share premium account (460 – 40 – 300) 120
478 478
Narrative: Purchase of Monty’s business.
b $000
Intangible non-current assets – goodwill: 175
Tangible non-current assets:
Land and buildings (510 + 190) 700
Plant and machinery (133 + 55) 188
Office furniture and equipment (58 + 19) 77
1 140
Current assets:
Inventory (67 + 26) 93
Trade receivables (33 + 13) 46
Cash and cash equivalents (69 – 40) 29
168
Total assets 1 308
Ordinary share capital (550 + 300) 850
Share premium (155 + 120) 275
1 251
Trade payables (39 + 18) 57
1 C The market value of the assets is 145 000 + 49 000 − 18 000 = $176 000
176 000 + Goodwill of 40 000 = $216 000
2 D Net assets = 800 000 + 120 000 − 70 000 – 300 000 = $550 000
Goodwill = amount paid 960 000 − net assets acquired 550 000 = $410 000
3 D The goodwill figure given in the question is inherent goodwill and so must be ignored – the net
assets acquired were 300 000.
The amount paid was 300 000 × $1.50 = $450 000 so goodwill was $150 000.
4 a Debit Credit
$000 $000
Motor vehicles 36
Office furniture 30
Inventory 54
Goodwill 83
Trade payables 35
Cash and cash equivalents 20
Ordinary share capital 100
Share premium account 70
225 225
Narrative: Purchase of Ruy Lopez’s business.
b $000
Intangible non-current assets – goodwill 83
Tangible non-current assets:
Premises 440
Motor vehicles (75 + 36) 111
Office equipment (110 + 30) 140
691
Current assets:
Inventory (94 + 54) 148
Trade receivables (65 + 22) 87
Cash and cash equivalents (31 – 20) 11
246
Total assets 1 020
Ordinary share capital (500 + 100) 600
Share premium (55 + 70) 125
914
Trade payables (71 + 35) 106
c Inherent goodwill relates to the excess value that the owners of the business (and possibly
outsiders) feel relates to the business over and above the value of the net assets shown in the
statement of financial position. This may arise from characteristics like a good reputation,
well-trained workforce or an established list of customers. But it is a matter of opinion as
money has not changed hands. IAS 38 does not allow this type of goodwill to be included in
the financial statements.
Purchased goodwill is the excess of the amount paid for over and above the value of the net
assets shown in the statement of financial position or the amount agreed between the partners
during an admission or retirement of a partner. According to IAS 38, as money has changed
hands, this type of goodwill can be shown as an intangible non-current asset in the statement
of financial position although it is usual to amortise it (write it off) either immediately or over a
number of accounting years.
d Learners’ answers may include:
• Efficiency gains – there are cost savings that can be made by being able to cut down on the
number of service departments, e.g. only one human resources department might be needed
rather than two. Higher levels of output might justify the purchase of more advanced
machinery that speeds up work and reduces production costs.
• Economies of scale – there will also be cost savings on purchasing because the new entity will
be buying in larger quantities.
• Increased expertise – it is likely that the skill sets owned by the people involved in both
businesses will be different and the two business combining will provide greater coverage.
The increased size of the business may also justify the new organisation employing specialists
who may improve efficiency and cut costs.
• Growth – mergers can give the acquiring company an opportunity to grow market share by
buying out a competitor’s business for a certain price. For example, a beer company may
choose to buy out a smaller competing brewery, enabling the larger outfit to produce more
beer and increase its sales to brand-loyal customers.
• Increase supply-chain pricing power – a business can eliminate an entire tier of costs
and protect its market position by buying out one of its suppliers. Taking over one of its
distributors will also enable the business to cut out that business’s profit margin and enable the
goods to be sold at a lower price.
• Eliminate competition – many mergers or takeovers allow a business to eliminate future
competition and gain a larger market share although the authorities in many countries may
not allow a merger or takeover to happen if they feel that it would enable the new entity to
exploit customers unfairly.
be different.
Coursebook answers
Chapter 29
The accounts junior
• Problems:
• Reducing the inventory value by $10 000 will increase the cost of sales and reduce the gross profit
and profit for the year. This may lead to the business paying less tax than it should and would
almost certainly be regarded as tax evasion and/or fraud.
• The reduced value in the inventory figure would reduce the value of the assets of the business
as a whole and as with the profit, this would again mean that the financial statements would not
represent a ‘true and fair view’ of the business.
• Many stakeholders may use the financial statements to make decisions, e.g. whether to invest in the
business – the adjustment may be regarded as material in that it could influence a decision. If the
adjustment is not justified, then some of the decisions taken might be the wrong ones.
• If the adjustment is not justified, this might suggest that the partner is dishonest and cannot be
trusted, and this raises the question, ‘How common is this sort of situation?’
• If this sort of fraud comes to light, outsiders will feel that they cannot trust any information
that comes out of this firm of accountants – this will include the tax authorities who may
decide to investigate all of the firm’s other clients (which will cause major inconvenience for
everyone concerned).
• What should Jamal do?
• Ethically, Jamal cannot make the adjustment as this will involve him in fraud/tax evasion and,
strictly speaking, should refuse to obey that instruction.
• However, this is very likely to lose Jamal his job and if he (and/or family members) depend on his
salary, then that will cause major hardship.
• As with many ethical situations, doing the right thing may not always be the risk-free or
easy option.
Activities
Activity 29.1
Situation 1
While there is nothing wrong with being offered a gift of this type, the potential problem is one of ‘conflict
of interest/being compromised’ – is the gift large enough that someone not involved in the situation might
suspect that the gift was a pay-off for carrying out work in a particular way rather than according to
accounting rules and regulations (the word ‘bribe’ might even be used). This might lead to people doubting
the overall integrity of the accountant.
The accountant should declare the gift to his/her company – many organisations have rules that require
all gifts (or even offers of gifts) to be declared, particularly if they are above a certain value. Some firms
of accountants make a point of informing clients, before the work starts, what the policy regarding the
offering of gifts is.
Situation 2
The problem here is that an employee may feel unable to declare that they do not possess the skills and
knowledge and so might pretend they do – which is dishonest. In all probability, the employee will not do
the job up to the required standard and may even make mistakes that have major consequences.
Obviously, the employee should make the declaration as soon as possible as this might allow them to be
trained up before the assignment starts. If this is not possible, they can be replaced by someone who can do
a good job and be redeployed onto a job that they have the skills and knowledge to do.
Situation 3
An employer has the right to expect that staff are fit and able to perform to a good standard and there is
every likelihood that the result of this weekend will be a very tired employee who is likely to be tired and/or
ill on Monday morning. If the member of staff conceals the fact that they are going on this weekend, they
are dishonestly depriving the employer of a valuable resource.
The ethical approach would be to inform the management of the situation and get their permission. It may
be that someone else can step in and attend the meeting. The problem is that there is the possibility that the
employer will say ‘no’ and be on the lookout to see whether the employee disobeys them. Saying nothing
gives the employee a chance of ‘getting away’ with attending this weekend.
Situation 4
Helping one of your employer’s competitors almost certainly represents a ‘conflict of interest’ and if the
employer does this without telling the employer, this has to be regarded as dishonest. There are other
hazards such as coming across information about other businesses or clients that cannot be unlearned and
this may affect the way the employee does his or her job when he or she returns to his or her
normal position.
The only ethical approach is for the employee to inform his or her manager of the offer. The answer will
probably be ‘no’, but cooperation between companies is not unknown—carrying out the work unofficially
could also have consequences if managers find out—probably dismissal!
Activity 29.2
1 This is a clear case of familiarity as one of the partners of the building firm is your brother-in-law and
so it is possible that he might use the link to make requests regarding how the job is done.
The only ethical course of action you can take is to declare the family link to your manager and let
someone more senior decide whether you can work on that client’s job or not – you might be given
other work.
2 This is clearly a case of intimidation as the client is threatening you – he thinks that losing a client will
get you into trouble with the partners at your firm.
You should report this conversation to your partner at the earliest opportunity – hopefully, the partner
will deal with the situation by talking to the client and informing him that the request and subsequent
threat are inappropriate. In any event, this action will hopefully avoid you having to defend yourself
against accusations later – where it is your word against the client’s.
3 This could well be a self-review risk if you had worked on that client’s accounts when at the previous
company. While the problems and disputes might involve size and payment of fees, it might be that
there are questions over whether work was done to the right standard. There is a possibility that you
might not spot any errors that you made and in any case, might be tempted to conceal any that you do
find to spare your embarrassment and avoid questions over your ability.
The only ethical course of action is to declare your connection with that client – the partner at your
firm may decide to give you another assignment.
Note: in these cases, the risks are not your fault, but it is your responsibility to do the right thing – which in
all three cases will involve reporting the issue to your manager.
Activity 29.3
1 Estate agent request for information: The information can be provided as long as permission (if not
already received) is sought from the client – this should really be in writing.
2 Tax authorities: The tax authorities have a legal right to this information so you must provide it,
regardless of what your client says.
3 Banking details: Strictly speaking, only the banking details should be passed on. The new receptionist
is breaching confidentiality by passing on details of rates of pay and benefits provided by her previous
employer. If you just forward the email as it is, you could be accused of aiding the problem. You
should delete the non-relevant parts of the email before forwarding it or ask the receptionist to send a
revised email with only the details required.
4 The friend: This is one of those situations where ethical principles are tested to the limit – and
nobody wins. You are facing both a familiarity risk to your objectivity and a risk to the principle of
confidentiality. Your duty is to the client and you would be behaving unethically if you even hint that
dealing with your client may not be wise.
5 Fictional employees: In addition to being a possible fraud or tax evasion, this has the potential to be
money laundering and so there is almost certainly a legal duty for you to do something – like reporting
your suspicions to the authorities or your equivalent of the Money Laundering Reporting Officer if
you work in a large organisation.
The one real problem is that this type of ‘criminal activity’ might involve directors or partners, so if
you make an internal report, all you may be achieving is letting the perpetrators know that people are
aware of their activities.
6 Fictional invoices: Your responsibilities for this are the same as the fictional employees.
1 D Professional competence and due care.
2 B Integrity (this is dishonest behaviour).
3 C Self-interest (she stands to gain something – the holiday if she chooses to award the contract to
Harrow PLC).
a If employees make ethical choices, even if it is impossible to make a decision that pleases everyone,
they are less likely to get into trouble.
If the employee acquires a reputation for behaving, then clients may have greater confidence in
them and the organisation that they represent.
If the company acquires a reputation for behaving ethically, then the tax authorities will be more
likely to believe the information produced on behalf of the clients and less likely to want to carry
out investigations on the company or its clients.
b Kane may be tempted to say nothing and just do his best, which will mean that he will breach the
following fundamental principles:
Integrity: Kane would be implying that he is able to do something when clearly he cannot – this is
not being honest.
Professional competence (and due care): Based on his past experiences, Kane does not have the
skills or knowledge required to carry out this job to the standard required – doing his best is likely
to lead to mistakes and time wasted (by others) sorting them out.
Professional behaviour: Any unethical behaviour by Kane could fall into this category as it would
not be the sort of conduct expected of a member of the accounting profession.
c Kane should explain to his manager that he does not possess the skills and knowledge needed to
perform the task. He could either ask for training and support or ask to be given something else
until such time as training could be given.
d The manager could:
• Give the task to someone else and find some other work that Kane is able to do; however, this
might damage Kane’s confidence.
• Provide the necessary training before the job needs to be done so that Kane is now competent
to do the job.
• Let Kane attempt the task but ensure that he is heavily supported and monitored – this
will mean that Kane could acquire the skills and knowledge ‘on the job’ and may build up
his confidence.
e The company could:
• Introduce a disciplinary process – this would support the ethical guidelines that have been
provided. If employees know the consequences of unethical behaviour and know that anyone
found guilty of poor behaviour will be put through the process regardless of who they are,
then this might encourage them to behave more ethically.
• Management could set a good example – if employees see their bosses behaving properly it
might encourage them to do the same … certainly, if the management is behaving badly, it is
likely that the employees will take the view, ‘why should we behave any better?’
• Introduce a reporting procedure – this would enable examples of bad behaviour to be reported
… the possibility of unethical behaviour coming out into the open may deter people from
committing any.
be different.
Coursebook answers
Chapter 30
The Shoe Company
• Sunita and the 800 employees at The Shoe Company may be worried about the security of their jobs.
If the company is in trouble then it is likely that there may be redundancies.
• The job losses will affect the local economy as they will reduce the income of many hundreds of local
households. This in turn may harm other businesses who rely on those households spending money on
their goods and services.
• There will be other businesses that trade directly with The Shoe Company – they may stand to lose
a major customer if the business fails completely. As it stands, they are facing delays in receiving
payment from The Shoe Company and this may cause them cash flow difficulties.
• The lack of profits and dividends will undoubtedly have caused the value of Sunita’s shares to fall,
particularly if many of the shareholders have decided to sell their shares and invest their money in
something that will provide a return.
• If the company fails completely, then the shares will be completely worthless and Sunita will
have nothing.
Activities
Activity 30.1
a 2020 2019
592 456
Gross profit margin × 100 = 37.00% × 100 = 38.00%
1 600 1 200
592 456
Mark-up × 100 = 58.73% × 100 = 61.29%
1 008 744
440 363
Operating expenses to revenue % × 100 = 27.50% × 100 = 30.25%
1 600 1 200
152 93
Profit margin % × 100 = 9.50% × 100 = 7.75%
1 600 1 200
140 78
Profit margin % (after interest) × 100 = 8.75% × 100 = 6.50%
1 600 1 200
152 93
Return on capital employed × 100 = 28.15% × 100 = 15.90%
540 585
b The directors might interpret the profitability as follows:
Gross profit: While both the gross profit margin and the mark-up have declined slightly between 2019
and 2020, both figures still exceed the industrial average.
Operating expenses to revenue: This has improved as a percentage of revenue although this ratio
still exceeds the industrial average, which may indicate that there is still work to do to achieve
greater efficiencies.
Profit margin %: The profit margins before interest for both 2019 and 2020 were less than the industrial
average despite considerable improvement. The profit for the year percentage after interest not only
showed improvement between 2019 and 2020 but went from being lower than the industrial average to
being much better.
Return on capital employed: The directors should be very happy with the dramatic improvement
between 2019 and 2020. Not only has the percentage nearly doubled, but the 2020 figure now
comfortably exceeds the industrial average, which suggests that the investors should be getting a good
return on their investment.
Profitability seems to have improved and the directors are entitled to feel pleased with the company’s
performance in 2020.
Note: it is difficult to be more specific in the interpretation of these ratios as it is not known whether:
• The industry has changed the way it operates or the structure of the market has changed in terms
of levels of competition or the level of demand for the goods or services that Freddy Limited
provides, which might have caused the 2020 industrial averages to be different from those in 2019.
• The company has actively changed the way it operates or whether the directors have adopted
strategies (e.g. price setting) that might have affected the figures, rather than being affected by
factors beyond the company’s control.
Activity 30.2
a Anderson Harmison
150 105
Current ratio = 1.25 : 1 = 2.10 :1
120 50
150 − 48 105 − 31
Acid test ratio = 0.85 : 1 = 1.48 : 1
120 50
900 700
Non-current asset turnover = 1.03 times = 1.28 times
870 545
50 30
Inventory turnover × 365 = 35.58 days × 365 = 31.92 days
513 343
513 343
Rate of inventory turnover = 10.26 times = 11.43 times
50 30
73 45
Trade receivables turnover × 365 = 29.61 days × 365 = 23.46 days
900 700
104 20
Trade payables turnover × 365 = 74.58 days × 365 = 21.16 days
509 345
b Liquidity: Both the current and acid test ratios are significantly higher for Harmison than Anderson
whose figures are well below the generally accepted benchmarks of 1.50 and 1.00 (indicating that
Anderson Limited is more likely to encounter short-term cash flow issues).
c Efficiency: Anderson’s inventory turnover is longer than Harmison’s, which might indicate that either
too much or the wrong type of stock is being held.
Anderson’s trade receivables turnover is nearly twice that of Harmison suggesting the efficiency in
collecting money from credit customers is considerably lower. The extreme length of Anderson’s
trade payables payment period implies inefficiency and it is likely that this business suffers a frosty
relationship with its suppliers.
The non-current asset turnover is very low for both companies.
d Conclusion: Harmison Limited would seem to be the better investment. Anderson Limited seems to
have major problems and unless the investor is going to be prepared to spend time and effort in turning
the company round, this would not be a wise investment.
143 180
1 A The gross profit margin has fallen from × 100 = 35.75% to × 100 = 30%
400 600
So either the sales price has gone down (not one of the options) or the cost of sales has increased
and a shortage of raw materials is likely to have caused purchase prices to increase.
2 C This increases one current asset (inventory) but reduces another (cash), so the current assets
remain unchanged and so does the current ratio. However, converting cash to inventory reduces
the non-cash current assets, which reduces the acid test ratio.
(42 000 + 48 000)
3 B Average inventory = = $45 000
2
45 000
Inventory turnover = × 365 = 37.50 days
438 000
4 Hilfenhaus Limited
a 2020 2019
46 36
Inventory turnover (days) × 365 = 20.99 days × 365 = 18.77 days
800 700
180 90
Trade receivable turnover (days) × 365 = 54.75 days × 365 = 31.28 days
1 200 1 050
150 100
Trade payables turnover (days) × 365 = 67.59 days × 365 = 51.41 days
810 710
b Inventory turnover (days): The increase in this ratio suggests a slight reduction in the efficiency
with which the inventory is being managed. Inventory levels have increased and it may be that this
increase has been larger than the extra level of total sales warranted. Whether this area is being
managed well or badly is difficult to determine as ‘par’ figures for companies in this particular
industry are not available.
Trade receivable turnover (days): The increase in this ratio again suggests a reduction in the
efficiency of debt collection. Without information concerning the periods actually being granted
by this firm or across the industry, it is difficult to say whether the situation is good or bad (only
that it seems to have worsened).
Trade payables turnover (days): From a cash flow point of view, long TPTs are regarded as good
news as it means the company is retaining its money for longer. At first glance, this ratio seems
to reflect an improved situation. However, it is difficult to draw definitive conclusions without
knowing what credit period was actually granted. If it was a 30-day arrangement then it is highly
possible that suppliers are becoming irritated by what appears to be an increased tendency towards
late payment. In this case, the change in the figure between 2019 and 2020 might be regarded as a
bad thing.
Overall, the ratios suggest that efficiency in managing these items has fallen.
c Learners’ answers may include:

Cash or credit sales: There was no information given regarding whether purchases or sales were
made on a cash or credit basis. The figures in a have assumed that all transactions were on a credit
basis. If this is not the case, then the figures will be distorted – the real periods will be longer.
Changes in credit policy: There is no indication as to whether there was a change in credit terms
being given to customers – many customers may have been granted 30 days in 2019 but were
allowed to pay in 60 days in 2020 (particularly new customers), which would then render any
comments about falling efficiency invalid.
Inventory turnover: It has been assumed that Hilfenhaus was not under-stocked in 2019 – in which
case, holding higher levels of inventory would represent a sensible precaution against the risk of
running out.
Note: it is difficult to make meaningful comments about the actual level of efficiency because
no industrial averages have been provided. Even if they were, we would need to know whether
Hilfenhaus Limited was a typical business in this market or operated in a standard way.
The company may have chosen to operate at the high-end or low-end of the market, which would
have an impact on figures like the inventory turnover. High margins are often associated with low
inventory turnover while selling items cheaply will reduce margins but result in inventory being
sold quicker.
be different.
Coursebook answers
Chapter 31
Aravinda’s new business
• Aravinda is right to be concerned. His cash flow seems to be very poor and if he runs out of money, he
will not be able to pay his day-to-day expenses or replace inventory. It is likely that the business will fail
despite it being apparently profitable.
• The causes of his problems are as follows:
• Aravinda is having to pay his suppliers immediately and although he is selling those goods at
a profit, he is not receiving the income until weeks (possibly months) after the sale has been
made. His bank account is clearly not in a position to sustain this time gap and the fact that he is
expanding is only potentially making the deficit worse.
• Aravinda may well be carrying too much inventory as there is reference to the wide range of
inventory being carried. Having so much money tied up in the stockroom is only damaging his
cash flow further.
Activities
Activity 31.1
a Before changes After changes
(for part b)
180
Inventory turnover × 365 = 61 days 46 days
406
97
Trade receivables turnover × 365 = 56 days 46 days
628
33
Trade payables turnover × 365 = 29 days 49 days
410
Working capital cycle 61 + 56 − 29 = 88 days 43 days
b The changes are likely to improve Virat’s liquidity (cash flow) as he will now be paying his suppliers
50 days before receiving the money from his customers. Without further information, it is difficult to
assess whether he is now in a good position or just one that is not quite as bad as before.
c Depending on how Virat has achieved these changes, possible problems that might result include:
• Inventory: If the range of inventory has been cut down, has this been achieved without losing
significant sales or have lots of customers gone elsewhere when Virat could not supply their needs?
• Trade receivables: If Virat has taken to offering less credit or enforcing credit control procedures
more rigorously, has this resulted in customers settling up and then seeking an alternative supplier?
• Trade payables: Has Virat taken as long as possible to pay suppliers and exceeded agreed credit
periods? This may have resulted in a worsening of relationships with those suppliers that could
result in lost discounts and even refusals to meet further orders.
Activity 31.2
a and b 2020 2019
Net working assets to revenue
Net working assets 96 + 147 − 72 48 + 102 − 45
× 100 × 100 = 8.07% × 100 = 6.56%
Revenue (sales) 2 120 1 600
These figures suggest that Rose Limited was making better use of the net
working assets at its disposal in 2019. However, we do not know whether
the current or acid test ratios have improved as we do not have details of
cash, bank or accruals and prepayments. One of the main contributors to
the decline has been a doubling of inventory levels, which far exceeds the
percentage increase in the revenue.
Interest cover
= 4.93 times = 3.33 times
Interest payable 90 95
These figures indicate that Rose Limited has a better interest cover in
2020 and is now better equipped to meet its interest payments. The main
contributor has been an increase in profit from operations.
Gearing
Fixed cost capital 900 1 100
× 100 = 27.31% × 100 = 36.54%
Total capital 1 130 + 1 265 + 900 880 + 1 030 + 1 100
The gearing ratio for Rose Limited has improved in 2020 largely due to
a share issue and the repayment of some of its loans (or redemption of
debentures). Both figures represent fairly low gearing.
Activity 31.3
a Dhoni Limited Karthik Limited
Earnings per share:
Profit for the year 1 130 2 415
= $0.226 per share = $0.345 per share
Number of ordinary shares 5 000 7 000
Price/earnings ratio:
Market price per share 0.90 1.50
Earnings per share 0.226 0.345
Dividend per share:

Annual ordinary dividend 270 420
Number of issued ordinary shares 5 000 7 000
Dividend yield:
Annual ordinary dividend per share 0.054 0.06
× 100 × 100 = 6.00% × 100 = 4.00%
Dividend cover:
Profit for the year available to pay ordinary dividend 1 130 2 415
b Learners’ answers may include:
Dividend yield: The shareholders in Dhoni Limited appear to have enjoyed a better return on their
investment although how this compares with returns available on alternative investment opportunities
is not known.
Earnings per share and dividends per share: Both of these ratios seem to favour Karthik Limited, but
the market price of the shares is much larger and so shareholders are effectively having to invest far
more money per share – hence the poor dividend yield.
Price/earnings ratio: The slightly higher figure for Karthik may reflect slightly higher confidence by the
market in the future performance of the company.
Dividend cover: Kartik’s dividend cover is higher, which may reflect a less generous dividend policy
by its director. It may reflect a desire to reinvest the profits and protect the cash flow of the company
(although the information is not available to support this).
Note: there are no figures available to provide a context – without industrial averages or details of
likely returns from other investment opportunities, it is difficult to say whether the shareholders of
these companies are getting a good or poor return on their investment.
1 A Working capital cycle = 32 + 41 − 55 = 18 days
2 C Non-current liabilities = 500 + 245 = 745
Share capital and reserves = 180 + 600 + 344 + 275 = 1 399
745
Gearing ratio = × 100 = 34.75%
745 + 1 399

3 Carnation Limited and Lily Limited
a Carnation Limited Lily Limited
Earnings per share:
Number of issued ordinary shares 900 1 200
Price/earnings ratio:
Earnings per share 0.22 0.10
Dividend per share:

Number of issued ordinary shares 900 1 200
Dividend yield:
Annual ordinary dividend per share 0.08 0.03
× 100 × 100 = 6.40% × 100 = 4.00%
Dividend cover:
b Carnation Limited appears to have given investors the best return for 2020 as the dividend yield
is 2.40% higher than that of Lily Limited. The earnings per share for Carnation Limited was also
higher and the lower dividend cover suggests greater generosity by its directors.
However, the higher price/earnings ratio could suggest that the market has slightly greater
confidence in the future performance of Lily Limited and, as we are considering future investment,
this may be important. We do not know why the directors have paid a low dividend this year – it
may be that they are reinvesting the profits in order to promote company growth, which may
benefit the shareholders more in the long term.
c Learners’ answers may include:
• They are reinvesting the profits in order to promote company growth, which may benefit the
shareholders more in the long term.
• There is not enough cash available to support the payment of generous dividends – to do so
would affect the company’s ability to function properly.
d Learners’ answers may include:
• To be useful and reliable, ratios must be reasonably accurate. They should be based on
information in accounts and notes to the financial statements. Some useful information may
not be disclosed in the financial statements and some account headings may not indicate the
contents clearly.
• The financial statements may have been the subject of window dressing and income smoothing
techniques, which, unknown to the users of the accounts, may render comparisons less
meaningful and lead to poor decision making.
• Information must be timely to be of use. It may not be available until months after the end of
a company’s financial year – enough time for circumstances to have changed significantly.
• Ratios do not explain the cause of the changes in the results but may indicate areas of concern
– further investigation is necessary to discover the causes of the concern.
• Ratios do not recognise seasonal factors in business.
be different.
Coursebook answers
Chapter 32
Eat it while it’s fresh
• It is important to keep many items of food fresh to eat and appealing to look at, particularly those
that have a short lifespan, e.g. milk, salad, fish. It reduces waste and the prospect of items of inventory
becoming worthless. It is less important with food that has long sell-by dates.
Note: students might be aware of stock rotation in shops, i.e. older item is brought to the front of the
shelves and newer item is put behind it. This is to encourage shoppers to select the oldest item first.
• Businesses prefer to sell older inventory first where possible, especially items that will be updated or
changed regularly, for example seasonal clothing or high fashion.
• Any items that don’t change much and are not updated regularly, e.g. manual tools such as screws,
nails, hammers.
Activities
Activity 32.1
a i FIFO
Date Receipts Issues Inventory
Units Price per Units Value ($) Units Value ($)
unit
Aug 2 100 10.20 100 100 × 10.20 = 1 020
8 70 70 × 10.20 = 714 30 30 × 10.20 = 306
10 200 10.40 230 30 × 10.20 = 306
200 × 10.40 = 2 080
Total 2 386
18 120 30 × 10.20 = 306 110 110 × 10.40 = 1 144
90 × 10.40 = 936
Total 1 242
30 50 50 × 10.40 = 520 60 60 × 10.40 = 624
ii AVCO
Date Receipts Issues Inventory
Units Price per Units Value ($) Units Value ($)
unit
Aug 2 100 10.20 100 100 × 10.20 = 1 020
8 70 70 × 10.20 = 714 30 30 × 10.20 = 306
10 200 10.40 230 230 × 10.374[1] = 2 386
18 120 120 × 10.374 = 1 244.88 110 110 × 10.374 = 1 144.14
30 50 50 × 10.374 = 518.70 60 60 × 10.374 = 622.44
Note:
306 + 2 080
[1] Weighted average at 10 August: = $10.374
230
b The FIFO method gives the higher inventory valuation at the end of August. This is because the
purchase price is rising, i.e. it is higher on August 10 than on August 2. By using FIFO, the older,
cheaper inventory is issued first leaving the newer, more expensive inventory to make up the valuation
at the end of August.
Activity 32.2
a Basic pay: 40 hours × $16 per hour = $640
b Overtime payment: 4 hours × ($16 × 1.5) = $96
Overtime premium: 4 hours × ($16 × 0.5) = $32
c Bonus payment for excess units: [284 − (44 × 6)] × $3 = $60
d Gross pay: $640 + $96 + $60 = $796
1 C 100 units × $1.25
2 D $350 basic + $75 overtime + $40 bonus
3 C (40 × $6) + (4 × $4.80)
4 Any two examples of costs that are not directly associated with a produced unit. For example, cleaning
equipment, mangers salaries, support staff salaries, rent, heating and lighting, depreciation, etc.
5 a Date Receipts Value of inventory sold Inventory
1 Aug 160 × 5 = $800
5 100 × 6 = $600 $800 + $600 = $1 400
10 120 × $5.38 = $646.15 140 × $5.38 = $753.85
15 180 × 7 = $1 260 $1 260 + $753.85 = $2 013.85
20 100 × $6.29 = £629 220 × $6.29 = $1 384.85
1 400
Weighted average unit cost at 5 August = = $5.38
260
2 013.85
Weighted average unit cost at 15 August = = $6.29
320
The value of the inventory at the end of August using the AVCO method is $1 384.85
b Sales (220 × $12) 2 640.00

Opening inventory 800.00
+ Purchases ($600 + $1 260) 1 860.00
− Closing inventory (1 384.85)
Cost of sales 1 275.15
Gross profit 1 364.85
be different.
Coursebook answers
Chapter 33
The cost of making steel
• Other production overheads might include cleaning materials, heating and lighting and other utilities,
rent (if they don’t own the land and buildings), and other facilities costs.
• A business like Tata Steel is likely to want to invest heavily in its plant and equipment because it needs
lots of big and expensive machinery to make its products and will want to produce goods of good
quality and use resources efficiently and safely. Therefore, it will need to replace, maintain and repair
all its machinery.
• Prices are often set using mark-up or gross margin. Therefore, the unit cost for each product needs to
be known. If a business only produces one product, all of the indirect costs can be allocated to that
product and a unit cost is easily calculated. If a business has more than one product, it must share
out the indirect costs between products. The wider the product range the more complicated this
can become.
Activities
Activity 33.1
Expense Basis of Total Machining Assembly
apportionment
$000 $000 $000
Indirect labour Allocation 17 12.00 5.00
Heating and lighting Floor area 60 40.00 20.00
Maintenance Floor area 40 26.67 13.33
Factory insurance Floor area 20 13.33 6.67
Depreciation Cost 80 68.57 11.43
Repairs Cost 28 24.00 4.00
a Total overhead cost for each department 245 184.57 60.43
Direct materials 90 80.00 10.00
Direct labour 140 100.00 40.00
b Total cost per cost centre 475 364.57 110.43
Activity 33.2
Bakery Packaging Canteen Stores
$ $ $ $
Overheads 120 000 80 000 40 000 10 000
First apportionment based on 80 20 40

no. of requisitions 10 000 × 10 000 × 10 000 × (10 000)
140 140 140
= 5 714.29 = 1 428.57 = 2 857.14
Second apportionment based on 30 20

staff nos. 42 857.14 × 42 857.14 × (42 857.14) [2] –
50 50
= 25 714.28 = 17 142.86
151 428.57 98 571.43 – –
Activity 33.3
a The total number of direct labour hours required to produce 5 000 units of A and 6 000 units of B is:
1
(5 000 × 12 ) + (6 000 × 0.6) = 11 100
The overheads for November are $130 000, the overhead absorption rate is:
$130 000
= $11.71 per direct labour hour
11 100
The overhead absorbed per unit is:
1
i for A: $11.71 × 12 = $17.57
ii for B: $11.71 × 0.6 = $7.03
b The total overhead is fully absorbed as follows:
$

A: 5 000 × $17.57 87 850
B: 6 000 × $7.03 42 180
Total overhead absorbed 130 030[1]
Note:
[1] The total may be slightly different from the $130 000 estimated overhead expenditure for November
due to rounding.
1 D (18 +20 +8) × 1.5
165 000
2 B
11 000
18 500
3 C OAR = ; o/hs recovered = 168.18 × 100; under-recovery = $19 000 − $16 818 = $2 182
110
4 a Overheads are allocated if they can be specifically identified with individual cost centres, e.g.
the indirect labour costs of a manager or supervisor in a canteen. Other overheads need to be
apportioned if they can’t be identified with specific cost centres, e.g. rent of a building that is used
by more than one cost centre.
b Assembly Finishing Canteen

$ $ $
Overheads 120 000 260 000 40 000
40 20
Apportionment based on staff no. 40 000 × = 26 666.67 40 000 × = 13 333.333 (40 000)
60 60
146 666.67 273 333.33 –
c The assembly department should use machine hours because it is machine intensive as it uses more
machine hours than labour hours.
The finishing department should use direct labour hours because it is labour intensive as it uses
more labour hours than machine hours.
d The overhead absorption rates (OARs) are:
$146 666.67
Assembly OAR: = $24.44 per machine hour
6 000
$273 333.33
Finishing OAR: = $27.33 per direct labour hour
10 000
e Assembly 2 hours × $24.44 = $48.88
Finishing: 1 hour × $27.33 = $27.33
Therefore, the overhead absorbed by 1 product = $76.21
f Direct costs = $12 ($5 + $7)
Unit cost = $12 + $48.88 + $27.33 = $88.21
40
∙
g Selling price = $88.21 + $88.21 ×
100 ∙
= $123
be different.
Coursebook answers
Chapter 34
Pictures and pricing
• Services usually have few or no direct materials. Taking photos is essentially a service with an end
product (the photos and album). Other services with few/no direct materials include hairdressing,
web design, cleaning, etc.
• Insurance, advertising, depreciation of equipment, repairs of vehicle, etc.
• A quote (in the case study context) is an estimated price of a good or service that is given to the
potential customer.
If a business is to make a profit then it must price its products or services above the cost of producing
the goods or providing the service. Therefore, it is important to know the cost of a job.
• Other factors can affect whether customers will accept a quote and order the goods or service. For
example, if the photographer’s competitors have lower prices for a similar service, then customers may
choose to buy from a competitor instead.
Activities
Activity 34.1
The cost per unit (of 1000 cans) is:
$(350 000 + 20 000 + 1 200 000)
= $500 per unit
3 500
where one cost unit is 1000 cans of soup.
Activity 34.2
a Raj special occasion outfit quote Estimated costs
$
Direct materials 130
Direct labour: Vinay (4 × $80); assistant (10 × $20) 520
Overhead ($25 × 14 hours) 350
Total cost 1 000
Add: Profit (30% of cost) 300
Amount of quotation 1 300
b Accepting the work or refusing the work are both acceptable answers provided the answer is justified.
Arguments against agreeing a price of $1 100:
• The customer is offering less than the price quoted so Vinay will make less profit.
• If other customers know prices can be negotiated, they may also try to reduce the price on any
quote they receive.
• If Vinay has other work he can take instead, then he should take the more profitable work.
Arguments for agreeing a price of $1 100:
• The customer is still offering to pay $100 more than the cost of producing the outfit, so it is still a
profitable job.
• If Vinay does not have other work he can take instead, then he should agree to it as he will still get
paid for his time and a share of the overheads is absorbed.
Activity 34.3
Costs for batch of 60 boxes of pens
$ $
Direct materials 700.00
Direct labour:
Moulding (10 × $14) 140.00
Finishing (8 × $15) 120.00 260.00
Prime cost 960.00
Production overhead absorbed
Moulding (10 × $5) 50.00
Finishing (8 × $8) 64.00 114.00
a Cost of production 1 074.00
$1 074.00
b Cost of 1 box of pens: = $17.90
60
$17.90
Cost of 1 pen: pens per box = $0.18
100
c $
Cost of production 1 074.00
Profit (40% of $1 074.00) 429.60
Total price for batch of 60 boxes of pens 1 503.60
1 C $
Labour (10 × $30) 300
(50 × $25) 1 250
Overhead (60 × $10) 600
2 150
20% profit 430
2 580
2 A
3 Any of the following points can be credited:
• Job costing is used where one specific or special order is received for one item or service.
• Unlike job costing, batch costing is used where production involves a number of identical items
rather than just one.
• Examples of orders requiring job costing include repainting a house, repairing a bicycle, etc.
• Examples of orders requiring batch costing include ordering a set of goods etc.
4 a Any of the following points can be credited:
• Continuous (or process) operations are typically those in which a single type of good is
produced and the cost units are identical.
• Continuous operations may involve a sequence of continuous or repetitive operations.
• Examples of continuous operations include oil refining, production of mineral water, the
manufacture of goods on an assembly line.
• Specific order operations are those that are performed in response to special orders received
from customers.
• Job or batch costing methods are suitable for specific order operations while unit costing is
suitable for continuous operations.
• Examples of specific order operations include repainting a house, repairing a bicycle, etc.
b Moulding OAR:
$8 000
= $61.54 per machine hour
130
Finishing OAR:
$5 000
= $83.33 per direct labour hour
60
c Costs for batch of 3 000 model figures

$ $
Direct materials 6 000
Direct labour:
Moulding (30 × $14) 420
Finishing (60 × $12) 720 1 140
Prime cost 7 140

Production overhead absorbed
Moulding (130 × $61.54) 8 000
Finishing (60 × $83.33) 5 000 13 000
Budgeted total cost of production 20 140
Profit (30% of $20 140) 6 042
Price 26 182
20 140
d = $6.71 per figure
3 000
e Accepting the work or refusing the work are acceptable answers provided the answer is justified.
Arguments against agreeing a price of $23 000:
• The customer is offering less than the price quoted so will not meet their target mark-up of 30%.
• If other customers know prices can be negotiated, they may also try to reduce the price on any
quote they receive.
• If the manufacturer has other work that can be taken instead, then it should take the more
profitable work.
Arguments for agreeing a price of $23 000:
• The customer is still offering to pay $2 860 more than the cost of producing the figures, so it is
still a profitable job.
• If the manufacturer does not have other work it can take instead, then it should agree to it and
overheads (which occur whether or not the work is done) are absorbed.
• It might be possible to cut costs, e.g. buy cheaper direct materials. This will increase profits.
be different.
Coursebook answers
Chapter 35
Cool hats for hot weather
• Examples include direct materials – cotton, etc; direct labour – assuming she pays herself for the hats
that she makes; selling expenses – delivery for hats ordered online.
• Examples include rent, insurance, depreciation of equipment, e.g. cash register, sewing machine.
• The statement is true provided the cost of the cotton, delivery, etc. (variable costs) for each hat are less
than the selling price. Then the more hats made and sold the greater the profit once fixed costs have
been covered.
If selling price is less than the variable cost per hat, then the more hats sold the greater the loss.
• Other factors include encouraging new customers by offering a low introductory price, giving
discounts if several hats are bought by one customer and considering what competitors charge for
similar products.
Activities
Activity 35.1
$56 000
a i Contribution per unit = = $14
4 000
Profit = (5 000 × $14) – $30 000 = $40 000
ii Profit = (2 000 × $14) – $30 000 = ($2 000)
$56 000
b Calculate the contribution to sales ratio = × 100 = 58.33%
$96 000
c Contribution = 58.33% × $132 000 = $77 000
Profit = $77 000 – $30 000 = $47 000
Activity 35.2
Work out the impact of each option:
a Order for 5 000 reels of cotton at $950 per 1 000 reels of cotton:
(1 unit is 1 000 reels of cotton)
• contribution per unit $(950 − 1 000) = ($50)
• negative contribution from order: $250 (5 units × ($50) per unit).
b Order for 3 000 reels of cotton at $1 100 per 1 000 reels of cotton:
• contribution per unit $(1 100 − 1 000) = $100.
Sew with Zo Limited should not accept an order for 5 000 reels of cotton at $950 per 1 000 reels of cotton
because there is a negative contribution.
Sew with Zo Limited should accept order b for 3 000 reels of cotton at $1 100 per 1 000 reels of cotton
because it makes a positive contribution. This decision assumes that there is capacity in the business to take
on the work and it is accepted that this is a special ‘one-off’ price.
Activity 35.3
Burnish Dazzle Shine
$ $ $
Selling price per unit 4 7.0 6.0
Direct materials per unit 1 1.5 1.5
Direct labour per unit 1 4.0 2.0
Marginal cost per unit 2 5.5 3.5
Contribution per unit 2 1.5 2.5
Litres per unit 2 3.0 3.0
Contribution per litre 1 ($2 /2 litres) 0.5 ($.50/3 litres) 0.83 ($2.50/3 litres)
Ranking by contribution per litre 1 3 2
Revised plan of production where direct materials is the limiting factor:
Units Direct materials Contribution per Total contribution

litres unit and profit
$ $
Burnish 2 000 8 000 2.0 8 000
Shine 1 800 5 400 2.5 4 500
Dazzle 2 000 6 000 1.5 3 000
19 400 15 500
Less: Fixed costs (10 000)
Profit 5 500
Activity 35.4
a Profit = $180 000 – $60 000 – $80 000 = $40 000
$180 000
Selling price = = $9
20 000
$60 000
VC per unit = = $3
20 000
$80 000
Break-even = = 13 334 units
$6
(Note: break-even quantity is rounded up)
b i Fixed costs increase by 20% and are not passed on to customers:

New FC = $96 000 ($80 000 × 1.2)
Profit = $24 000 ($40 000 − $16 000)
$96 000
$6
ii variable costs increase by 20% and are not passed on to customers (there is no increase in fixed costs):
New VC = $72 000 ($60 000 × 1.2)
$72 000
New VC per unit = = $3.60
20 000
Profit = $28 000 ($40 000 − $12 000)
$80 000
$5.40
iii fixed and variable costs increase by 20% and the increases are passed on to customers:
New selling price = $10.80 ($9 × 1.2)
$
Revenue 216 000
Variable costs 72 000
Fixed costs 96 000
Profit 48 000
$96 000
$7.20
Note: as all the costs and revenue have risen by 20% the break-even quantity is the same as the
answer in part a.
Activity 35.5
a, b and c
Marginal costing Absorption costing

$ $ $ $
Revenue 200 000 200 000
Variable costs 104 000 104 000
Less: Closing inventory (24 000) [1]
80 000
Fixed overheads 30 000 30 000
134 000
Less: Closing inventory (30 924) [2]
Gross profit 90 000 96 924
Notes:
[1] 600 × $40 = $24 000.
$134 000
[2] Inventory value per unit = = $51.54 per unit.
2 600
The closing inventory value = 600 × $51.54 = $30 924
650 000
1 D Contribution per unit = 57.5, BEP = , then round up
57.5
2 C At 1 000 units: profit = $15 000 sales revenue − $8 000 total cost
40 000
3 B Contribution per unit at BE = = $20, therefore VC = $60, i.e. a decrease of $10 or 25% of
direct labour 2 000
4 a A limiting factor is anything that limits the quantity of goods that a business may produce, such as
a shortage of labour.
When there is a limited resource, a business making several different products should rank
the products according to the amount of contribution they make from each unit of the scarce
resource. Then use the limited resources in a way that produces the most profit.
b ($36 × 8 000) + ($48 × 4 000) + ($24 × 10 000) = $720 000
c Product Product Product Total
K L M
Total sales units 8 000 4 000 10 000
$ $ $ $
Contribution 24 28 26
Total contribution 192 000 112 000 260 000 564 000
Fixed costs 200 000
Profit 364 000
d This question requires understanding that material is a limiting factor.

Product Product Product
K L M
Direct materials at $6 per kg (36) (48) (24)
Kg per unit 6 8 4
Contribution per unit 24 28 26
Contribution per kg 4 3.5 6.5
Ranking 2 3 1
i 48 000 kg of material will be available.

Units Direct materials kg Contribution per Total contribution
unit and profit
$ $
Product M 2 500 20 000 26 65 000
Product K 2 000 12 000 24 48 000
Product L 2 000 16 000 28 56 000
48 000 169 000
Loss (31 000)
ii Units Direct materials kg Contribution per Total contribution

unit and profit
$ $
Product M 10 000 40 000 26 260 000
Product K 1 333 8 000 24 31 992
48 000 291 992
Profit 91 992
e Using marginal costing, it is better to put no minimum production requirement if any product
is put in place. This will lead to a profit of $91 992 rather than a loss of $31 000 if a minimum of
2 000 units of each product is required.
Other factors that can be credited:
• The effect on customers if no product L and limited product K is available for the next six
months. Will disappointed customers go to competitors and not come back in the future?
• What happens to specialist labour? Can workers switch to producing other products or will
they made redundant?
be different.
Coursebook answers
Chapter 36
Careful costing
• Any other simple products, e.g. making boxes, paper, making fruit juice, etc.
• Any other complex product, such as one with several parts, e.g. musical instruments, computers, etc.
• In absorption costing, overheads are assumed to be fixed costs that are completely unaffected by
production. Overheads are absorbed using an overhead absorption rate and then charging that rate to
products on the basis of, usually, direct labour hours or machine hours. Absorption costing can lead to
inaccurate results because overheads are not spread fairly among products.
Activities
Activity 36.1
1 –c
2 –d
3 –f
4 –e
5 –b
6 –a
Activity 36.2
a Number of quality checks is the cost driver for quality control costs.
Labour hours spent on maintenance is the cost driver for machine maintenance costs.
Cost driver rates:
$800
Machine maintenance costs: = $20 per hour
40
$1 500
Quality control costs: = $10 per check
150
Apportionment of each activity to summer and winter hats:

Summer hat Winter hat
$ $
Machine maintenance 20 × $20 400 20 × $20 400
Quality control 100 × $10 1 000 50 × $10 500
Allocated overheads 1 400 900
Total cost of 2 000 summer hats

$
Overhead cost 1 400
Direct cost 7 000
Cost 8 400
$8 400
Cost per summer hat = units = $4.20
2 000
Total cost of 500 winter hats
$
Overhead cost 900
Direct cost 3 250
Cost 4 150
$4 150
Cost per winter hat = units = $8.30
500
b Summer hat selling price = $4.20 + (60% × $4.20) = $6.72
Winter hat selling price = $8.30 + (60% × $8.30) = $13.28
Activity 36.3
$800 000
a OAR: = $20 per direct labour hour
40 000
b X Y
$ $
Selling price 210 90
Direct costs 80 35
Apportioned overhead 80 ($20 × 4 hours) 40 ($20 × 2 hours)
Profit per unit 50 15
c Cost driver rates:

$100 000
Machine maintenance: = $12.50 per maintenance hour
8 000
$60 000
Materials handling: = $60 per delivery
1 000
$40 000
Packing: = $25 per hour
1 600
d Activity X Y
$ $
Direct costs 80 × 3 500 280 000 35 × 13 000 455 000
Machine maintenance 12.50 × 3 000 37 500 12.50 × 5 000 62 500
Materials handling 60 × 400 24 000 60 × 600 36 000
Packing 25 × 600 15 000 25 × 1 000 25 000
Total cost 356 500 578 500
e Cost per unit:

$356 500
Product X: = $101.86
3 500
$578 500
Product Y: = $44.50
13 000
f Profit per unit:
Product X: $210 − $101.86 = $108.14
Product Y: $90 − $44.50 = $45.50
1 Any two limitations of using activity-based costing, such as:
• It is very time consuming to try to work out which specific costs a product incurs and why.
• It is difficult to say with certainty which costs are cost drivers for a particular product.
• It is time consuming as it requires a greater degree of analysis of costs than absorption costing.
2 Absorption costing calculates an overhead absorption rate and then charges that rate to products on
the basis of, usually, direct labour hours or machine hours. Activity-based costing apportions each
overhead in a fairer way by carefully considering how it is used.
Absorption costing uses a single overhead absorption rate for every product. ABC uses a number of
different absorption rates for different overheads.
ABC tries to identify which specific overheads should be charged to a product, by looking at the
activities that are needed to make a product and charging the product with overheads based on how
much an activity is used.
ABC leads to more accurate cost information than absorption costing because of how overheads
are spread among products. The greater accuracy of ABC means that ABC is better at identifying
products and areas of high overhead cost.
3 a OAR:
$216 000
Direct machine hours OAR = $9 /hour
24 000
For product Skinny: $9 × 8 000 hours/16 000 units = $4.50 per unit
For product Baggy: $9 × 16 000 hours/24 000 units = $6 per unit
Product Skinny Product Baggy

$ $
Direct materials per unit 10.00 12.00
Direct labour per unit 4.00 4.00
Factory overhead per unit 4.50 6.00
Cost per unit 18.50 22.00
Selling price (cost + 50%) 27.75 33.00
b Cost driver rates:

$66 000
Machine set-up costs = $550 per set-up
120
$100 000
Machine maintenance = $50 per hour
2 000
$50 000
Quality control check costs = $20 per check
2 500
Allocation of overheads to products
Skinny Baggy
$ $
Machine set-up 50 × $550 27 500 70 × $550 38 500
Machine maintenance 800 × $50 40 000 1 200 × $50 60 000
Quality control checks 1 000 × $20 20 000 1 500 × $20 30 000
87 500 128 500
Units ÷16 000 ÷24 000
$ $
Overhead cost 5.47 5.35
Direct cost 14.00 16.00
Cost per unit 19.47 21.35
Selling price 29.21 32.03
c Advising to change to ABC or to continue with absorption costing are both acceptable answers
provided the answer is justified.
Arguments for ABC:
• Fairer/more accurate/meaningful allocation of overhead costs.
• Provides good understanding of what drives the cost.
• Uses multiple cost drivers so recognises complexity of manufacturing.
• Useful for decision making (profitability/pricing/discontinue lines).
• Accurate and reliable cost information.
However, ABC is very time consuming and it requires a greater degree of analysis of costs than
absorption costing.
Ultimate selling prices are very similar for Skinny and Baggy under both methods. Therefore, if
the main reason is to assist with setting selling prices, it is unlikely to be worth changing the
method to ABC.
$264 000
4 a Machine maintenance costs = $8.25 per machine hour
32 000
Where machine hours = (10 000 units × 2.5 hours) + (14 000 units × 0.5 hours) = 32 000 hours
$54 000
Ordering costs = $675 per order
80
$24 000
Production run costs = $500 per set-up
48
Allocation of overheads to products is below.
Product X Product Y
$ $
Machine hours (25 000 × $8.25) 206 250 (7 000 × $8.25) 57 750
Orders (20 × $675) 13 500 (60 × $675) 40 500
Production runs (12 × $500) 6 000 (36 × $500)

18 000
225 750 116 250
Overhead cost (225 750 ÷ 10 000) 22.58 (116 250 ÷ 14 000) 8.30

Direct cost 100.00 50.00
Full cost per unit 122.58 58.30
$342 000
b Direct labour hours basis = $12 per hour
28 500
Overhead charged to Product X = $12 per hour × 0.75 hours = $9
Overhead charged to Product Y = $12 per hour × 1.5 hours = $18
c If Ahmed uses direct labour hours, Y takes double the time per unit than X. Therefore, double the
share of overhead costs.
If Ahmed uses ABC, the cost of X will increase and the cost of Y will decrease. X has fewer
set-ups and orders than Y so takes less share of overhead costs. X has more machine hours than Y
so takes larger proportion of machine-based overheads. The cost driver for machine maintenance
costs is machine hours. X has five times more hours per unit than Y so gets a much larger share of
the cost.
d $
Full cost 122.58
Mark-up 49.03
Selling price 171.61
Order price (171.61× 50 units) $8 580.50
• The offer price of $8 450 is less than his required price of $8 580.50 so it should be rejected.
• The offer price is close to the mark-up of 40% and a profit is still made so it should
be accepted.
Non-financial factors should also be considered, e.g. the customer may give further orders in the
future. Spare capacity in the factory can be used.
e Allocation of overhead costs are fairer.

More accurate cost information.
ABC is useful for decision making such as deciding selling prices or whether to close a
business unit.
be different.
Coursebook answers
Chapter 37
What does the future hold?
• Depends on the country, e.g. Treasury department in the UK with Chancellor of the Exchequer as the
senior officer.
• Many reasons, e.g. taxes and spending affect people’s lives; people may be interested for political
reasons; businesses are impacted by the state and growth of the economy as well as taxes on businesses.
• See advantages of budgeting (Topic 37.13), e.g. motivates staff, encourages coordination between
departments, etc.
Activities
Activity 37.1
a Megan and James Limited’s sales budget
September October November December Total
Units 2 400 2 500 2 600 2 600 10 100
Price $10 $10 $12 $12
Sales $24 000 $25 000 $31 200 $31 200 $111 400
b Megan and James Limited’s production budget

August September October November December
Production for sales 2 400 2 500 2 600 2 600 2 800
(units)
Add: 10% 240 250 260 260 280
Monthly production 2 640 2 750 2 860 2 860 3 080
Activity 37.2
The labour budget in hours and value for the three-month period would look like this:
October November December

Production units 4 200 4 400 4 800
Budgeted labour hours required (units × 2) 8 400 8 800 9 600
90% of the direct labour is paid in the month it occurs × $12 $90 720 [1] $95 040 $103 680
10% of the direct labour is paid in the month after it occurs $9 600 [2] $10 080 $10 560
× $12
Budgeted labour payment $100 320 $105 120 $114 240
Notes:
[1] 8 400 × 90% × $12
[2] 8 000 × 10% × $12
Activity 27.3
a Megan and James Limited’s purchases budget based on its production budget for the five months from
August to December:
August September October November December
No. of units 2 500 2 600 2 600 2 800 3 000
Material required (litres) 5 000 5 200 5 200 5 600 6 000
Purchases $15 000 $15 600 $15 600 $19 600 $21 000
b Megan and James Limited’s expenditure budget for the four months ending 31 December:
September October November December
$ $ $ $
Purchases 15 000 15 600 15 600 19 600
Wages 3 000 3 000 3 000 3 000
Electricity 1 400
General expenses 3 000 3 000 3 000 3 000
Loan interest 250 – 250
Equipment 12 000
Total expenditure 21 250 23 000 33 600 25 850
Activity 37.4
a Megan and James Limited’s trade receivables budget for the four months ending December.
Working
July August September October November December
$ $ $ $ $ $
Sales for the 26 000 27 000 24 000 25 000 31 200 31 200
month
Cash sales 13 000 13 500 12 000 12 500 15 600 15 600
Credit sales 13 000 13 500 12 000 12 500 15 600 15 600
Cash received 10 400 [1] 10 800 9 600 10 000 12 480
one month after
sale
Cash received 2 600 [2] 2 700 2 400 2 500
two months
after sale
Notes:
[1] $13 000 × 0.8
[2] $13 000 × 0.2
Trade receivables budget for the period January to April

$ $ $ $
Opening trade receivables 16 100 [1] 14 700 14 900 18 100
Add credit sales for the month 12 000 12 500 15 600 15 600
Less cash received 13 400 [2] 12 300 12 400 14 980
Closing trade receivables 14 700 14 900 18 100 18 720
Notes:
[1] $2 600 + $13 500
[2] $10 800 + $2 600
b Megan and James Limited’s trade payables budget for the four months ending December.
$ $ $ $
Opening trade payables 15 000 15 600 15 600 19 600
Add credit purchases for month 15 600 15 600 19 600 21 000
Less cash paid 15 000 15 600 15 600 19 600
Closing trade payables 15 600 15 600 19 600 21 000
c Megan and James Limited’s cash budget for the four months ending December.
$ $ $ $
Receipts
Cash sales 12 000 12 500 15 600 15 600
Credit customer receipts 13 400 12 300 12 400 14 980
Total revenue 25 400 24 800 28 000 30 580
Expenditure
Purchases 15 000 15 600 15 600 19 600
Wages 3 000 3 000 3 000 3 000
Electricity 1 400
General expenses 3 000 3 000 3 000 3 000
Loan interest 250 – 250
Equipment 12 000
Total expenditure 21 250 23 000 33 600 25 850
Calculation of opening and
closing bank balances
Net receipts (payments) (total 3 750 1 800 (5 600) 4 730
receipts minus total payments)
Bank balance brought forward (500) 3 250 5 050 (550)
Bank balance carried forward 3 250 5 050 (550) 4 180
1 A fixed budget is for a planned output level and does not change when sales, or some other activity,
increases or decreases.
2 Any three advantages of a budgetary control system, such as:
• it encourages managers to think about the future direction of the business
• lenders may require budgeted information particularly cash budgets
• it can motivate staff. They may build in some extra costs or reduce the expected revenue to ensure
they always beat it.
3 a i The production budget:
August
Production for sales (units) 900
Add: 10% for inventory 90
Monthly production [1] 990
Note:
[1] See Additional information 2 – September’s sales are August’s production units plus 10%.
ii The purchases budget in dollars:

August
No. of units [1] 880

Material required (2 kg per unit) 1 760
Purchases ($5 per kg) $8 800
Note:
[1] See Additional information 4 – Purchases are one month before production. August’s
purchases are September’s production. September’s production is October’s sales + 10%
(800 + 80).
iii The cash budget:
January August March April
$ $ $ $
Receipts
Sales [1] 30 000
Expenditure
Purchases [2] 11 000
Wages [3] 27 720
Variable overheads [4] 14 850
Fixed overhead [5] 4 400
Total payments 57 970
Calculation of opening and closing bank balances
Net receipts (payments) (27 970)
(total receipts minus
total payments)
Bank balance brought forward 20 000
Bank balance carried forward (7 970)
Notes:
[1] see Additional information 1 – July’s sales are August receipts from sales (600 × $50).
[2] see Additional information 4 – June’s purchases are paid for in August. June’s purchases
are July’s production and August’s sales + 10% = $11 000 (1 100 units × 2 kg × $5).
[3] see Additional information 3 and 5 – Labour is $27 720 (990 × 2 hours × $14).
[4] see Additional information 3 and 5 – Variable overheads are $14 850 (990 × $15).
[5] see Additional information 3 and 6 – Fixed overheads are July’s production × $4 = $4 400
(1 100 × 4).
b Credit any of the following points:
• budgets encourage managers to think about the future and the direction in which the business
is heading.
• encourage managers to be aware of costs and helps identify parts of the business where
improvements are required or can be made before the start of a trading period.
• motivate managers and other staff.
• banks and other lenders often require budget information from the business.
• budget preparation ensures the co-ordination of all the activities of a business.
• when managers are involved in the preparation of their budgets, they are committed to
meeting them. Therefore, they are more likely to be achieved.
• budgets avoid ‘management by crisis’, which describes situations in which managers have not
foreseen problems before they arise and prepared for them in advance. These managers spend
their time dealing with problems that would never have arisen had they been foreseen.
• budgets are time consuming to prepare.
• budgets can become out of date very quickly.
• budgets often require specialist knowledge to prepare. This can add to the expenses of
the business.
• if managers are paid on their performance against the budget, they may build in some extra
costs or reduce the expected revenue to ensure they always beat it.
Other relevant points acceptable.
Budgets are vital to enable managers to do their jobs. They are also essential if banks or other
lenders require them.
4 a EJs Limited
Cash budget for the four months to April 2021
January August March April
$ $ $ $
Receipts
Cash sales 22 500 30 000 30 000 45 000
Cash from credit sales 20 000 [1] 22 500 30 000 30 000
42 500 52 500 60 000 75 000
Payments
Purchases 15 000 [2] 20 000 [3] 20 000 30 000
Selling and distribution exp. 4 500 6 000 6 000 9 000
Admin expenses 10 000 10 000 10 000 10 000
Purchase of plant and machinery – 20 000 – –
Dividend payment – – – 8 000
29 500 56 000 36 000 57 000
Net receipts/(payments) 13 000 (3 500) 24 000 18 000
Balance brought forward 16 000 29 000 25 500 49 500
Balance carried forward 29 000 25 500 49 500 67 500
Notes:
[1] Trade receivables at 31 December 2020 = $20 000
[2] Trade payables at 31 December 2020 = $15 000
[3] Previous month’s purchases.
b EJs Limited
Budgeted statement of profit or loss for the 4 months ending 30 April 2021
$ $
Revenue 255 000
Purchases 100 000
130 000
Closing inventory [1] (30 000) (100 000)
Less: Expenditure
Selling expenses (25 500)
Administration expenses (40 000) (65 500)
Note:
[1] See note 5 in the Additional information.
c EJs Limited
Budgeted statement of financial position at 30 April 2021
Cost Accumulated Net book value
depreciation
$ $ $
Non-current assets:
Plant and machinery 70 000 (10 000) 60 000
Current assets:
Inventory 30 000
Trade receivables 45 000 [1]
Cash and cash equivalents 67 500
142 500
Share capital and reserves
Ordinary shares of $1 80 000
Retained earnings
(11 000 + 89 500 – 8 000) 92 500
172 500
Trade payables [2] 30 000
Total equity and liabilities 202 500
Notes:
[1] 50% of April sales
[2] April’s purchases
be different.
Coursebook answers
Chapter 38
A clean performance
• Uses financial information to assess performance. Helps to focus on larger differences and encourages
investigation and corrective action to improve business performance.
• The first year’s performance gives Faiza useful information that she can draw on when budgeting for
year 2. There was no equivalent information when preparing the budgets for year 1.
• Comparisons can be time consuming and do not explain the causes of the differences. The causes will
still need to be investigated.
Activities
Activity 38.1
The standard direct labour cost to make the products in three months will be:
Total standard hours Total standard

wage cost [1]
$ $
10 000 curtains: 2 hours at $12 per hour 20 000 240 000
8 000 sheets: 1 hour at $12 per hour 8 000 96 000
Total standard hours and wages cost of production 28 000 336 000
Note:
[1] The total for each product is the total time taken × $12.
The standard material costs of production are as follows:
Total standard Total standard

material in metres material cost [1]
$ $
10 000 curtains: 5 metres of cotton at $4 per metre 50 000 200 000
8 000 sheets: 2 metres of cotton at $4 per metre 16 000 64 000
Total standard quantity and cost of material for production 66 000 264 000
Note:
[1] The total amount of metres required is multiplied by $4 per metre.
Budgeted fixed overheads at $266 000. It is absorbed on the basis of direct labour hours, therefore the
standard overhead absorption rate is $9.50 ($266 000 ÷ 28 000 hours).
Budgeted profit statement for the next three-month period

Curtains Sheets Total
$ $ $
Revenue 900 000 320 000 1 220 000
Direct materials (200 000) (64 000) (264 000)
Direct labour (240 000) (96 000) (336 000)
Fixed overhead (at $9.50* per direct labour hour) (190 000) (76 000) (266 000)
Budgeted profit 270 000 84 000 354 000
Note: $266 000
[1] OAR = hours = $9.50
28 000
Activity 38.2
Baqri Ltd
Flexed budget statement for the 6 months to 30 June:
Actual Budget Variance
$ $ $
Units 15 600 15 600
Revenue 20 × 15 600 312 000 22 × 15 600 343 200 (31 200)
Direct materials 1 × $3 × 15 600 (46 800) 1.2 × 4 × 15 600 (74 880) 28 080
Direct labour 0.5 × $14 × 15 600 (109 200) 4 (124 800) 15 600
× $12 × 15 600
6
Contribution 156 000 143 520 12 480
Fixed overheads (115 000) (110 000) (5 000)
Profit 41 000 33 520 7 480
Activity 38.3
a the sales volume variance
(9 000 × $8) − (10 000 × $8) = $8 000 adverse
b the sales price variance
($10 − $8) × 9 000 = $18 000 favourable
c the direct materials usage variance

(9 000 − 9 900) × $5 = $4 500 adverse
where flexed quantity of material = 1 litre × 9 000 units.
d the direct materials price variance
($5 − $4.50*) × 9 900 = $4 950 favourable
*$44 550
= $4.50
9 900
e the direct labour efficiency variance
(*1 500[1] − 2 250) × $10 = $7 500 adverse
Note:
1
[1] × 9 000 = 1500
6
f the direct labour rate variance
($10 − $11) × 2 250 = $2 250 adverse
1 Any two advantages, such as:
• Budgets are likely to be more realistic.
• Variances are easier to identify.
• Standards help with estimating costs of new products.
2 Credit any of the following points:
• Decrease in customer demand through the goods becoming unfashionable or obsolete.
• Selling price has been increased to pass increased costs onto customers.
• Seasonal sales have decreased volume.
• Competition from other businesses has increased.
• Fewer special discounts have been given to selected customers.
• Customers have heard that new, improved products will be available soon and are waiting
for those.
Other relevant points acceptable.
3 a i Material price
$
Standard 26 190 kg × $3 78 570
Actual 75 951
2 619 F
ii Material usage
$
Standard 9 700 units × 2.75 kg 26 675
Actual 26 190
485 kg
× $3
1 455 F
iii Labour rate

$
Standard 12 610 × $5 63 050
Actual 65 572
2 522 A
iv Labour efficiency
$
Standard 9 700 units × 1.5 hours 14 550
Actual 12 620
1 940 hours
× $5
9 700 F
v Fixed production overhead expenditure

$
Standard 10 000 units × $3.75 37 500
Actual 39 750
2 250 A
vi Sales price
$
Standard 9 700 units × $27 261 900
Actual 258 375
3 525 A
vii Sales volume

$
Standard 10 000
Actual 9 700
300 units
*Standard profit per units × $7.50
$2 250 A
Note:
[1] Per unit

* Working: Selling price $27.00
Total cost $19.50
Standard profit $7.50
b Reconciliation statement
$ $
Budgeted profit 75 000
Add favourable variances:
Material price 2 619
Material usage 1 455
Labour efficiency 9 700
88 774
Deduct adverse variances:
Fixed production overhead volume ((10 000 − 9 700) × $3.75) 1 125
Fixed production overhead expenditure 2 250
Labour rate 2 522
Selling price 3 525
Sales volume 2 250 11 672
Actual profit 77 102 [1]
Note:
[1] $
Actual sales 258 375
Less direct materials 75 951
Direct labour 65 572
Fixed production overheads 39 750
77 102
c The price increase would:

Increase the cost by $5 238
or alternative answer
Change the material price variance from favourable to adverse by $5 238.
or alternative answer
Change the material price variance from 2 619 F to 2619 A.
Working:
$
Old actual unit price 26 190 kg × $2.90 75 951
New actual unit price 26 190 kg × $3.10 81 189
Increase in cost 5 238
An increase in material price/adverse variance will show a decrease in future profits. Will Tareq
increase his price? Possible effect on demand. Standard costs will need to be revised. Will the
supplier offer discounts, e.g. for bulk buying? Will the quality change due to the change in
price – better or worse? Can a cheaper supplier be found? Will another supplier be reliable, e.g.
delivery, quality?
4 a Statement of budgeted profit for October

$ $
Revenue (10 000 × $60) 600 000
Direct materials (10 000 × 3 kg × $4) (120 000)
Direct labour (10 000 × 2 hours × $10) (200 000) (320 000)
Contribution 280 000
Fixed overheads (10 000 × $8) (80 000)
Budgeted profit 200 000
b Actual Budget Variance

Units 11 000 11 000
Revenue ($) 11 000 × 58 638 000 11 000 × 60 660 000 (22 000) A
Direct materials ($) (133 980) 11 000 × 3 × 4 (132 000) (1 980) A
Direct labour ($) (181 500) 11 000 × 2 × 10 (220 000) 38 500 F
Contribution ($) 322 520 308 000 14 520 F
Fixed overheads ($) (100 000) (80 000) (20 000) A
Profit ($) 222 520 228 000 (5 480) A
c i Labour rate variance = (standard wage rate – actual wage rate) × actual hours worked
($10 – $11) × 16 500 [1] = $16 500 adverse

Note:
$181 500
[1] where actual hours worked is
$11
ii Labour efficiency = (flexed budget hours – actual hours) × standard wage rate
(22 000 − 16 500) × $10 = $55 000 favourable
iii Sales price
(actual price – standard price) × actual units = ($58 – $60) × 11 000 = $22 000 adverse
iv Sales volume
(actual sales volume – original budgeted sales volume) × standard price
= ( 11 000 – 10 000) × $60 = $60 000 favourable
d Possible causes of a favourable labour efficiency variance
• better skilled workers were employed who work more efficiently than the standard
• highly motivated staff
• good quality materials and/or machinery for staff to work with.
be different.
Coursebook answers
Chapter 39
Investing for a global future
• There are many different examples. Best known products include many electronic goods such as
televisions and audio equipment, memory chips and kitchen appliances such as fridges.
• Most product investments involve risk; however, tech products may include very high levels of up-front
research and development costs. Potential revenues may be very difficult to predict partly because of
intense competition from big companies such as Apple along with a rapidly changing demand
from customers.
• The initial cost of the investment along with estimates of future revenues and costs. Broader factors
such as how a product may fit in with the rest of Samsung’s portfolio of products, any environmental
impact, etc.
• The principles of considering initial costs, future revenues and costs will be similar. Broader factors
may be slightly different such as the impact on staff morale if locations are changed.
Activities
Activity 39.1
The average profit of the investment of calculating ARR is:
$(30 000 + 36 000 + 38 000 + 40 000) ÷ 4 years = $36 000
The average investment is:
$150 000 + $20 000 + $15 000 – $5 000
= $90 000
2
Note: the $25 000 machine is a sunk cost so is not included in the calculation.
$36 000
The ARR = × 100 = 40%
$90 000
Activity 39.2
a The cumulative net cash flows are as follows:
System A System B
Net cash flow Cumulative cash flow Net cash flow Cumulative cash flow
$ $ $ $
Year 0 (50 000) (50 000)
Year 1 20 000 (30 000) 30 000 (20 000)
Year 2 20 000 (10 000) 20 000 –
Year 3 40 000 30 000 25 000 25 000
System A
The investment will be paid back partway between years 2 and 3.
At the end of year 2 $30 000 is still required to pay back the investment. This balance of $30 000 will be
received in the third year:
$30 000
= 0.75 × 12 months = 9 months
$40 000
The payback period is, therefore, 2 years 9 months.
System B is exactly 2 years.
b System B has the shorter payback period by 9 months. Therefore, as a quick payback is important to
the business, System B should be chosen.
(It is noteworthy that System A has higher cumulative cash flow by the end of year 3. If payback isn’t
the business’s priority then System A may be the better option.)
Activity 39.3
a The calculation of the net present value of the project is:
Project X Project Y
Year Discount factor Net cash inflow/ Discounted Net cash inflow/ Discounted
at 12% (outflow) cash flow (outflow) cash flow
$ $
0 1.000 (130 000) (130 000)
1 0.893 50 000 44 650 35 000 31 255
2 0.797 50 000 39 850 35 000 27 895
3 0.712 30 000 21 360 35 000 24 920
4 0.636 25 000 15 900 35 000 22 260
5 0.567 20 000 11 340 35 000 19 845
Net present value 3 100 (3 825)
b Maya Limited should choose project X. Project X is the only project with a positive NPV. This means
that the net receipts in present day terms more than cover the initial outlay.
Activity 39.4
Project X
Year Discount factor Net cash inflow/ Discounted
at 12% (outflow) cash flow
$ $
0 1.000 (130 000)
1 0.833 50 000 41 650
2 0.694 50 000 34 700
3 0.579 30 000 17 370
4 0.482 25 000 12 050
5 0.402 20 000 8 040
Net present value (16 190)
∙ ∙
3 100
IRR for Project X = 12% + 8% × = 13.29%
3 100 + 16 190
1 Any two advantages of payback over NPV, such as:
• Payback is straightforward to calculate.
• Easier for managers to understand as it doesn’t involve discounted cash flows.
• Encourages short payback periods that result in increased liquidity and lower risk as the money is
returned more quickly.
2 Project Capital cost Net present value Profitability index
$ $ $
X 200 000 50 000 0.25
Y 300 000 60 000 0.2
Z 400 000 120 000 0.3
Order of priority for investment is Z then X then Y.

3 a Average profit per year = $100 000 − $55 000 − $32 500 (depreciation) = $12 500
Average investment = $65 000
$12 500
ARR = × 100 = 19.23%
$65 000
b Year Net cash inflow/(outflow) Discount factor Discounted cash flow
$ $
0 (130 000) 1.000 (130 000)
1 45 000 0.909 40 905
2 45 000 0.826 37 170
3 45 000 0.751 33 795
4 45 000 0.683 30 735
Net present value 12 605
c Year Net cash inflow/(outflow) Discount factor Discounted cash flow

$ $
0 (130 000) 1.000 (130 000)
1 45 000 0.870 39 150
2 45 000 0.756 34 020
3 45 000 0.658 29 610
4 45 000 0.572 25 740
Net present value (1 480)
∙ ∙
12 605
IRR = 10% + 5% × = 14.47%
12 605 + 1 480
4 a Year Machine Revenue [1] Direct Fixed Net cash Cumulative Expected
costs [2] costs flow cash flow annual profit [3]
$ $ $ $ $ $ $
0 (100 000) (100 000) (100 000)
1 240 000 (192 000) (10 000) 38 000 (62 000) 13 000
2 252 000 (192 000) (11 000) 49 000 (13 000) 24 000
3 264 000 (192 000) (12 000) 60 000 47 000 35 000
4 276 000 (192 000) (13 000) 71 000 118 000 46 000
Notes:
[1] year 1: 20 × 12 000; year 2: 21 × 12 000; year 3: 22 × 12 000; year 4: 23 × 12 000
[2] 16 × 12 000
[3] annual profit = net cash flow − annual depreciation ($25 000)
b i Payback is year 2 plus:

$13 000
= 0.217 × 12 months = 2.6 months
$60 000
Payback is 2 years and 3 months.
ii ARR =
The average profit of the investment for calculating ARR is:
$118 000 ÷ 4 years = $29 500
The average investment is:
$100 000
= $50 000
2
$29 500
The ARR = × 100 = 59%
$50 000
c Credit any of the following points:
• Alternate machine B is $40 000 higher initial cost; we do not know whether this is affordable
for the business.
• Alternate machine B has a slightly longer payback by six months. This adds to risk.
• The alternate machine has a much lower ARR indicating that it is less profitable.
• There is no information about possible non-financial factors that differentiate the
two machines.
• A more informed decision might be made if we knew the cost of capital and were able to
calculate NPV and IRR.
Based on the ARR and payback, Machine A should be chosen.

ASAL Accounting Coursebook Answers

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CAMBRIDGE INTERNATIONAL AS & A LEVEL ACCOUNTING: TEACHER'S RESOURCE

Faris – capital account

Prisha – loan account

Rent payable account

Sales returns account

Purchase returns account

Mira – capital account

Rent payable account

Carriage inwards account

Heating and lighting account

Rent receivable account

Carriage outwards account

Sales returns account

Interest received account

Purchase returns account

Sales returns account

Purchase returns account

Name of account Name of account

Purchase returns account

Discounts received account

Purchases returns journal

Discounts received account

Purchase returns account

Purchases returns journal

Sales returns journal

Purchase returns account

Sales returns account

Discounts received account

Discounts allowed account

4 Learners’ answers might include:

Discount received account

Note: this is not an exhaustive list.

Discounts received account

J and P Ltd account

Oct 1 Balance b/d 600

A and B Ltd account

Motor vehicles account

Oct 1 Balance b/d 1 800

4 Learners’ answers might include:

Account Asset Liability Revenue or Expense

4 Trial balance extracted from the books of Lee at 31 December 2021

Capital at April 1 2019 89 350

Commission received account

Statement of financial position for Xand at 30 June 2020

Machinery at cost account

1 Jan 19 Balance b/d 12 000

1 Jan 20 Balance b/d 28 000 31 Dec 20 Balance c/d 28 000

1 Jan 21 Balance b/d 28 000

Accumulated depreciation on machinery account

1 Jan 19 Balance b/d 4 800

1 Jan 20 Balance b/d 14 080

1 Jan 21 Balance b/d 19 648

b Statement of financial position at 31 December …

Motor vehicles at cost

Accumulated depreciation on motor vehicles

Disposals of motor vehicles

Accumulated depreciation on machinery

Motor vehicles at cost

Provision for depreciation on motor vehicles

Disposals of motor vehicles

Allowance for doubtful debts

31 Dec 18 Statement of profit or loss 100 1 Jan 18 Balance b/d 590

1 Jan 19 Balance b/d 490

1 Jan 20 Balance b/d 600