Cambridge A Level Accounting 9706 — 2003 Oct/Nov Paper 3 · Variant 1

CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Level ACCOUNTING 9706/03 Paper 3 Multiple Choice October/November 2003 1 hour Additional Materials: Multiple Choice Answer Sheet Soft clean eraser Soft pencil (type B or HB is recommended) READ THESE INSTRUCTIONS FIRST Write in soft pencil. Do not use staples, paper clips, highlighters, glue or correction fluid. Write your name, Centre number and candidate number on the answer sheet in the spaces provided unless this has been done for you. There are thirty questions on this paper. Answer all questions. For each question there are four possible answers A, B, C, and D. Choose the one you consider correct and record your choice in soft pencil on the separate answer sheet. Read the instructions on the Answer Sheet very carefully. Each correct answer will score one mark. A mark will not be deducted for a wrong answer. Any rough working should be done in this booklet. Calculators may be used This document consists of 11 printed pages and 1 blank page.
CIE 2003 [Turn over

2 9706/3 Nov03 1 When a company calculates the net present value of proposed capital expenditure, which rate does it use to discount annual income and expenditure? A cost to the company of providing the initial outlay B current rate of inflation C rate of interest payable on a bank overdraft D rate which will give the highest net present value 2 What is not included in cash flow statements? A capital commitments B foreign currency deposits C liquid investments D taxation 3 The table shows an extract taken from the final accounts of a limited company. $ purchases of machine 100 000 vehicle 10 000 disposal of motor vehicle original cost 5 000 net book value 500 part exchange value 1 500 The only acquisitions and disposals were those stated above. What will be the net cash outflow as a result of these transactions? A $103 500 B $108 500 C $110 000 D $115 000 4 When a company redeems shares, it may create a capital redemption reserve. Why does it create this reserve? A to make the Balance Sheet balance B to protect the creditors' rights C to provide cash for the redemption D to replace the cash used in the redemption

3 9706/3 Nov03 [Turn over 5 A company’s Balance Sheet shows: $ Ordinary share capital 60 000 Redeemable preference shares 300 000 Revaluation reserve 100 000 Share premium 200 000 Profit and Loss Account 400 000 The preference shares are to be redeemed at par with no new issue of shares. The company wishes to maintain maximum distributable profits. What will the balance on the Profit and Loss Account be after redemption of the shares? A $100 000 B $200 000 C $300 000 D $400 000 6 A company's Balance Sheet extract is given. $ Share capital and reserves Ordinary share capital (shares of $1.00) 1 000 000 Profit and Loss Account (300 000) 700 000 The directors have decided to write off the debit balance on the Profit and Loss Account together with Goodwill of $100 000. The shareholders agreed to exchange their shares for new ordinary shares of $0.50. How many shares will the directors have to issue to the shareholders? A 600 000 B 700 000 C 1 200 000 D 1 400 000 7 A limited company purchases a partnership. It issues to the partners 10% debentures and pays them cash in full settlement of the purchase price. Which of the following is true? A The company's gearing is reduced. B The company intended to expand its business. C The company's reserves are reduced. D The partners now own some of the equity in the company.

4 9706/3 Nov03 8 A limited company acquires a business from a sole trader. The net assets of the business are $612 000. The purchase price has been agreed at $700 000. The Goodwill element is to be paid in cash. The balance of the consideration is to be made by the issue of 300 000 shares of $0.50 each valued at $1.80 per share and the balance in 7% loan stock valued at $90 per $100. What is the par value of the loan stock? A $64 800 B $72 000 C $80 000 D $177 778 9 A company acquires the business of an unincorporated trader. The net assets are acquired at the following agreed values. $ premises 35 000 other fixed assets 19 500 net current assets 25 000 bank overdraft 8 000 The company pays for the business by issuing 75 000 shares of $0.50 each. What is the premium on each share, to the nearest cent? A $0.17 B $0.45 C $0.56 D $0.67 10 What does the Companies Act 1985 require to be disclosed in the directors’ report? A audit fee B directors’ remuneration C the company’s accounting policies D the main activity of the company 11 An accounting standard (FRS 3 'Reporting Financial Performance') requires a special format for the Profit and Loss Account. Under this standard which of the following need not be separately disclosed? A profit or loss on continuing operations B profit or loss on discontinued operations C profit or loss on disposal of an operation D profit or loss on overseas operations

5 9706/3 Nov03 [Turn over 12 An accounting standard (SSAP 25 'Segmental Reporting') requires companies to disclose certain information in published accounts. What does this standard require to be disclosed? A amounts of annual depreciation B earnings per share C stock valuation methods D turnover in different classes of business 13 Which of the following correctly shows the effect of a company revaluing upwards its fixed assets? return on capital employed gearing A decrease decrease B decrease increase C increase decrease D increase increase 14 When deciding whether to transfer money from an interest bearing bank account to an investment in ordinary shares, which of the following ratios should be considered? A dividend yield B earnings per share C interest cover D return on shareholders' funds 15 A company wishes to reduce its gearing. What will achieve this? A a bonus issue of ordinary shares B an issue of debentures C an issue of convertible loan stock D a rights issue of ordinary shares

6 9706/3 Nov03 16 How may a company 'window dress' its financial statements? A amortising Goodwill as soon as it arises B failure to write down freehold property following a revaluation shortly after the Balance Sheet date C omitting to write down stock which has been stolen after the Balance Sheet date D writing off debts before they have become bad 17 The capital structure of a company is given. $ 300 000 ordinary shares of $0.50 150 000 reserves 85 000 10% debentures 2004 - 2005 60 000 The company then issues $20 000 8% debenture stock 2008 - 2010 followed by the issue of bonus shares on a one for three basis. Finally it makes a rights issue of 1 ordinary share for every two already held at $0.80 per share. How will these transactions affect the Balance Sheet? gearing reserves A decrease decrease B decrease increase C increase decrease D increase increase

7 9706/3 Nov03 [Turn over 18 A company makes three products for which details per unit are given. product X product Y product Z selling price $18 $35 $50 direct materials $4 $5 $5 direct labour hours 0.5 2 2.5 The direct labour rate is $8.00. Direct labour hours are limited. In which order should the products be ranked to achieve the maximum profit with the available labour hours? first next last A X Y Z B Y Z X C Z X Y D X Z Y 19 A product passes through two processes. Information for process 2 is given. $ material transferred from process 1 (2000 units) 40 000 added material 2 400 labour 16 000 overheads (based on 50% of labour) 8 000 There was no opening stock of work-in-progress but at the end of the period 400 units were complete as to 100% of materials and 50% labour. What was the value of the closing stock of work-in-progress? A $2080 B $2880 C $10 080 D $10 880 20 What is a master budget? A a budget based on a limited factor B a cash budget C a flexible budget D a set of budgeted final accounts

8 9706/3 Nov03 21 The table shows a company’s estimated sales. cash ($) credit ($) February 10 000 15 000 March 10 000 25 000 April 10 000 35 000 Debtors are expected to pay as follows: 60% in month following sale 40% in second month following sale How much cash from sales is received in April? A $21 000 B $25 000 C $31 000 D $45 000 22 The table shows the budget for a business. fixed budget sales and production 20 000 units sales $400 000 variable costs $280 000 fixed costs $50 000 Actual production and sales were 14 000 units. Using a fixed budget, what would profit be? A $28 000 B $34 000 C $49 000 D $84 000 23 A company plans to sell 12 000 units in month 1 and 13 000 units in month 2. Sales will increase by 1000 units each month after that. Production will be scheduled so that at any one time a stock of finished goods equal to the next month’s sales will be held, and a stock of raw materials equivalent to next month’s required production. What will be the budgeted stocks, in units, at the end of month 3? raw material (equivalent units) finished goods A 15 000 14 000 B 15 000 16 000 C 16 000 15 000 D 17 000 16 000

9 9706/3 Nov03 [Turn over 24 A company's debtors total $42 000 when the debtors' days are 40. The company budgets in the coming year for a 30% increase in turnover and debtors' days reduced to 30. What will the budgeted debtors be at the year end? A $24 231 B $31 500 C $40 950 D $43 077 25 The cost of sales for a business comprises direct materials and direct labour. At the end of a trading period the following variances are calculated. $ direct materials price variance 800 adverse direct materials usage variance 700 favourable direct labour rate variance 650 favourable direct labour efficiency variance 750 adverse If the actual cost of sales was $12 220, what is the standard cost of sales? A $12 020 B $12 120 C $12 320 D $12 420 26 The following information relates to labour costs. standard pay rate per hour $7.50 actual pay rate per hour $9.00 actual hours worked 60 000 labour efficiency variance $12 000 adverse What is the standard number of labour hours for actual output? A 48 667 B 51 333 C 58 400 D 61 600

10 9706/3 Nov03 27 Budgeted and actual sales of a product are given. budget actual sales : number of units 1 200 1 240 selling price per unit $16 ? sales revenue ? $19 530 What is the sales price variance? A $310 adverse B $310 favourable C $330 adverse D $330 favourable 28 Budgeted and actual labour costs for making a product are given. standard hours 4 000 budgeted wages $33 000 actual labour rate paid per hour $8.10 labour rate variance $630 favourable wages paid $33 390 What is the labour efficiency variance? A $1620 adverse B $1620 favourable C $1650 adverse D $1650 favourable 29 Which method of investment appraisal is based on profits? A accounting rate of return B internal rate of return C net present value D payback

11 9706/3 Nov03 30 In a cash flow statement, which item is a cash outflow? A a decrease in trade debtors B an increase in stock C an increase in trade creditors D an issue of preference shares