Answers Part Examination – Paper 1.1 (INT) Preparing Financial Statements (International Stream) June 2004 Answers Section A A 20,000 minus 16,000 x 20%/2 B (7/12 x 8,400) + (5/12 x 12,000) = 9,900 1,000 paid in advance in sundry payables D 28,500 + 42,000 – 38,000 A (160,000 x 20%) + (40,000 x 20% x 3/4) + (50,000 x 20% x 1/2) D C Receivables ledger control account 308,600 154,200 2,400 147,200 1,400 4,900 4,600 307,100 –––––––– 465,200 –––––––– –––––––– 465,200 –––––––– B A C 386,400 minus loss on 3,800 Receivables ledger total account 130,000 Balance 686,400 1,400 4,160 2,000 181,000 –––––––– 874,960 –––––––– 744,960 –––––––– 874,960 –––––––– 10 D Payables ledger total account 302,800 2,960 2,000 84,000 –––––––– 391,760 –––––––– 11 C 60,000 Balance –––––––– 391,760 –––––––– 281,250/3 – 53,050 12 D 13 B G 90,000 110,000 ––––––––– 200,000 ––––––––– H 20,000 30,000 66,000 ––––––––– 116,000 ––––––––– 331,760 I 10,000 30,000 44,000 ––––––––– 84,000 ––––––––– 14 A 15 C 16 A 17 A 18 D 19 19 A 20 B 21 C 22 D 23 C 280,000 – (112,000 + 40,000 + 48,000) = 80,000; minus 20% = 64,000 24 C 290,000 x 20% 25 A 20 Section B (a) Sales revenue less: less: Minica Income statement for the year ended 31 December 2003 $ $ (3,845,000 – 15,000) 3,830,000 Cost of sales Opening inventory Purchases (2,184,000 – 60,000) Carriage inwards 360,000 2,124,000 119,000 –––––––––– 2,603,000 450,000 –––––––––– Closing inventory Gross profit less: Expenses Sundry administrative expenses Carriage outwards Bad and doubtful debts Depreciation Profit on sale of office equipment (W1) 430,300 227,000 26,000 94,000 (9,000) –––––––––– (W2) (W3) (W4) Net profit for the year (b) 2,153,000 –––––––––– 1,677,000 768,300 –––––––––– 908,700 –––––––––– The proposed dividend of $240,000 would be disclosed by note in Minica’s published income statement Workings $ Sundry administrative expenses 416,000 + 28,700 – 14,400 430,300 Bad and doubtful debts Bad debts written off Allowance (31,000 – 20,000) 15,000 11,000 –––––– 26,000 88,000 6,000 –––––– 94,000 Depreciation (460,000 – 20,000) x 20 per cent 60,000 x 20 per cent x 6/12 $ Profit on sale of equipment 15,000 proceeds minus 6,000 net book value 21 9,000 $ Repairs to premises Premises asset Suspense $ 8,700 7,800 900 Correction of error in posting cost of repairs to premises Suspense account Motor vehicle disposal 1,000 1,000 Entry for unposted item Accumulated depreciation Depreciation expense (or Income statement) 6,000 6,000 Motor vehicle disposal Motor vehicles – cost Transfer of cost of vehicle destroyed to disposal account Accumulated depreciation Motor vehicle disposal Transfer of depreciation on vehicle destroyed to disposal account 30,000 Income statement Motor vehicle disposal Loss on destruction of car transferred 23,000 30,000 6,000 6,000 23,000 Renada Cash flow statement for the year ended 31 October 2003 $ Cash flows from operating activities Net profit before taxation Adjustments for: Depreciation Loss on sale of office equipment Operating profit before working capital changes Increase in inventory Increase in receivables Increase in payables Cash used in operations Income taxes paid Net cash used in operating activities Cash flows from investing activities Purchase of non-current assets Proceeds from sale of noncurrent assets Net cash used in investing activities Cash flows from financing activities Proceeds from issuance of share capital Net cash from financing activities $ 200,000 120,000 50,000 ––––––––––– 370,000 (1,000,000) (530,000) 1,050,000 ––––––––––– (110,000) (120,000) ––––––––––– (230,000) (700,000) 30,000 –––––––––– 500,000 –––––––––– Net decrease in cash and cash equivalents Cash and cash equivalents at 31 October 2002 Cash and cash equivalents at 31 October 2003 22 (670,000) 500,000 ––––––––– (400,000) 140,000 ––––––––– (260,000) ––––––––– Working Non-current assets – net book value Balance Revaluation reserve $ 1,000,000 300,000 Assets purchased (balancing figure) $ 80,000 120,000 Transfer disposal Depreciation 700,000 Balance 1,800,000 –––––––––– 2,000,000 –––––––––– –––––––––– 2,000,000 –––––––––– (a) 31 October 2002 (i) Inventory holding period 600,000/6,300,000 x 365 35 days 1,600,000/7,200,000 x 365 (ii) 2003 81 days Average period of credit granted to customers 1,270,000 / 8,400,000 x 365 55 days 1,800,000 / 9,000,000 x 365 73 days (iii) Average period of credit allowed by suppliers 1,050,000 / 6,400,000 x 365 60 days 2,100,000 / 8,200,000 x 365 (b) (i) 93 days All three ratios show deterioration The large increase in the inventory holding period suggests that the company is having difficulty making sales in the closing months of the period Customers are taking longer to pay, placing further strain on the company’s liquid position The company is attempting to finance the increased inventory and receivables by paying its suppliers more slowly, which will probably have the effect of losing supplier goodwill (ii) (a) The main reason for the decline is the reduced gross profit percentage If the gross profit percentage of 2002 (25 per cent) had continued in 2003, an additional $450,000 of profit would have been made Instead, the gross profit percentage went down to 20 per cent Other contributing factors are: – the new non-current assets ($700,000) were not acquired until near the end of the year, and thus may not be fully operational – the share issue also took place right at the end of the year, and so has not yet been deployed in profit-earning assets Comparability means that users are able to draw conclusions about the performance or financial position of a business by relating figures for a particular period to other relevant figures Possible types of comparison are: (i) comparison with figures for the same business for earlier periods (ii) comparison with figures for other businesses for the same period (iii) comparison with budgets or forecasts (Two types required for full marks) (b) Two (i) (ii) (iii) from: by requiring the disclosure of accounting policies and the effect of changes in them by reducing or eliminating the number of possible alternative treatments for similar items available to businesses by requiring businesses to treat similar items in the same way within each period and from one period to the next, unless a change is required to comply with accounting standards or to ensure that a more appropriate presentation of events or transactions is provided 23 Part Examination – Paper 1.1 (INT) Preparing Financial Statements (International Stream) June 2004 Marking Scheme Section B Marks 1/ 1/ 1/ Sales revenue Opening inventory Purchases Carriage inwards Closing inventory Gross profit correct Sundry administrative expenses Carriage outwards Bad and doubtful debts Depreciation Profit on sale 1/ 1 1/ 11/2 Heading –– 11 –– 12 –– Proposed dividend For each journal entry 1/ 1/ per entry for narrative 1/ ––– 11/2 11/2 x Calculation of cash used in operations 1/ Profit Depreciation Loss on sale Working capital movements x 1/2 1 11/2 –––– 1/ Taxation Investing activities Purchases Proceeds of sale x 1/2 21/2 1/ Share issue Cash movement 2x 1/ Heading 1/ Layout –– 11 –– (a) Ratios 3x1 (b) (i) Comments 3x1 (c) (ii) Reasons for decline 2x2 –– 10 –– (a) Explanation Types of comparison (b) 2x1 2x2 25 2 –– 4 –– –– ... comparison are: (i) comparison with figures for the same business for earlier periods (ii) comparison with figures for other businesses for the same period (iii) comparison with budgets or forecasts... businesses to treat similar items in the same way within each period and from one period to the next, unless a change is required to comply with accounting standards or to ensure that a more...Part Examination – Paper 1.1 (INT) Preparing Financial Statements (International Stream) June 2004 Answers Section A A 20,000 minus 16,000 x 20%/2 B (7/12 x 8,400) + (5/12 x 12,000) = 9,900 1,000