Mark Scheme (Results) January 2011

GCE

GCE Accounting (6002/01) Paper 01

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Section A
Question Answer Number 1(a)
Profit and Loss Account for Bangla Radios plc for Y/e 31st Dec 2010 Turnover Cost of sales Gross profit Distribution costs Administrative expenses Other operating income Other Investment Income Interest Receivable Interest payable Profit on ordinary activities before tax Corporation tax Profit on ordinary activities after tax 3645000 1134000 2511000 996700 516750 18650 46720 4780 91000 976700 165000 811700 o/f o/f o/f o/f o/f W3Administrative Expenses o/f C o/f W4 Interest Payable 15 x Debenture 91000
C

Mark
W1 Cost of Sales

Direct Labour Direct materials Factory Deprctn Machinery Depreciation Production Director Stock Adjust

521000 374000 84000 87000 59000 9000 1134000

9 x

W2 Distribution Costs Commission on sales Promotions and Advertising Fuel Motor Lorries Depctn Shop Rent Transport Staff Wages Shop staff wages Marketing Director

36450 47000 73500 133750 290000 127000 231000 58000 996700

10 x

Bad Debts Written Off Administration staff wages Finance Director Professional fees

1750 197000 64000 254000 516750

4 x

2 x

(40)

Question Number 1(b)

Answer Maximum 8 Marks for arguing one side only

Mark (12)

Case For Importance of Directors Report Report gives information to eg shareholders which they could use to make a decision eg invest more funds in the company. Shareholders may be assured the company is acting in an ethical manner Other stakeholders eg pressure group may use information in the Report to bring about change in company policy eg treatment of disabled Disclosures may be required under Stock Exchange regulations, which may be appropriate in the Directors Report eg legislation pending Information is given to shareholders which allows them to see in some detail how the company is performing Eg principal activities, review of position of business Post balance sheet events, future developments Names of directors, interests of directors Employee involvement, disabled employees policy Political and charitable donations Creditor payment policy, creditor payment days (Maximum of 4 marks for listing of items contained in Report)

Case Against Importance of Directors Report Report costs personnel time to prepare and money to print etc Directors may use Report to window dress accounts, give an unrealistic positive view of the company, as it is in their interest to do so. Readers with no knowledge of accounts may not understand the report. 2 Marks

Conclusion

Should relate to above points. Eg Directors Report is important.

Question Answer Number 2(a) Depreciation per year

Mark
675,000 840,000 960,000 8 56 5 135,000 135,000 16 12,000 35,000 9 135,000 705,000 825,000 4,480,000 5,712,000

Payback period Cumulative Year 0 1 2 3 4 5 Cash Inflow 5,712,000 5,712,000 5,712,000 5,712,000 5,712,000 Cash outflow -2,000,000 5185000 5,185,000 5305000 5,305,000 5,305,000 Net cash Flow -2,000,000 527,000 527,000 407,000 407,000 407,000 Column o/f Cash Flow -2,000,000 -1,473,000 -946,000 -539,000 -132,000 275,000 Column o/f

o/f C

Payback is after

and

132 407

ie

3.89 months 26 marks

Net Present Value Discounted Year 0 1 2 3 4 5 Net cash Flow -2000000 527,000 527,000 407,000 407,000 407,000 Multiplier 1.000 0.893 0.797 0.712 0.636 0.567 NPV Cash Flow -2,000,000 470,611 420,019 289,784 258,852 230,769 -329,965

o/f C 14 marks

(40)

Question Answer Number 2(b) Answers may include : Payback method says invest as project does pay back . However, is the payback period of 4 years 3.89 months (o/f) acceptable for the company? Is it too long? Project is profitable (each year) NPV method states do not invest as NPV is negative (o/f) NPV may be a better method to use as it includes falling value of money over time Other Relevant Points 2m has to be raised which may worsen the gearing ratio How accurate are the predictions for costs, cost of capital, and revenues? (need 2 of these 3) Chance of renewal of contract after 5 years ? Would this be profitable Other possible investment projects available at present? More or less profitable? Objectives/strategy of company? Is this investment in line with objectives? If only one side of argument maximum of 8 marks. Overall Conclusion - 2 marks Company should/ should not invest.

Mark

(12)

Question Number 3(a)

Answer Reconciliation of operating profit to net cash flow from operating activities Net Operating Profit Add Interest: Bank overdraft Debenture 14 000 + 3 500 Profit on Sale of fixed asset Depreciation 38 000 + 15 000 Decrease in Stock Increase in Debtors Decrease in Creditors Net Cash Inflow from Operating Activities 67 210 1 220 17 500 (2 500) 53 000 1 500 (1 590) (1 970) 134 370 o/f C

Mark

(12)

Question Answer Number 3(b) Cash Flow Statement for the Year ended 31st December 2010 Wording is required to obtain the mark(s). Item also needs to be in correct place. Net Cash Inflow from Operating Activities Returns on Investment and Servicing of Finance Interest Paid Preference Dividend Paid Taxation Tax Paid Capital Expenditure + Financial Investment Payments to acquire tangible fixed assets Receipts from sales of tangible fixed assets Net Cash Flow from Investing Activities Equity Dividends Paid Interim Dividend 2010 Net Cash Outflow before Financing Financing Issue of Ordinary Shares Redemption of Preference shares Issue of Debenture Net Cash Inflow from Financing Decrease in Cash 134 370 o/f (18 720) o/f (8 000) (9 000) (80 000) 4 500 (75 500) o/f (94 440) (94 440) (71 290) o/f

Mark

50 000 (50 000) 50 000 50 000 o/f (21 290) o/f C (22)

Question Number 3(c)

Answer Analysis of Changes in Cash and Bank Balances during year ended 31 December 2010 31 December 31 December Change in 2009 2010 Year Cash 3 700 1 110 (2 590) Bank 7 050 (11 650) (18 700) Total 10 750 (10 540) (21 290) Need first two columns for first Other layouts for reconciliation are acceptable.

Mark

(6) Mark

Question Number 3(d)

Answer Max 8 marks available for arguing only one side. Handled poorly Working capital has decreased from 22 610 to (940) ie by 23 550 Working capital ratio has worsened from 1.84:1 to 0.98 : 1 Liquid (acid test) ratio has decreased from 0.85 : 1 to 0.36 : 1 Bank/Cash has decreased by 21 290 Directors paid themselves an enormous interim dividend Handled well Tax due at the start year has been paid. Funding via issue of debenture and/or ordinary shares that covers redemption of preference shares Conclusion 2 marks Liquidity has been handled poorly by the directors through the year.

(12)

Section B Question Number 4(a)(i) Answer Fixed Costs Rent 6 000 Depreciation 2 800 Telephone 3 000 ) Other 18 200 ) (need both) Total FC 30 000 Break Even Point Question Number 4(a)(ii) Answer Profit OR Sales = 192 000 Fixed Costs = (30 000) o/f Variable Costs = (96 000) o/f Profit = 66 000 o/f Question Number 4(b)(i) Answer Fixed Costs now 27 000 o/f Variable costs per unit now 42.50 o/f 37.50 o/f (4) Mark Contribution 37.50 o/f x 2 400 = 90 000 o/f Less FC = 27 000 o/f Profit = 63 000 o/f C (4) Mark Contribution 40 x 2 400 Less FC Profit = 96 000 o/f = 30 000 o/f = 66 000 o/f = 30 000 o/f = 40 o/f Variable costs per unit 30 + 10 = 40 Contribution per unit 80 - 40 = 40 750 units o/f C (12) Mark Mark

(4)

Contribution per unit 80.00 42.50 = Break even Point Question Number 4(b)(ii) Answer Profit = 27 000 o/f 37.50 o/f =

720 units o/f

OR Sales = 192 000 Fixed Costs = (27 000) o/f Variable Costs = (102 000) o/f Profit = 63 000 o/f

Question Number 4(c)

Answer Valid answers may include : Case for keeping Fixed charge (Option 1) Profit is higher by 3 000 o/f (if 2400 units are sold, option 2 telephone charge is 6000) Profit is the most important aim of a business more important than reducing break-even point especially when break-even point is easily met. Case for changing to Measured charge (Option 2) Measured charge sees break even point reduced by 30 units o/f which is beneficial to firm especially if trading is tough. Margin and safety is greater from 1650 (option 1) to 1680 (option 2) by 30 o/f Maximum of four marks if candidate argues for one side only. Conclusion 2 marks Keep with fixed charge method / measured charging method must be rejected.

Mark

(8)

Question Number 5(a)(i) Question Number 5(a)(ii)

Answer Total material cost variance Answer Material Price Variance for one brick = 210 o/f 120 000 = 0.175 pence o/f Adverse OR 5.6p 5.425p = 0.175p o/f Adverse = 6 720 6 510 = 210 Adverse

Mark (3) Mark (4)

Question Number 5(a)(iii)

Answer Actual cost per kilo of clay = 6 720 120 000 x 2.5 = 2.24 pence per kilo

Mark (4)

Question Number 5(b)(i)

Answer Budgeted Total cost = 120 000 x 2.5 x 2.2 p

Mark

= 6 600 Total material cost variance Question Number 5(b)(ii) Answer Material usage variance for one brick = = OR 6.16p - 5.5p = 0.66p o/f Adverse Question Number 5(b)(iii) Answer Kilos of clay to produce one brick = 7 392______ 120 000 x 2.20 = 2.8 kilos (4) Mark 792 o/f 120 000 0.66 pence o/f Adverse (4) = 7 392 - 6 600 o/f = 792 o/f Adverse (5) Mark

Question Number 5(c)

Answer Maximum of 4 marks for giving one side of the argument Case for Chinclay Probably better quality clay as no material usage variance. Earthworks has adverse usage variance so probably poorer quality clay. 0.3 kilos o/f of clay less used per brick Overall cost of using Chinclay is cheaper by 672 Cost of 1 brick for Chinclay is 5.6p, which is 0.56p cheaper than Earthworks which is 6.16p. Case for Earthworks Limited Cost per kilo of clay is cheaper by 0.04 pence per kilo. Conclusion 2 marks Best to stay with Chinclay

Mark

(8)

Question Number 6(a)(i) Question Number 6(a)(ii) Question Number 6(a)(iii) Question Number 6(a)(iv) Question Number 6(a)(v)

Answer 310 000 = 5 000 000 Answer 1900 x 6.2 p o/f = Answer 420 000 = 310 000 Answer 6.2 o/f 197 Answer 420 000 5 000 000 = 8.4 pence per share x 100 = 3.14% 1.35 times 117.80 o/f 6.2 pence per share

Mark (3) Mark (3) Mark (3) Mark (3) Mark (3) Mark 23.45 times (3) Mark OR 3743 - 2907 = 836 = 836 3 = 278.67 (6) Mark

Question Answer Number 6(a)(vi) 197 = 8.4 o/f Question Number 6(b) Answer

44 x 100 = 28.76% over 3 years 153 28.76 = 3 9.59 % per year

Question Number 6(c)

Answer Maximum of 4 marks for stating one side of argument only Case for selling shares Dividend yield is low. She could possibly earn a better return in another company, or maybe even in a bank deposit account. Price/Earnings ratio is high, so a seller would get a good price. Profit of 836 has been made Case for holding shares Dividend policy looks reasonably generous with about 75% large amount of this years profit paid as a dividend. Price/Earnings ratio is high, which means the market has confidence in the share, so price may continue to rise. Capital return of 9.59% per year is reasonably good and may continue. Conclusion - 2 marks Appears to be a share worth holding

(8)

Question Answer Number 7(a) (i) Property / Buildings Revaluation reserve (ii) Profit and Loss Stock

Mark Debit 500 000 26 000 26 000 650 000 650 000 27 500 27 500 (12) Mark 350 000 350 000 Credit 500 000

(iii) Foreign Exchange Reserve Profit and Loss

(iv) Profit and Loss Corporation Tax provision (v) Profit and Loss Preference Share Dividend Question Answer Number 7(b) Answers could include

A rights issue sees existing ordinary shareholders being offered the first right to purchase newly issued shares. The shares would be issued at a discount to the market value, to benefit the shareholders subscribing. The shareholder may be able to sell this right, if they do not wish to take up the issue themselves. Shareholders who do not take up the rights issue lose out by owning a smaller share of the company. A rights issue will involve the company receiving cash for the shares. The double entry would be Dr Cash Cr Ordinary shares. A bonus issue would involve the company issuing new shares to existing ordinary shareholders. The shareholders do not have to pay any money to the company for the shares. They may be issued to make the market price of the share lower, and therefore easier to trade. Or, the issue could be to make the balance sheet appear more like that of a large company . The shareholders do not really benefit, as they still hold the same percentage ownership of the company. If company has no cash for dividends they may give a bonus issue instead The double entry would be Dr Any Reserve Cr Ordinary shares.

(12)

Question Number 7(c)

Answer Maximum of 4 marks for stating one side of argument only Case for debentures Company raises cash required for new investment. Fees are likely to be low compared to an issue of shares e.g. prospectus, advertising, etc No capital repayments over the life of the debenture Interest is fixed which allows budgeting to take place Debenture interest is allowed against tax so less corporation tax is paid on profits Issuing debentures instead of shares reduces the chance of a takeover Case Against debentures There will be some expenses involved in debenture issue e.g. administration, underwriting etc When debenture matures, a large capital sum has to be repaid Interest must be paid on debenture even when the company makes a loss and interest will reduce the profits Issue of debenture means gearing ratio will increase Debenture holders are likely to insist on a charge over company assets Debenture holders may insist on some form of control e.g. a seat on the board Conclusion 2 marks As a source of finance for the new marina, a debenture is probably (not) a good idea.

Mark

(8)

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