Cambridge A Level Accounting 9706 — 2004 Oct/Nov Paper 4 · Variant 1

This document consists of 6 printed pages and 2 blank pages. SP (AT) S55973/2 © UCLES 2004 [Turn over UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Subsidiary Level and Advanced Level ACCOUNTING 9706/04 Paper 4 Problem Solving (Supplementary Topics) October/November 2004 2 hours Additional Materials: Answer Booklet/Paper READ THESE INSTRUCTIONS FIRST If you have been given an Answer Booklet, follow the instructions on the front cover of the Booklet. Write your Centre number, candidate number and name on all the work you hand in. Write in dark blue or black pen on both sides of the paper. You may use a soft pencil for any diagrams, graphs or rough working. Do not use staples, paper clips, highlighters, glue or correction fluid. Answer all questions. At the end of the examination, fasten all your work securely together. The questions in this paper carry equal marks. All accounting statements are to be presented in good style. Workings should be shown. You may use a calculator. The number of marks is given in brackets [ ] at the end of each question or part question.

© UCLES 2004 2 9706/04/O/N04 1 Rengaw Ltd’s Balance Sheet at 30 September 2004 was as follows. $000 $000 $000 Fixed assets 142 Current assets Stock 82 Debtors 30 Bank 28 140 Current liabilities Creditors 59 Proposed dividend 8 67 73 215 Less Long term liability 10% Debentures 2003 – 2005 40 175 Capital and reserves Ordinary shares of $1 80 8% Redeemable preference shares of $1 30 Retained profit 65 175 On 1 October 2004 the following transactions occurred: 1. The debentures were redeemed at a premium of 5%. The directors decided that the debentures should be replaced by a reserve equal to the amount of the debentures redeemed. 2. An additional 30 000 ordinary shares of $1 were issued at $1.50 to provide for the redemption of the preference shares. 3. The 8% redeemable preference shares were redeemed at a premium of $0.20 per share. The shares had been issued originally at par value. REQUIRED (a) Prepare Rengaw Ltd’s Balance Sheet immediately after the above transactions were completed, and before any further transactions had taken place. [12] Following the completion of the above transactions, the directors require a cash budget for the four months October 2004 to January 2005 to be prepared from the following information. 1. Sales in September 2004 were $40 000. 2. Forecast sales are as follows: 2004 October $48 000 2005 January $36 000 November $60 000 February $36 000 December $54 000 3. 25% of all sales are cash transactions. One month’s credit is allowed on the remainder. 4. A gross profit of 33
 % is made on all sales. 5. Goods are purchased one month before sale and paid for two months after purchase. 6. Wages of $28 000 and overheads of $10 000 are paid each month. 7. The ordinary dividend for the year ended 30 September 2004 will be paid on 1 January 2005. 8. A machine costing $30 000 will be purchased and paid for in November 2004. REQUIRED (b) Prepare a cash budget in columnar form for each of the four months October 2004 to January 2005. (All calculations should be made to the nearest $000.) [17]

3 9706/04/O/N04 [Turn over Rengaw Ltd’s bank overdraft is limited to $40 000. REQUIRED (c) State four actions the directors could take to avoid the overdraft limit being exceeded. Where possible state the effect of each of the actions on the bank balance. [11] [Total: 40] © UCLES 2004

4 9706/04/O/N04 © UCLES 2004 2 Ragle Ltd’s Balance Sheets at 30 June 2003 and 2004 were as follows. At 30 June 2003 At 30 June 2004 $000 $000 $000 $000 $000 $000 Tangible fixed assets (note 1) 630 850 Current assets Stock 41 54 Debtors 36 30 Bank 87 103 164 187 Creditors: amounts due within one year Creditors 29 41 Proposed dividend 25 54 35 76 Net current assets 110 111 Total assets less current liabilities 740 961 Creditors: amounts due after one year 10% Debentures 2002 – 2005 100 60 640 901 Capital and reserves Ordinary shares of $1 fully paid 500 700 Share premium 25 50 General reserve 100 120 Retained profit 15 31 640 901 Notes 1. Tangible fixed assets Freehold Plant and Motor Total property machinery vehicles $000 $000 $000 $000 At cost At 30 June 2003 1 000 230 140 1 370 Additions – 302 250 552 Disposals – (35) (85) (120) At 30 June 2004 1 000 497 305 1 802 Provisions for depreciation At 30 June 2003 540 120 80 740 Depreciation on disposals (30) (78) (108) Depreciation for the year 50 200 70 320 At 30 June 2004 590 290 72 952 Net book values at 30 June 2004 410 207 233 850 2. Proceeds from the sales of fixed assets were: $000 Plant and machinery 10 Motor vehicles 5

5 9706/04/O/N04 [Turn over 3. 200 000 ordinary shares of $1 were issued on 1 July 2003 at a premium of $0.125 per share. 4. An interim dividend of $0.03 per share was paid on 1 November 2003. 5. The directors propose to pay a final dividend of $0.05 per share for the year ended 30 June 2004 on 1 January 2005. 6. $40 000 of debentures were redeemed at par on 31 December 2003. Interest on the debentures is paid each year on 30 June and 31 December. REQUIRED (a) Calculate the operating profit for the year ended 30 June 2004. [5] (b) Prepare a reconciliation of the operating profit for the year ended 30 June 2004 to the net cash flow from operating activities. [7] (c) Prepare a cash flow statement for the year ended 30 June 2004. [9] (d) Prepare a statement showing the change in the bank balance between 30 June 2003 and 30 June 2004. [3] (e) Explain why a cash flow statement is important to shareholders. [8] (f) Explain how cash flow statements differ from cash budgets. [8] [Total: 40] © UCLES 2004

6 9706/04/O/N04 3 The directors of Relham Ltd plan to introduce a new product. A new machine costing $125 000 will be required. It will be sold at the end of five years for $30 000. Machinery is depreciated using the straight line method. The new product will earn $90 000 revenue annually and incur additional expenditure of $60 000 each year The purchase of the new machine will be financed by a loan at 8% per annum. The following discounting factors are given. 8% 14% Year 1 0.926 0.877 2 0.857 0.769 3 0.794 0.675 4 0.735 0.592 5 0.681 0.519 REQUIRED (a) Calculate for the new product (i) net present value (NPV) [10] (ii) internal rate of return (IRR) [7] (iii) accounting rate of return (ARR) [5] The budget for the new product is based upon the production and sale of 1000 units each year at $90 per unit. The standard cost of production of each unit is made up as follows: Direct material: 4 kilos at $5.50 per kilo. Direct labour: 1.75 hours at $12 per hour. The balance of the additional expenditure consists of administration expenses. 10% is added to the cost of production for factory profit. REQUIRED (b) Prepare Manufacturing, Trading and Profit and Loss Accounts in as much detail as possible to show the product’s budgeted additional annual profit. [10] 1000 units of the product were made and sold. The actual expenditure per unit was as follows: Direct material: 4.2 kilos at $5.25 per kilo. Direct labour: 1.5 hours at $12.60 per hour. REQUIRED (c) Calculate the following variances: (i) direct materials usage (ii) direct materials price (iii) direct labour efficiency (iv) direct labour rate. [8] [Total: 40] © UCLES 2004

8 9706/04/O/N04 BLANK PAGE University of Cambridge International Examinations is part of the University of Cambridge Local Examinations Syndicate (UCLES) which is itself a department of the University of Cambridge.

UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS GCE Advanced Level MARK SCHEME for the November 2004 question paper 9706 ACCOUNTING 9706/04 Paper 4 Problem Solving (Supplementary Topics), maximum raw mark 120 This mark scheme is published as an aid to teachers and students, to indicate the requirements of the examination. It shows the basis on which Examiners were initially instructed to award marks. It does not indicate the details of the discussions that took place at an Examiners’ meeting before marking began. Any substantial changes to the mark scheme that arose from these discussions will be recorded in the published Report on the Examination. All Examiners are instructed that alternative correct answers and unexpected approaches in candidates’ scripts must be given marks that fairly reflect the relevant knowledge and skills demonstrated. Mark schemes must be read in conjunction with the question papers and the Report on the Examination. • CIE will not enter into discussion or correspondence in connection with these mark schemes. CIE is publishing the mark schemes for the November 2004 question papers for most IGCSE and GCE Advanced Level syllabuses.

Grade thresholds taken for Syllabus 9706 (Accounting) in the November 2004 examination. minimum mark required for grade: maximum mark available A B E Component 4 120 92 82 44 The thresholds (minimum marks) for Grades C and D are normally set by dividing the mark range between the B and the E thresholds into three. For example, if the difference between the B and the E threshold is 24 marks, the C threshold is set 8 marks below the B threshold and the D threshold is set another 8 marks down. If dividing the interval by three results in a fraction of a mark, then the threshold is normally rounded down.

NOVEMBER 2004 GCE A LEVEL MARK SCHEME MAXIMUM MARK: 120 SYLLABUS/COMPONENT: 9706/04 ACCOUNTING Paper 4 Problem Solving (Supplementary Topics)

Page 1 Mark Scheme Syllabus Paper GCE A LEVEL – NOVEMBER 2004 9706 4 © University of Cambridge International Examinations 2005 1 (a) Rengaw Ltd Balance Sheet after redemption of shares and debentures $000 $000 $000 Fixed assets 142 Current assets Stock 82 Debtors 30 112 Current liabilities (1) (1) (1) Bank overdraft (28 - 42 + 45 - 36) 5 (1) Creditors 59 Proposed dividend 8 72 40 182 (1) OF Capital and reserves Ordinary shares of $1 (80 + 30) (must be shown as single item) 110 (1) Share premium 15 (1) Debenture redemption reserve (1) (1) 40 (1) Retained profit (65 - 42 - 6) 17 182 (2) OF [12]

Page 2 Mark Scheme Syllabus Paper GCE A LEVEL – NOVEMBER 2004 9706 4 © University of Cambridge International Examinations 2005 (b) Cash forecast for four months to January 2005 2004 2005 October November December January $000 $000 $000 $000 Cash sales 12 (1) 15 (1) 14 (1) 9 (1) Debtors 30 (1) 36 (1) 45 (1) 40 (1) 42 51 59 49 Creditors 27 (1) 32 (1) 40 (1) 36 (1) Wages 28 (1) 28 (1) 28 (1) 28 (1) Overheads 10 (1) 10 (1) 10 (1) 10 (1) Dividend 8 (1) Purchase of machine - 30 (1) - - 65 100 78 82 Net payments (23) (49) (19 ) (33) Brought forward (5) 1 (OF) (28) (77 ) (96) Carried forward (28) (77) (96 ) (129 ) (1) OF [17] Actions to keep bank balance within overdraft limit • reduce stock (1) by (82 000 - 32 000) $50 000 (1) • delay purchase of machine (1) saving $30 000 (1) Alternatively hire machine (1) saving most of $30 000 (1) • increase selling prices by 5% (1) if this can be done without decreasing volume (1) increasing revenue by $10 000 (1) • reduce cost of purchases by 5% (1) $6 000 (1) by obtaining discounts (1) or buying from cheaper suppliers (1) • delay payment of dividend (1) $8 000 (1) • give incentives to customers to purchase for cash (1) • negotiate longer credit from suppliers if possible without loss of confidence (1) • issue shares (1) • issue debentures (1) • renegotiate overdraft (1) 1 mark for identification 1 mark for development 1 mark for effect on bank balance Max [11]

Page 3 Mark Scheme Syllabus Paper GCE A LEVEL – NOVEMBER 2004 9706 4 © University of Cambridge International Examinations 2005 2 (a) Calculation of operating profit for the year ended 30 June 2004 $000 Retained profit at:: 30.6.2004 31 30.6.2003 (15) Retained profit for the year 16 (1) Add: interim dividend paid 21 (1) proposed final dividend 35 (1) transfer to general reserve 20 (1) debenture interest paid (5 + 3) 8 (1) Operating profit 100 [5] (b) Reconciliation of operating profit to net cash flow from operating activities $000 Operating profit 100 (1) (OF) Depreciation charges 320 (1) Profit less loss on sale of fixed assets: Plant and machinery (10 - 5) (5) (1) Motor vehicles (7 - 5) 2 (1) (3) Increase in stock (13) (1) Decrease in debtors 6 (1) Increase in creditors 12 (1) Net cash inflow from operating activities 422 [7] (c) Cash Flow Statement $000 $000 Net cash inflow from operating activities 422 (1) (OF) Returns on investment and servicing finance Interest paid (8 ) (1) (OF) Capital expenditure (552) (1) Less proceeds of sales 15 (1) (537 ) (1) (1) (123 ) Equity dividends paid (25 + 21) (46 ) (169 ) Financing Issue of shares 225 (1) Redemption of debentures (40 ) (1) Increase in cash 16 (1) [9] $000 (d) Balance at bank at 30.6.2003 87 (1) or 0 Increase in cash in year ended 30.6.2004 16 (1) OF Balance at bank at 30.6.2004 103 (1) or 0 [3]

Page 4 Mark Scheme Syllabus Paper GCE A LEVEL – NOVEMBER 2004 9706 4 © University of Cambridge International Examinations 2005 (e) Cash flow statements are important to shareholders because they show • the ability of a business to generate cash internally (1) • how much cash has been raised externally (1) • the causes of change in liquidity (2) or cash inflows (1) cash outflows (1) • viability (1) whether business can generate cash to service finance, pay tax and maintain its fixed assets (1) going concern (1) • stability of business (1) reliance upon internal sources (1) external sources (1) for financing • profitability and liquidity reconciled (1) shareholders may confuse profitability with liquidity (1) • indication of future cash flows (1); capital investment (expansion of activities) and its effect on future cash flows (1) (1 mark per point + 1 for development) max [8] (f) Cash Flow Statement Cash budget Based on historical data (1) Based on future plans (1) An account of the directors' stewardship of funds (1) For internal use (1) Cannot (legally) be manipulated (1) May be adjusted to reflect management policy (1) A requirement for some companies (1) Desirable for management purposes (1) It may be produced for budgeting Often gives rise to the principal budget purposes (1) factor (1) Max [5] Max [5] (1 mark per point plus 1 mark for development) overall max [8] 3 (a) (i) NPV 8% $ Year 0 Cost (125 000) (1) 1 $30 000 (1) X 0.926 27 780 (1) OF 2 $30 000 (OF) X 0.857 25 710 (1) OF 3 $30 000 (OF) X 0.794 23 820 (1) OF 4 $30 000 (OF) X 0.735 22 050 (1) OF (OF) (1) 5 $(30 000 + 30 000) X 0.681 40 860 (1) OF NPV (1) 15 220 (1) OF [10]

Page 5 Mark Scheme Syllabus Paper GCE A LEVEL – NOVEMBER 2004 9706 4 © University of Cambridge International Examinations 2005 (ii) IRR 14% $ Year 0 Cost (125 000) (1) 1 $30 000 (OF) X 0.877 26 310 2 $30 000 (OF) X 0.769 23 070 3 $30 000 (OF) X 0.675 20 250 4 $30 000 (OF) X 0.592 17 760 5 $60 000 (OF) X 0.519 31 140 (6 470) (1) OF (OFS) (1) (1) (1) (1) IRR 8% + (6% X 15 220/21 690) = 12 2% (1) [7] (iii) ARR (1) (1) (1) (1) 30 000 – 19 000 /1/2 X 155 500 X 100 = 14.29% (1) OF [5] (b) Budgeted Manufacturing, Trading and Profit and Loss Accounts $ $ Direct material 22 000 (1) Direct labour 21 000 (1) Prime cost (or cost of production) 43 000 (1) OF Factory profit (10%) 4 300 (1) OF 47 300 Sales 90 000 (1) OF Cost of sales 47 300 (1) OF Gross profit 42 700 Administration expenses 17 000 (1) Depreciation 19 000 (1) 36 000 Net profit on trading 6 700 (1) OF Manufacturing profit 4 300 (1) OF Net profit 11 000 [10] (c) Direct materials usage variance (4 000 - 4 200)$5.50 $1 100 (A) (2/1/0) Direct materials price variance $(5.50 - 5.25)4 200 $1 050 (F) (2/1/0) Direct labour efficiency variance (1 750 - 1 500)$12 $3 000 (F) (2/1/0) Direct labour rate variance $(12.00 - 12.60)1 500 $ 900 (A) (2/1/0) Each correct variance (2) If $ sign omitted (1) 1 mark for direction [8