However, after some considerable thought, we decided against doing so. There is no one precise mode of marking and any suggestions that we might make could perhaps create more arguments and consequent misunderstandings.
However, the books sell world-wide and practices can vary. Some examiners will award zero marks, even though the answers given by the student show good knowledge of the topic. Others including ourselves would be kinder than that. In cases of this type, only one set of marks should be lost.
The one exception that may arise concerns multiple choice questions where wrong answers may be penalised as an incentive to prevent students guessing. In this case, the examining body would make this information known well in advance of the examina- tion date. This is simply because examiners are human beings with human fail- ings, and work that can be easily marked makes them feel generous.
Answer to Question 1. The day of the month is shown in brackets. Answer to Question 5. Leech, Tidy and Rock are creditors. Purchases ledger: Credits in personal accounts should be obvious. Revenue b d e g. Answer to Question Revenue: of a ; all of b ; 2, of c ; 1, of d. Debenture interest similarly not applicable. Always provide for probable losses. Percentages using ageing schedule. Flat sum. Allowance for doubtful debts: the amount of accounts receivable on a certain date which will probably turn out to be bad debts and have to be written off eventually.
Values per balance sheet also overstated. An increase in value, without sale, does not represent realisation. For 9 months Note: Avoid very technical language as it is for a non-accountant. Keep it fairly brief. That is that the asset must have cost the business something that can easily be measured in monetary terms. It cannot therefore be included as a business asset.
Accordingly the increase in the value is also irrelevant. Assets are called current assets when they represent cash or are primarily for conversion into cash or have a short life. An example of a short-lived asset is that of the stock of oil held to power the boilers in a factory, as this will be used up in the near future.
Other examples of current assets are cash itself, stocks of goods, debtors and bank balances. Other vehicles, such as a breakdown truck, have been bought for use, not resale, and are consequently non- current assets. Some of the costs were paid for in a previous year, some items are still owed for. This means that costs do not mean items paid for in the year. Similarly, a lot of sales will still be owed for — see accounts receivable — so that this does not equal cash received in the year.
Depreciation represents the part of the cost used up in the year. As equipment may last for several years, only part will be charged against one year. The remaining value of the equipment is shown in your balance sheet. LIFO: Advantage: cost of sales nearer to current price levels. Disadvantages: not related to actual movement of goods, therefore inventory valuations will not match up to current price levels.
Descriptions per text. Sales 1, Trade accounts receivable 1, Being reversal of trade sample sent to John Grey wrongly treated as a sale. Trade samples 1, Purchases 1, Being correction of treatment of trade sample. Repairs and renewals Purchases Being correction of treatment of paint used to paint stockroom wrongly charged to purchases.
Machinery increased by 1, subject to depreciation in the balance sheet. Also electricity owing to be included as extra accrual in balance sheet.
If the bank demanded payment of the overdraft, the company would face severe liquidity problems. It should probably try to reduce the level of inventory held and reduce the bank overdraft. Credit balance on suspense account treated as sales. This implies that CD has far higher expenses than AB. Similarly the quick asset ratio is too low.
AB is by far the more successful business. It is turning over its inventory more frequently and has kept expenses under control. It is also in a good liquid position and able to meet its debts. CD on the other hand is in a worse position on each factor. Loan note holders normally have no voice in the running of the company.
Higher expenses. Can this be maintained? Only then can we sensibly compare the return from the business with the return from the investment. Demerits depend on whether branch staff are given room for initiative within the above system, or else the HO stupidly lets the system strangle all initiative. Answer to Question 2. B Time basis.
C Pro rata to sales. The split of cost of sales is rather tricky. Answer to Question 7. It should be reviewed annually for impairment. It should not be amortised. Financial statements should be drawn up on the accrual basis and on the assumption that the entity is a going concern.
See Chapter 13 Section Uniform account- ing policies should be used and, if possible, the same accounting date. Land normally is not to be depreciated. Buildings are to be depreciated over normal expected useful life. Costs of maintenance do not mean that depreciation should not be charged. The degree of obsolescence and the full physical life will have to be taken into consideration.
Straight line 25 per cent would take only four years to write cost down to nil. On the other hand, 15 per cent reducing balance would take over three times that period. If repairs and maintenance are likely to be light in early years and heavy in later years, it may make sense to use a fairly high rate using the reducing balance method. If it has, then this sum can be written off over an appropriate period. Sales prices are only used in certain cases, e.
Market value of investments at These were. Sometimes, management is accused of short-termism, for example delaying necessary capital expenditure in order to keep costs low. Non-current assets in Son and Daughter reduced by 1, Non-current assets in S2 reduced by 1, Large is therefore quite clearly a subsidiary undertaking and will be treated as such in the consolidated accounts.
This means that Medium is an associated or related undertaking. It will simply be shown as an investment. In this case, the company appears as if it may have liquidity prob- lems, possibly due to excessively high inventory. The EPS and dividend cover ratios would need to be compared to those of other companies in the same sector, as would all the other ratios calculated, before any further conclusions could be drawn. Report to Martha The analysis of the results which are shown above indicates a major query associated with the expenses of the existing business in the second half of the year.
The reasons behind these changes cannot be given since information is not given. If this trend continues, the business will be unable to meet its liability to creditors. If this is not managed, the owner needs to be advised of the necessity of urgent action. It will give some indication if comparisons are made over a period of time as to whether the business is investing and expanding or declining, and whether a proper capital structure is in place.
The capital structure will depend on the nature of the business and the risks it is involved with, whether it is high or low geared for example. The balance sheet, being a position statement at one point in time, does not give a dynamic picture of future prospects which are essential in planning liquidity. Examiners have been known to switch them, so always check which is which.
This is a most disappointing result after experiencing such a marked increase in its sales activity. Of course this is not a surprising result since more generous credit terms were offered in in order to stimulate sales. In subsequent years it may not be possible to carry on with this policy unless it is able to raise even more long-term funds. Hence the com- pany has maintained its dividend at the same level as in Is this level necessary?
What terms are customers given? Purchases cannot be calculated for but for the later years is: Cost of goods sold Add Closing inventory 45 85 Less Opening inventory 20 45 Purchases Purchases for are taken as cost of goods sold. Revaluations of non-current assets do take place in many companies, but these are usually based on the views of professional valuers e. Balance sheets 2 AA has substantial freehold property.
Such freehold property gives a large measure of solidarity to an investment, and also provides a useful security on which to borrow money if required. BB appears to own no freehold or leasehold property — at least, no entry for either appears in its bal- ance sheet. AA may therefore have to face the cost of replacement before long.
The working capital situation in both companies is satisfactory but the need for the overdraft in AA underlines the high stock and slow-paying debtors in that company. By arithmetical deduction, Purchases is therefore 2, Purchases for is taken opening inventory not being known as same as Cost of sales. The extra sales generated of This will be largely due to cash received from the issue of loan notes. The debtors are taking much longer to pay: This raises the question as to the creditworthiness of the businesses to whom the extra sales have been made.
Every sensible effort should be made to reverse the trend in the accounts receivable ratio. There is a large cash balance which does not seem to be making a return on its funds. This should be utilised more fully. Further informa- tion will be needed.
Further information will be needed. This may indicate poorer management, or may be due to the environment in which the branch is operating — it may, for example, be in competition with a price-cutting competitor. Control over debtors appears weak, but may be due to a need to compete. The only positive ratio result is the lower inventory turnover period. However, it could actually be an indication that mismanagement is occurring.
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