2023 May Paper 2

Question 1 (d)
A manufacture may not be able to produce to meet the customer’s demand due to the
Constraints/limitations in production process.
Question 2
(a)
The written agreement states how profit and losses will be shared and the rules under which
The partners will work together.
So, drawing up written partnership agreement can avoid conflicts and misunderstandings
between the partners.
(b) If a partner provides a loan to the partnership, he will be repaid these loan amount at an
agreed time and guaranteed to receive loan interest each year.
2022 May paper 2
Question 1
(c)
i
The prudence principle means that profits and assets should not be overstated and losses and
liabilities and expenses should not be understated.
The accountants’ duty is to ensure that the readers of the final accounts get a true and proper
picture of the financial statements of the business.
If provision for irrecoverable debts is created the profit for the year will not be overstated and
the assets (trade receivables) will not be overstated.
ii
The accruals/matching principle means that the revenue of the accounting period is matched
against the costs of the same period.
The income statement should only include the income (revenue) earned and expenses incurred
for the current financial year.
Maintaining a provision for irrecoverable debts ensures that the amount of sales which may not
be paid are regarded as an expense in the year of sale.

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2019 May, paper 2
Question 2
b(i) Profitability is the ability to generate profits from the buisness’ s operation.
(ii) Liquidity is the ability of a business to pay off its liabilities.
(c)
The gross profit margin has increased by 3.5%.
This indicates that an increase due to higher selling prices or purchasing goods at lower prices.
The profit margin has increased by 3.5%
This indicates that an increase due to increase in gross profit margin.

Current ratio has increased.

This indicates that the business can pay its short-term debts when they fall due.

Liquid ratio has also improved.

This indicates that the business can pay its short-term debts without selling its inventory.
The profitability and liquidity of the business has improved.
Q2
e
The partners must share the profit or losses between them.
So, they need to prepare the appropriation account.
The profit and loss appropriation account shows how the profit for the year is shared between
the partners.
Similar to a sole trader each member of the partnership business has their own capital account.
These usually record permanent increases or decreases in the capital invested by the individual
partner.
Capital accounts prepared in this way are referred to as fixed capital accounts.
If capital accounts are fixed, they must prepare the current account.

It includes what the partner becomes entitled to, things such as interest on capital, interest on
loan, the partner’s salary and profit share and the partner is charged with in drawings and interest
in drawings.

They must show the capital and current account separately in the statement of financial position.

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2020 January, paper 2
Q1
(f) ii
The liquidity position of the business has clearly worsened over the years as the current ratio is
now below that which is considered normal (2:1) and his liquid ratio is similarly lower than
expected (1:1).
The current ratio indicates that the business can pay its short-term debts.
However, the acid test ratio indicates that the business will struggle to pay its short-term debts.
It may be occured due to the business hold too much inventory.
In order to improve liquidity, the business needs to convert its inventory into cash quickly.
If he does not take into consideration an improving liquidity position, the business may difficult
to pay its short-term debts.
Q 2(d)
This is an application of the accruals principle.
This principle means that the income statement should only include the income (revenue) earned
and expenses incurred for the current financial year.
The accountants’ duty is to ensure that the readers of the final accounts get a true and proper
picture of the financial statements of the business.
So, it needs to be adjusted for other receivables and other payables.
May 2020 2R
The gross profit margin is unchanged over the two years. It indicates that there is no change in
selling price or cost price.
The profit for the year as a percentage of revenue has increased. It indicates that the business
controls its overhead expenses efficiently.
The return on capital employed has decreased by 3.5%.
This indicates that the business is not operating as efficiently and that they are not making the
most effective use of their capital employed.
So, the partners are not correct.

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2021 June, P 2
Q 1(c)
Leo is incorrect as both ratios have decreased. It indicates that his profitability’s is declined.
The decrease in gross profit percentage indicates that may be due to lower selling prices or an
increase in cost.
The decrease in return on capital employed percentage that may be due to inefficient use of
resources, due to poor control of operating expenses and increase in capital employed during
the year.
Q 2 (d)
i) Prudence
Introducing a provision for irrecoverable debt, it ensures that the profit for the year
and trade receivables (assets) are not overstated.

ii) Consistency
Once a method has been selected it must be used consistently from one accounting
period to the next to ensure comparability of financial statements.

2021 Nov, paper 2

Q1
C
The current ratio has improved above the benchmark of 2:1. It indicates that he can meet his
short- term debts as they fall due.
The liquid ratio has also improved above the benchmark of 1:1. It indicates that he can meet his
short- term debts as they fall due without selling his inventory.
So, Thomas is correct.
Q 2,
f (i)
charge interest on drawings in order to discourage drawings being made and to penalise a
partner who makes excessive drawings. It may also improve the liquidity of the partnership.

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(ii)
allow interest on capital as a reward for investing in the business and also as a form of
compensation to a partner who has invested more capital than the other partners.
2019 May 2R
Q2
d
The reducing balance method is useful for those non-current assets where greater benefits are
gained in the early years of usage.

Plant and machinery may operate at full capacity in earlier years, so it may lose more in earlier years.

So, for plant and machinery, this is the most suitable method.
If he used the straight -line method, the same amount of depreciation would have been charged
each year.
Q 1(d)
Current ratio indicates that the business was able to pay off its short-term liabilities in both
years.
Liquid ratio indicates that the business will struggle to pay its short-term debts.
Over the year liquidity has deteriorated though both ratios are still satisfactory.
In order to improve liquidity, the business needs to convert its inventory into cash quickly.
If he does not take into consideration an improving liquidity position, the business may difficult
to pay its short-term debts.

2019 May, paper 1

Q 17
Evaluate how the introduction of accounting software will improve the accuracy of a business’s
accounts.
Business accounts will be more accurate because all the ledger accounts will be updated
automatically, however, if the wrong amount is entered this will not be identified.
The business will be able to reduce the number of errors through constant monitoring therefore
producing accurate financial statements.
Overall, Mohan’s business accounts would be more accurate.

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Capital and revenue expenditure
monies spent on the day-to-day running of a business
monies spent on the purchase of or addition to a non-current asset
• Revenue expenditure is used up within one year (the income statement )
capital expenditure items will last longer than one year (on the statement of financial position.)
●If a business does not treat capital and revenue expenditure correctly, its final accounts will not
be accurate and will not reflect a true and fair view of the business’s profits or assets.
• If a business included the purchase of a new motor vehicle as an item of expenditure in the
income statement their profits would be understated and the asset valuation on the statement
of financial position would also be understated.
• The incorrect treatment could lead the business to make decisions regarding their development
which are inaccurate.