Answers Part Examination – Paper 1.1(INT) Preparing Financial Statements (International Stream) June 2003 Answers Section A B months at 90,000 per year, months at 120,000 per year; accrual month C (8,950 – 4,080 – 380) – (4,140 + 40) = 310 B 180 + 190 + 3·3 – 228 – – 4·2 – 1·5 – 2·4 = 129·2 D 8,200 + 34,600 + 3,200 – 3,600 – 9,300 = 33,100 D 38,000 – (50,000 – 36,200) = 24,200 A (350,000 + 9/12 x 30,000 + 9/12 x 51,000) x 20% = 82,150 B A 284,700 – (32,000 – 28,500) = 281,200 A 300 @ 230 + 500 @ 220 + 50 @ 190 = 188,500 10 D 11 D 12 A 3,000 + 9,000 – 3,460 – 5,600 – 500 = 2,440 13 C 14 A 15 A 16 C 17 B 12,000 + 240 + 6,000 + 4,000 = 22,240 18 B Share capital 50 + 25 + 30 Share premium 180 – 25 + 18 19 A 20 D 980 – 40 – 130 + 100 + 80 = 990 21 C 180 – 152 – 21 = 22 A 20% x 260 = 52 23 D 210 + 160 – 72 – 32 – 21 = 245 24 D 25 A 22/500 = 4·4% 21 Section B (a) Alamute and Brador Income statement for the year ended 31 March 2003 $ Sales Revenue Cost of sales: Opening inventory Purchases Less: Closing inventory Gross profit Less: Expenses: Salaries Rent (30,000 + 11,000) Insurance (4,000 – 1,500) Sundry expenses Depreciation (35,500 × 20%) Bad and doubtful debts (2,400 – 500) 15,600 184,600 ———— 200,200 21,400 ———— Alamute $ Net profit Interest on capital Balance of profit 60:40 1,900 ———— 2,500 51,000 ———— 53,500 ———— 34,000 ———— 36,500 ———— (179,900) ———— 90,000 ———— Total $ 90,000 (5,000) ———— 85,000 (85,000) ———— – ———— Current Accounts Alamute $ Balance Drawings Balance Brador $ 2,500 (b) (178,800) ———— 269,900 88,000 41,000 2,500 39,400 7,100 Net profit Division of profit $ 448,700 48,400 8,900 ––––––– 57,300 ––––––– Brador $ 2,600 36,900 ––––––– 39,500 ––––––– Balance Share of profit Balance 22 Alamute $ 3,800 53,500 ––––––– 57,300 ––––––– Brador $ 36,500 3,000 ––––––– 39,500 ––––––– Paniel Cash flow statement for the year ended 31 March 2003 $ 746,000 (72,000) ———— Net cash inflow from operating activities Interest paid Cash flows from investing activities Purchase of non-current assets (W1) Proceeds from sale of non-current assets (1,120,000) Cash flows from financing activities Proceeds from issuance of share capital Proceeds from long-term borrowings Dividends paid (260,000 – 110,000) 200,000 400,000 (150,000) ————— Net cash from financing activities 450,000 ———— 4,000 14,000 ———— 18,000 ———— Increase in cash Cash at 31 March 2002 Cash at 31 March 2003 Opening balance Purchases (a) Opening capital Capital introduced Less: Drawings Closing capital Profit is therefore (b) Payments to suppliers Discounts received Balance carried forward 674,000 (1,400,000) 280,000 ————— Net cash used in investing activities Workings $ Fixed assets – cost $ 2,140,000 1,400,000 ————— 3,540,000 ————— Transfer – disposal Closing balance $ 480,000 3,060,000 ————— 3,540,000 ————— $ 128,000 50,000 ———— 178,000 48,000 ———— 130,000 184,000 ———— 54,000 ———— Purchases Total Account $ Balance brought forward 888,400 Goods taken by Senji 11,200 Refunds from suppliers Purchases 171,250 ————— 1,070,850 ————— 23 $ 130,400 1,000 2,400 937,050 ————— 1,070,850 ————— (c) $ Cost of sales: Opening inventory Purchases Less: Returns $ 243,000 595,400 41,200 ———— 554,200 ———— 797,200 Less: Closing inventory 261,700 ———— 535,500 ———— Sales figure is therefore $535,500 × 3/2 = $803,250 (a) (i) Current ratio 990,000/430,000 1,420,000/860,000 Year ended 31 March 2002 2003 2.3:1 1·65:1 (ii) Quick ratio 1·05:1 0·81:1 (iii) Inventory turnover 540,000/1,900,000 × 365 720,000/2,400,000 × 365 104 days (iv) Average period of credit allowed to customers 450,000/2,800,000 × 365 700,000/3,700,000 × 365 59 days (v) (b) 450,000/430,000 700,000/860,000 109 days 69 days Average period of credit allowed by suppliers 410,000/2,080,000 × 365 690,000/2,580,000 × 365 72 days 98 days Comments (i) The current ratio and quick ratio are both down by over 20% The drop in the quick ratio to below 1:1 could indicate liquidity problems (ii) The increase in sales, and hence in receivables, purchases and payables, is placing strain on the working capital, evidenced by the increase in the receivables and payables payment periods (iii) The business is one requiring large holdings of inventory, but inventory control appears to have deteriorated slightly between the two years (iv) Cash sales have decreased considerably in 2003 Making more sales for cash could contribute to an improvement in the current and quick ratios because this would reduce the overdraft Other comments considered on their merits (a) (i) Reserves are balances in a company’s balance sheet forming part of the equity interest and representing surpluses or gains, whether realised or not (ii) Share premium account The surplus arising when shares are issued at a price in excess of their par value Revaluation reserve The unrealised gain when the amount at which non-current assets are carried is increased above cost (Other examples given credit on their merits) (b) A bonus issue is the conversion of reserves into share capital, with shares being issued to existing members in proportion to their shareholdings, without any consideration being given by the shareholders A rights issue is again an issue of shares to existing members in proportion to their shareholdings, but with payment being made by the shareholders for the shares allotted to them The fundamental difference between them is that the rights issue raises funds for the company whereas the bonus issue does not 24 Part Examination – Paper 1.1(INT) Preparing Financial Statements (International Stream) June 2003 Marking Scheme Marks Gross profit (4 × 1/2) Rent Insurance Depreciation Bad and doubtful debts 1 1 Division of profit —— Layout and style —— Current accounts Share of profit Drawings Balances × 1/2 1 —— Interest paid Capital expenditure Purchases of non-current assets Proceeds of sale of non-current assets Financing Issue of shares Issue of loan notes Dividends paid Increase in cash and cash movement (a) —— 12 —— 1 11/2 Format and style —— 101/2 max 1/ Opening capital Capital introduced Drawings Closing capital 1 1/ —— (Marks awarded for having figures the correct way round) mark per item × 1/2 (b) 1/ (c) Opening inventory Purchases Purchases returns Closing inventory 1/ 1/ 1/ 1/ Sale figure correct —— (a) mark per pair of ratios × (b) mark per valid comment × 3 —— —— 25 Marks (a) (b) (i) Definition Examples × Origins × 2 —— Bonus issue Rights issue Difference 2 —— 26 —— 11 ... issue is the conversion of reserves into share capital, with shares being issued to existing members in proportion to their shareholdings, without any consideration being given by the shareholders... issue is again an issue of shares to existing members in proportion to their shareholdings, but with payment being made by the shareholders for the shares allotted to them The fundamental difference