Interpretation of accounting ratios — Paper 2 · IGCSE Accounting (9-1) 0985

5 The directors of JKY Limited provided the following information. For the year to 30 April 2020: $ Revenue 209 510 Purchases 121 618 At 30 April 2020: Inventory 11 050 Trade receivables 28 700 Bank overdraft 6 280 All sales and purchases were made on credit terms. Inventory at 1 May 2019 was valued at $8000 REQUIRED (a) Calculate the following ratios. Show your workings. Rate of inventory turnover workings answer (to two decimal places) Trade receivables turnover (days) workings answer (round up to nearest whole day) [5] The rate of inventory turnover for the year ended 30 April 2020 was lower than that of the previous year. The trade receivables turnover (days) for the year ended 30 April 2020 was higher than that of the previous year. REQUIRED (b) Explain the effects of the change in: (i) inventory turnover … … … … … [3] (ii) trade receivables turnover (days) … … … … … [3] The directors are concerned about the level of trade receivables. They are considering introducing cash discount of 1% for payment within 21 days or charging interest on amounts outstanding after

11 marks

Mark scheme: 5(a) Rate of inventory turnover (8 000 121618 11050) 118 568 (8 000 11050 / 2 9 525 + − = = + (1) (1) 12.45 times (1)OF Trade receivables turnover 28 700 365 209 510 1 × (1) whole formula = 50 days (1)OF 5 5(b)(i) Risk of obsolete inventory (1) Risk of damage to inventory (1) Increased storage costs (1) May need to reduce selling price to sell old inventory (1) Cash is tied up longer in inventory (1) May mean missed business opportunities if insufficient cash (1) Accept other valid points Max (3) 3 5(b)(ii) Risk of irrecoverable debts (1) A provision for doubtful debts may be required (1) Credit control may need to be reviewed (1) Cash tied up in trade receivables (1) May mean missed business opportunities if insufficient cash (1) Effect may be significant as all sales are on credit (1) Accept other valid points Max (3) 3 Question Answer Marks 5(c) Cash discount Advantages Cash will be received significantly earlier (1) Good customer relationships are maintained (1) Credit control costs may be reduced (1) Irrecoverable debts may be reduced (1) Accept other valid points Max (1) Disadvantages Less cash will be received (1) 1% may not be enough to encourage earlier payment (1) If customers have insufficient funds to pay the cash discount may have no effect (1) Accept other valid points Max (1) Interest Advantages More cash may be received (1) Cash may be received earlier (1) Interest received will increase profit (1) Irrecoverable debts may be reduced (1) Accept other valid points Max (1) Disadvantages Customer relationships may worsen (1) Increased administration costs (1) Customers may refuse to pay the interest (1) Customers may find an alternative supplier (1) Accept other valid points Max (1) Recommendation (1) 5 Question Answer Marks 5(d)(i) Accounting policies should be applied consistently so that financial statements can be compared from year to year (1) Financial statements can be compared with similar businesses (1) Any change in the company’s accounting policies, and the effect of the change, should be disclosed (1) Accept other valid points Max (2) 2 5(d)(ii) Information is relevant if it is capable of influencing the decisions being made (1) Information must be available in time for decisions to be taken (1) Relevant information helps the directors to evaluate past, present and future events (1) Accept other valid points Max (2) 2

This question in 0985/22 May/June 2020

30 days. REQUIRED (c) Advise the directors whether they should introduce the cash discount policy or the interest charge policy. Justify your answer by providing one advantage and one disadvantage of each policy. … … … … … … … … … … … … [5] The information in the accounting statements is affected by the company’s accounting policies. REQUIRED (d) Explain to the directors of JKY Limited the importance of the following objectives in selecting the company’s accounting policies. (i) comparability … … … … [2] (ii) relevance … … … … [2] [Total: 20]

9 marks

This question in 0985/22 May/June 2020

4 Carlos owns a business selling computer equipment. He provided the following information for the year ended 31 July 2020. $ Sales 240 000 Cost of sales 169 000 Operating expenses 55 000 Drawings 18 000 Capital employed 62 000 REQUIRED (a) Calculate the profit for the year ended 31 July 2020. Workings Profit for the year ended 31 July 2020 31 July 2019 $11 550 [1] (b) Calculate the following ratios correct to two decimal places. Profit margin Workings Year ended 31 July 2020 31 July 2019 8.56% Gross margin Workings Year ended 31 July 2020 31 July 2019 34.26% Return on capital employed (ROCE) Workings Year ended 31 July 2020 31 July 2019 32.08% [6] (c) Comment on the performance of Carlos’s business over the two years (2019 and 2020). … … … … … … … … … … … … … … … [6] Carlos is concerned that the business bank balance has shown a large decrease. He is considering either investing more cash from his private funds or obtaining a two-year bank loan. REQUIRED (d) Advise Carlos which option he should select. Justify your answer by providing one advantage and one disadvantage of each option. … … … … … … … … … … [5] (e) State the name of one party, other than himself and his employees, who would be interested in Carlos’s financial statements. State one reason for their interest. Interested party The interest they would have [2] [Total: 20] PLEASE TURN OVER

20 marks

Mark scheme: 4(a) Workings Profit for the year 240 000 – 169 000 – 55 000 $16 000 (1) 1 Question Answer Marks 4(b) Profit margin Workings Answer × 16000 100 240000 1 OF (1) whole formula 6.67% (1) OF Gross margin Workings Answer − × 240000 169000 100 240000 1 (1) whole formula 29.58% (1) Return on capital employed (ROCE) Workings Answer × 16000 100 62000 1 OF (1) whole formula 25.81% (1) OF 6 Question Answer Marks 4(c) Profit margin General comment Has worsened from 8.56% to 6.67% (1) Possible causes Increase in expenses (1) Poor control over expenses (1) Accept other valid responses Max (1) from possible causes All comments to be based on Own Figures from (b) Gross margin General comment Has worsened from 34.26% to 29.58% (1) Possible causes Reduction in selling price (1) Purchasing from more expensive suppliers / increased cost of sales (1) Accept other valid responses Max (1) from possible causes All comments to be based on Own Figures from (b) Return on capital employed General comment Has worsened from 32.08% to 25.81% (1) Possible causes Increased capital employed (1) Less efficient use of its resources (1) Accept other valid responses Max (1) from possible causes All comments to be based on Own Figures from (b) 6 Question Answer Marks 4(d) Introduce additional capital Advantages Does not have to be repaid (1) No interest cost (1) Accept other valid responses Max (1) Disadvantages May not have enough available funds (1) Greater personal risk (1) Accept other valid responses Max (1) Loan Advantages Instantly available (1) Has two years to pay it off (1) Accept other valid responses Max (1) Disadvantages Annual interest is charged (1) Must be repaid (1) Security may be required (1) Accept other valid responses Max (1) Recommendation (1) 5 Question Answer Marks 4(e) Interested party The interest they would have Suppliers/potential suppliers To assess whether outstanding debts are likely to be paid Bank To assess the likelihood of loan/overdraft being repaid when due To assess the ability to pay interest on a loan/overdraft To assess the availability of security for a loan Lenders/potential lenders To assess the likelihood of a loan being repaid when due To assess the ability to pay interest on a loan To assess the availability of security for a loan Investors/potential partners To assess future prospects of the business To assess profitability Government/tax authorities To assess the tax due from the owner of the business Accept other suitable parties and reasons (1) for one named party + (1) for reason 2

This question in 0985/22 Oct/Nov 2020

2 Jabir owns an electrical wholesale business. The following balances appeared in his books on 30 September 2021. $ Inventory 8 000 Purchases 109 000 Trade payables 11 600 Revenue 160 000 Trade receivables 22 600 Operating expenses 35 200 The inventory on 1 October 2020 was $11 000. All sales and purchases were on a credit basis. REQUIRED (a) Calculate the gross profit and profit for the year. … … … … … … … … … … … … [2] (b) (i) Calculate the gross margin. … … … [2] (ii) Advise Jabir on two actions he could take to improve his gross margin. 1 … … 2 … … [2] (c) Calculate the trade receivables turnover. Round up your answer to the next whole day. … … … [2] Jabir wants to increase his credit sales and is considering allowing his credit customers an extra 14 days above his current trade receivables turnover. REQUIRED (d) Advise Jabir whether he should allow his credit customers an extra 14 days above his current trade receivables turnover. Justify your answer. … … … … … … … … … … [5] (e) Calculate the trade payables turnover. Round up your answer to the next whole day. … … … [2] Jabir’s credit suppliers are prepared to double the rate of his trade discount provided he increases his current monthly purchases by 20%. REQUIRED (f) Advise Jabir whether he should increase his current monthly purchases by 20% to earn the additional trade discount. Justify your answer. … … … … … … … … … … [5] [Total: 20]

20 marks

Mark scheme: 2(a) $ $ Revenue 160 000 Cost of sales Opening inventory 11 000 Purchases 109 000 120 000 Closing inventory 8 000 112 000 Gross profit 48 000 (1) Operating expenses 35 200 Profit for the year 12 800 (1)OF Accept other forms of presentation 2 Question Answer Marks 2(b)(i) Gross margin × 48000 100 160000 1 (1) OF whole formula = 30% (1) OF 2 2(b)(ii) Increase selling price / reduce trade discount to customers (1) Obtain cheaper supplies / obtain higher trade discount from suppliers (1) Purchase lower quality goods (1) Change proportion of different types of goods sold/sell more goods with higher profit margin(1) Accept other valid points Max 2 2 2(c) Trade receivables turnover × 22600 365 160000 1 (1) whole formula = 52 days (1) 2 2(d) Advantages Sales may increase (1) May attract more customers (1) Profit may increase (1) May improve relationship with customers (1) Disadvantages Delays the receipt of money (1) Additional working capital may be required (1) May be an increase in irrecoverable debts (1) May be an increase in administration costs (1) Accept other valid points Max (4) Recommendation (1) 5 2(e) Trade payables turnover × 11600 365 109000 1 (1) whole formula = 39 days (1) 2 Question Answer Marks 2(f) Reduction in cost of sales (1) If goods can be sold the gross profit will increase (1) May reduce selling price to increase sales revenue (1) Could increase range of products to sell (1) Accept other valid points Consider if the additional goods can be sold (1) Increase in quantity / value of inventory (1) Increased cost of storage (1) Additional working capital may be required (1) Increase in amount payable to suppliers each month (1) Accept other valid points Max (4) Recommendation (1) 5

This question in 0985/22 Oct/Nov 2021

5 Q Limited prepares its financial statements to 31 March each year. The company’s retained earnings at 1 April 2022 were $16 250. During the year ended 31 March 2023, the company made a profit of $43 500 (after charging all expenses and interest). The total dividends of $39 000 for the year were paid by 31 March 2023. The following balances were extracted from the company’s ledger accounts after the income statement had been prepared. $ Fittings and equipment at cost 150 000 Provision for depreciation of fittings and equipment 40 650 Motor vehicles at cost 72 000 Provision for depreciation of motor vehicles 31 125 Inventory 51 790 Balance at bank 1 076 debit Trade receivables 19 700 Provision for doubtful debts 591 Trade payables 31 450 5% Debentures (repayable 2029) 40 000 Bank loan (repayable 2027) 10 000 Ordinary share capital 120 000 REQUIRED (a) Calculate the retained earnings of Q Limited at 31 March 2023. … … … … … … [3] (b) Prepare the statement of financial position for Q Q Limi Statement of Financial Pos … … … … … … … … … … … … … … … … … … … … … … … (c) Calculate the liquid (acid test) ratio to two decimal places. … … … [2] The directors (who are also the shareholders) would like to expand the company and wish to borrow $50 000 to fund the expansion. They are considering whether to issue further ordinary shares or to request another long-term bank loan. REQUIRED (d) (i) Suggest two reasons why although the company has made a profit, there is little cash available in the bank account to fund the expansion. 1 … … 2 … … [2] (ii) Advise the directors whether they should fund the expansion by issuing ordinary shares or requesting a bank loan. Justify your answer. … … … … … … … … … … … … [5] [Total: 20]

20 marks

Mark scheme: 5(a) Calculation of retained earnings $ Retained earnings at 1 April 2022 16 250 } Profit for the year 43 500 }(1) 59 750 Less Dividend (39 000) (1) Retained earnings at 31 March 2023 20 750 (1)OF 3 Question Answer Marks 5(b) Q Limited Statement of Financial Position at 31 March 2023 $ $ $ Assets Non-current Assets Cost Provision For Depreciation Net Book Value Fittings and equipment 150 000 40 650 109 350 } (1) for Motor vehicles 72 000 31 125 40 875 } both lines 222 000 71 775 150 225 (1) Current Assets Inventory 51 790 Trade receivables 19 700 Less Provision for doubtful debts 591 19 109 (1) Bank 1 076 71 975 (1)OF Total assets 222 200 Equity and Liabilities Equity Ordinary share capital 120 000 (1) Retained earnings 20 750 (1)OF 140 750 Non-current Liabilities 5% Debentures 40 000 } Bank Loan 10 000 }(1) 50 000 Current Liabilities Trade payables 31 450 (1) Total Equity and Liabilities 222 200 8 Question Answer Marks 5(c) (19 109 OF + 1 076) : 31 450 OF = 20 185 OF : 31 450 OF (1) whole formula = 0.64 : 1 (1)OF 2 5(d)(i) Dividends paid (1) Increase in level of inventory (1) Purchase of non-current assets (1) Repayment of non-current liabilities (1) Payment of trade payables/payment of a bank overdraft (1) Delay in receiving payment from trade receivables (1) Accept other valid points Max (2) 2 Question Answer Marks 5(d)(ii) Issue ordinary shares No interest payable (1) No repayment required (1) No need to provide security (1) The directors can decide on the rate of dividend (1) May dilute control/ownership (1) Shareholders will expect a dividend (1) May not be able to raise amount required (1) Already have long-term liabilities to repay (1) Accept other valid points Max (3) Obtain bank loan Repayment is required (1) Once loan is repaid no further liability to bank (1) Funds would need to be available when repayment is due (1) Security will be required (1) Interest will be charged (1) Bank may not be willing to lend as already have substantial long-term liabilities (1) Funds may be obtained more quickly than a share issue (1) If company is wound up loan must be repaid before shareholders (1) Accept other valid points Max (3) Max (4) (1) for recommendation 5

This question in 0985/21 May/June 2023

3 Lionel started trading on 1 July 2022. He paid $15 000 of his own personal money into the business bank account. He did not keep full accounting records but has supplied the following information at 30 June 2023. 1. Cash sales of $90 000 were made and paid into the bank. No other money was received. Lionel marks up his goods by 50%. 2. Payments from the bank: $ Purchase of motor vehicle (van) 8 000 Payments to credit suppliers 55 000 Wages 8 060 General expenses 1 140 Rent and insurance 5 585 Motor expenses 4 992 Cash drawn from bank 14 600 3. Purchases returns amounted to $3000. 4. Inventory at 30 June 2023 was valued at $4175. 5. One third of the motor expenses paid were for Lionel’s private car. 6. A full year’s depreciation at 25% is to be charged on the van using the reducing balance method. 7. Lionel withdrew $1000 each month from the business cash, for personal use. The remaining cash drawn from the bank was used to pay wages. REQUIRED (a) Prepare Lionel’s income statement for the year ended 30 June 2023. Lionel Income Statement for the year ended 30 June 2023 $ $ …………………………………………………………… … …………… … …………… … …………………………………………………………… … …………… … …………… … …………………………………………………………… … …………… … …………… … …………………………………………………………… … …………… … …………… … …………………………………………………………… … …………… … …………… … …………………………………………………………… … …………… … …………… … …………………………………………………………… … …………… … …………… … …………………………………………………………… … …………… … …………… … …………………………………………………………… … …………… … …………… … …………………………………………………………… … …………… … …………… … …………………………………………………………… … …………… … …………… … …………………………………………………………… … …………… … …………… … …………………………………………………………… … …………… … …………… … …………………………………………………………… … …………… … …………… … …………………………………………………………… … …………… … …………… … …………………………………………………………… … …………… … …………… … [9] (b) Prepare Lionel’s capital account for the year ended 30 June 2023. Balance the account and bring down the balance at 1 July 2023. Lionel Capital account Date Details $ Date Details $ … … … … … … … … … … … … … … … … … … … … … … … … [5] (c) State one reason why Lionel should keep double-entry bookkeeping records. … [1] Lionel currently makes cash sales only. He would like to start selling on credit and is considering whether to offer a 10% trade discount to regular customers or a 3% discount for payment within 21 days. REQUIRED (d) Advise Lionel whether he should offer the 10% trade discount or the 3% cash discount. Justify your answer. … … … … … … … … … … … … … … … [5] [Total: 20]

20 marks

Mark scheme: 3(a) Lionel 9 Income Statement for the year ended 30 June 2023 $ $ Revenue 90 000 (1) Cost of sales Purchases 67 175 (1)OF Less Purchases returns 3 000 64 175 (1)OF Less Closing inventory 4 175 60 000 Gross profit 30 000 (1) Less Expenses Wages (8 060 + 2 600) 10 660 (1) Motor expenses (4 992  2/3) 3 328 (1) General expenses 1 140) Rent and insurance 5 585)(1) Depreciation of motor vehicles/van (25%  8 000) 2 000 (1) 22 713 Profit for the year 7 287 (1)OF 3(b) Lionel 5 Capital account Date Details $ Date Details $ 2023 2022 June 30 Drawings July 1 Bank (1) 15 000 (12 000 (1) + 1 664 (1)) 13 664 2023 Balance c/d 8 623 June 30 Profit for the year (1)OF 7 287 _____ _____ 22 287 22 287 July 1 Balance b/d (1)OF 8 623 3(c) Full details are available about the assets, liabilities, revenues and expenses of the business (1) 1 The preparation of financial statements is relatively straightforward (1) The profit or loss for the year is more likely to be reliable and accurate / the financial statements are more likely to be reliable and accurate (1) More informed decision-making is possible (1) A greater degree of control over business activities can be exercised (1) The possibility of fraud is reduced (1) Comparisons with the results of previous years and with other businesses are possible (1) Detailed records are available for reference purposes (1) Information required by a bank or other lender is readily available (1) 3(d) Allowing Trade discount 5 May encourage customers to purchase regularly / place repeat orders (1) If successful may increase revenue and gross profit OR If unsuccessful may decrease revenue and gross profit (1) Need to record which customers qualify for discount / record discount on invoices (1) One-off customers may feel they are being overcharged (1) Accept other valid points Max (3) Allowing Cash discount Some credit customers will pay more quickly or encourage prompt payment (1) Less money will be received (1) Will reduce profit / net profit for the year (1) 3% may not be enough to encourage early payment (1) May reduce risk of irrecoverable debts (1) Accept other valid points Max (3) Recommendation (1)

This question in 0985/22 Oct/Nov 2023

5 Nala is a retailer who sells toys and games. All sales are on a cash basis and all purchases are on credit. She has provided the following information. $ At 31 August 2023: Inventory 6 265 Cash at bank 992 Trade payables 4 880 Capital 125 000 For the year to 31 August 2023: Revenue 98 420 Purchases 78 130 Expenses 11 325 Inventory at 1 September 2022 was valued at $6175. REQUIRED (a) Complete the following table. Ratio Working Answer (to 2 decimal places ) Gross margin Profit margin Return on capital employed (ROCE) Rate of inventory turnover (times) Liquid (acid test) ratio [11] Nala increased her advertising expenses over the year to 31 August 2023 and sells at a lower price than her nearest competitor. This has resulted in Nala selling her inventory faster than her nearest competitor. Nala and her nearest competitor buy inventory at the same prices. Nala is pleased with her results. REQUIRED (b) Explain why Nala should not be entirely pleased with her results. … … … … … … [3] Nala is planning to expand her business and to take out a bank loan to finance the expansion. The loan would be repayable after five years. REQUIRED (c) Advise Nala whether she should obtain a bank loan to expand the business. Justify your answer by providing two points for and two points against obtaining the bank loan to expand the business. … … … … … … … … … … … … [5] (d) State why Nala’s bank manager would be interested in her financial statements if she requests the loan. … … [1] [Total: 20]

20 marks

Mark scheme: 5(a) Gross margin 11 98 420 − ( 6175 + 78130 − 6 265 ) 20 380 = = (1)  100 = 20.71% (1)OF 98 420 98 420 Profit margin ( 20 380 − 11325 ) 9 055 = = (1)OF x 100 = 9.20% (1)OF 98 420 98 420 Return on capital employed 9 055 OF =  100 = 7.24% (1)OF 125 000 ( 1) Rate of inventory turnover ( 6175 + 78130 − 6 265 )( 1) 78 040 = = = 12.55 times (1)OF ( 6175 + 6 265 ) / 2 ( 1) 6 220 Liquid ratio = 992/4 880 (1) = 0.20:1 (1)OF 5(b) The gross profit margin will be lower than her competitor’s (1) 3 Reduction in gross profit margin may result in a lower gross profit OR increase in sales my result in a higher gross profit (1) The profit for the year or profit margin will reduce because of the increase in (advertising) expenses OR the profit for the year may increase because of the increase in gross profit / increase in sales from extra advertising (1) Selling her inventory faster does not mean her sales will be more than her competitor (1) Needs to sell more inventory to significantly increase profit (1) Accept other valid points Max (3) 5(c) For obtaining a bank loan 5 If business expands profit may increase (1) Once the loan is paid off, there will be no further liability to the bank (1) 5 years before loan is due allows time for repayment (1) Accept other valid points Max (2) Against obtaining a bank loan Interest will have to be paid on the loan (1) Loan interest will reduce profit for the year (1) The bank may require security (1) Assets may be at risk if unable to repay loan (1) The loan will have to be repaid (1) Bank may not be prepared to offer a loan (1) Accept other valid points Max (2) Recommendation (1) 5(d) Assess whether loan can be repaid (1) 1 Assess whether loan interest can be paid (1) Assess security available for the loan (1)

This question in 0985/22 Oct/Nov 2023

4 Ahmed owns a trading business. He prepares his financial statements to 31 December each year. Ahmed had some unused office space and he decided to use some of this to store inventory and to rent the rest to Bilal. On 1 January 2023 Bilal started renting the office space from Ahmed. The annual rental charge is $4800. During 2023 Bilal paid the following amounts of rent into Ahmed’s bank account. $ 1 April 3600 30 September 2400 REQUIRED (a) Prepare Ahmed’s rent receivable account for the year ended 31 December 2023. Balance the account and bring down the balance at 1 January 2024. Ahmed Rent receivable account Date Details $ Date Details $ … … … … … … … … … … … … … … … … … … … … … … … … [3] Ahmed sold old office equipment for $1350 on 3 January 2023, on credit to Rahat. The equipment had been purchased for $3200 on 1 January 2021. Ahmed charges depreciation at 25% per annum using the reducing balance method. He does not charge depreciation in the year of disposal. REQUIRED (b) Prepare the disposal of office equipment account. Ahmed Disposal of office equipment account Date Details $ Date Details $ … … … … … … … … … … … … … … … … … … … … … … … … [5] (c) Complete the table by placing a tick (✓) to indicate whether each amount of spending on the new inventory storage space is capital expenditure or revenue expenditure. $ Capital Revenue expenditure expenditure Painting the walls of the storage area 600 Shelving for the storage area 2115 Installation of the shelving 460 Light fittings for storage area 620 Light bulbs for storage area 105 [3] Ahmed’s ledger accounts at 31 December 2023 include the following balances. $ Inventory at 1 January 2023 9000 Receivables 6180 Cash 175 Payables 5500 Bank overdraft 640 Ahmed’s inventory at 31 December 2023 was valued at $12 130. His purchases for the year ended 31 December 2023 were $97 000. REQUIRED (d) Complete the following table. ratio working answer (to 2 decimal places) Rate of inventory turnover (times) Current ratio Liquid (acid test) ratio [7] Ahmed’s rate of inventory turnover for 2023 was lower than for 2022. REQUIRED (e) Suggest two problems which may be caused by Ahmed’s lower rate of inventory turnover. 1 … … 2 … … [2] [Total: 20]

20 marks

Mark scheme: 4(a) Ahmed Rent receivable account Date 2023 Dec 31 Details Income statement (1) Balance c/d $ 4 800 1 200 6 000 Date 2023 Apr 1 Sept 30 2024 Jan 1 Details Bank }(1) Bank } Balance b/d (1) $ 3 600 2 400 6 000 1 200 3 Question Answer Marks 4(b) Ahmed Disposal of office equipment account Date 2023 Jan 3 Details Office equipment (1) $ 3 200 ____ 3 200 Date 2023 Jan 3 Dec 31 Details Provision for Depreciation (800 + 600) (1) Rahat (1) Income statement (1)OF $ 1 400 1 350 450 3 200 Dates (1) *Calculation of depreciation 3 200  25% = 800 (3 200 – 800) = 2 400  25% = 600 5 4(c) $ Capital expenditure Revenue expenditure Painting the walls of the storage area 600  (1) Shelving for the storage area 2 115  } Installation of the shelving 460  }(1) Light fittings for storage area 620  } Light bulbs for storage area 105  }(1) 3 Question Answer Marks 4(d) ratio working answer (to 2 decimal places) Rate of inventory turnover (times) (9000 97000 12130) (9000 12130) / 2    = 93870 10565 (1) (1) 8.88 (1)OF Current ratio (12 130 + 6180 + 175) : (5500 + 640) = 18 485 : 6140 (1) whole formula 3.01:1 (1)OF Liquid (acid test) ratio (6180 + 175) : (5500 + 640) = 6355 : 6140 (1) whole formula 1.04:1 (1)OF 7 4(e) The increased inventory may result in goods deteriorating or becoming obsolete (1) Increase in storage costs (1) Inefficient use of storage space (1) Increase in funds tied up in inventory/may result in bank overdraft/may incur interest charges (1) Accept other valid points Max (2) 2

This question in 0985/21 May/June 2024

5 Ajay is a retailer. He has provided the following information. $ At 1 April 2023 Inventory 5 200 Trade receivables 6 875 Cash at bank 1 946 Trade payables 5 115 For the year ended 31 March 2024 Revenue – credit sales 86 400 – cash sales 10 600 Purchases 51 300 Expenses 23 750 At 31 March 2024 Inventory 6 500 Trade receivables 9 550 Cash at bank 1 200 Trade payables 6 000 REQUIRED (a) Complete the following table. ratio working answer Gross margin (to 2 decimal places) Profit margin (to 2 decimal places) Rate of inventory turnover (times) (to 2 decimal places) Trade receivables turnover days (round up to next whole day) Liquid (acid test) ratio (to 2 decimal places) [11] Ajay has been trading for 3 years and he has established a good reputation. He has never changed his selling price. His gross margin for the year ended 31 March 2024 is higher than for the previous years. REQUIRED (b) (i) Suggest one reason why Ajay’s gross margin has increased. … … [1] (ii) State one reason why Ajay’s customers might be interested in his financial statements. … … [1] Ajay is concerned about the levels of his inventory and trade receivables. He is considering reducing his selling price. REQUIRED (c) Advise Ajay whether or not he should reduce his selling price. Justify your answer by providing advantages and disadvantages of reducing his selling price. … … … … … … … … … … [5] Although Ajay’s gross margin has increased, his profit margin has fallen for each of the last two years. Sales revenue is Ajay’s only income. REQUIRED (d) State two reasons why Ajay should be concerned about his falling profit margin. 1 … … 2 … … [2] [Total: 20]

20 marks

Mark scheme: 5(a) Gross margin: Cost of sales 5 200 + 51 300 – 6 500 = 50 000 Gross profit 97 000 – 50 000 = 47 000 Gross margin = 47000 97000 (1)  100 1 = 48.45% (1) Profit margin: Profit 47 000 OF – 23 750 = 23 250 Profit margin = 23250 97000 (1) OF CF  100 1 = 23.97% (1)OF Inventory turnover: 50000 (5200 6500) / 2 5850   (1) OF (1) = 8.55 times (1)OF Trade receivables turnover 9550 86400  365 1 (1) whole formula = 41 days (1)OF Liquid (acid test) ratio (9 550 + 1 200) : 6 000 (1) whole formula = 1.79:1 (1)OF 11 5(b)(i) His purchase price has fallen / he has been allowed trade discount (1) His sales mix has changed (1) Max (1) 1 5(b)(ii) Whether Ajay will be able to continue in business / continue being able to supply them (1) 1 Question Answer Marks 5(c) Advantages Should increase sales / attract new customers (1) May increase profit for the year (1) Should increase rate of inventory turnover (1) Reduces risk of inventory deteriorating / becoming damaged / obsolete (1) Reduces cost of holding inventory (storage, insurance) (1) May improve his reputation (1) Accept other valid points Max (3) Disadvantages Would reduce gross margin / gross profit / profit for the year / profit margins / may make a loss (1) Less money coming in from each unit sold / liquidity reduced (1) Customers may question the quality of the goods / it may damage his reputation (1) Customers may be unwilling to pay the full price in future (1) It may be better to offer cash discount to reduce trade receivables (1) Accept other valid points Max (3) Max (4) Recommendation (1) 5 5(d) May result in loss if expenses continue to increase (1) He may not be able to pay expenses / suppliers / wages if they continue to increase. (1) The business cannot continue indefinitely if this trend continues. (1) Accept other valid points Max (2) 2

This question in 0985/22 May/June 2024

5 Azim is a wholesaler. He sells goods on both cash and credit basis. Terms of business for all credit sales is 30 days. Azim has provided the following information for the year ended 31 December 2023. $ Cash sales 18 170 Credit sales 392 600 Credit purchases 278 429 Inventory at 31 December 2022 24 074 Inventory at 31 December 2023 25 600 Money owed by credit customers at 31 December 2023 42 375 Money owed to credit suppliers at 31 December 2023 21 603 REQUIRED: (a) Using the information provided, calculate the following ratios for the year ended 31 December 2023. Show your workings. Ratio Workings Answer Inventory turnover (correct to 2 decimal places) Trade receivables turnover (round up your answer to the nearest whole day) Trade payables turnover (round up your answer to the nearest whole day) [7] During the previous year, Azim’s trade receivables turnover had been 35 days and he is concerned that this is too high. Azim had been considering using the services of a debt collection company to improve the speed at which he receives his money from his credit customers. REQUIRED: (b) Advise Azim whether he should appoint a debt collection company. Justify your answer with two advantages and two disadvantages. … … … … … … … … … … … … … … … … … [5] (c) Suggest two other measures that Azim might take to reduce his trade receivables turnover period. 1. … … 2. … … [2] Azim had calculated his gross profit margin and profit margin for the year ended 31 December 2023. He wants to compare these to his competitor Baher who has a similar sized business. Azim Baher Gross profit margin 33% 37% Profit margin 10% 12% REQUIRED: (d) Suggest one action that Azim might take to improve his: (i) Gross profit margin … … [1] (ii) Profit margin … … [1] During the year ended 31 December 2023, Azim took goods for his own use, $340, but had not entered this in his accounting records. To correct this error, Azim made a year-end adjustment. REQUIRED: (e) (i) Prepare the journal entry that Azim would need to make to correct this error. A narrative is not required. Details Debit Credit $ $ …………………………………………………………… … …………… … …………… … …………………………………………………………… … …………… … …………… … [2]

18 marks

Mark scheme: 5(a) 7 Ratio Workings Answer Inventory turnover 24074 + 278429 − 25600 (1) (correct to 2 decimal places) (24074 + 25600) / 2 (1) 11.15 times (1) 276 903 = = 24 837 Trade receivables turnover 42 375  365 (1) for formula 40 days (1) (round up your answer to the nearest whole day) 392 600 Trade payables turnover 21603  365 (1) for formula 29 days (1) (round up your answer to the nearest whole day) 278 429 5(b) Advantages (2) 5 Reduced administration – debt collection company will manage debt collection Owner can spend more time on other areas of the business Money received from credit customers quicker / improved cashflow / improved liquidity / trade receivables turnover will improve Reduced risk of irrecoverable debts Reduced need to borrow to finance working capital Accept other valid points Max 2 Disadvantages (2) Cost/fees of debt collection company May damage relationship with customer Credit sales may reduce Maybe a lack of communication between the agency and the owner / may not be effective in improving debt collection Accept other valid points Max 2 Recommendation (1) 5(c) Improve credit control policy (1) 2 Issue regular statements & invoices (1) Offer cash discount for prompt payment (1) Charge interest on overdue accounts (1) Max 2 5(d)(i) Reduce cost of purchases (1) 1 Increase selling price (1) Changing the proportions of types of goods sold (1) Max 1 5(d)(ii) Improve gross profit (1) 1 Control / reduce overall expenses (1) Increasing other income (1) Max (1) 5(e)(i) Azim 2 Journal Details Debit Credit $ $ Drawings 340 (1) Purchases 340 (1) 5(e)(ii) 2 increase decrease no effect gross profit  (1) closing capital  (1)

This question in 0985/22 Oct/Nov 2024

2 Mo is a farmer. He prepares his financial statements to 31 December each year. He delivers his farm produce to his customers in his delivery vehicle. Mo charges depreciation on vehicles at 20% per annum using the reducing balance method. He charges a full year’s depreciation in the year of purchase and no depreciation in the year of disposal. On 31 March 2024, he sold his delivery vehicle for $2900 and received payment by cheque. He had purchased this delivery vehicle in June 2021 for $10 000. REQUIRED (a) Calculate the accumulated depreciation on the delivery vehicle which Mo sold on 31 March 2024. … … … … … … … … … … … [3] (b) Prepare the disposal account for the sale of the delivery vehicle on 31 March 2024. Mo Disposal of vehicles account Date Details $ Date Details $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [4] Mo purchased a new delivery vehicle on 1 April 2024. The purchase price is made up as follows: $ Cost of vehicle 12 500 Petrol 60 Insurance (6 months) 475 Number (licence) plates 215 Total 13 250 REQUIRED (c) Calculate the amount which Mo will record in his delivery vehicle account for this transaction on 1 April 2024. … … … … [2] Mo is considering opening a shop to sell his farm produce. He hopes that customers will come to his farm and buy from the shop so that he will not need to deliver to them. He will use an existing farm building as his shop. REQUIRED (d) Advise Mo whether or not he should open the shop. Justify your answer by providing advantages and disadvantages of opening the shop. … … … … … … … … … … … … [5] Mo owns his farmland and rents out one of his fields to a neighbouring farmer, Barry, for $80 a month. Barry pays Mo by bank transfer. On 1 January 2024, Barry owed Mo two months’ rent. During the year ended 31 December 2024, Barry paid the following amounts to Mo for rent: $ 1 March 320 1 September 720 REQUIRED (e) Prepare Mo’s rental income account for the year ended 31 December 2024. Total the account and bring down the balance at 1 January 2025. Mo Rental income account Date Details $ Date Details $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [4] Mo has noticed that his gross margin and profit margin are higher than those of Barry. REQUIRED (f) State one reason why: (i) Mo’s gross margin is higher than Barry’s … … [1] (ii) Mo’s expenses are lower than Barry’s. … … [1] [Total: 20]

20 marks

Mark scheme: 2(a) $ 3 Cost 10 000 Depreciation 2021 (10 000  20%) 2 000 Net book value 31 Dec 2021 8 000 Depreciation 2022 (8 000  20%) 1 600 Net book value 31 Dec 2022 6 400 Depreciation 2023 (6 400  20%) 1 280 Net book value 31 Dec 2023 5 120 Total depreciation on delivery vehicle = 2000 + 1600 (1) + 1280 (1) = 4880 (1)OF 2(b) Mo 4 Disposal of motor vehicles account Date Details $ Date Details $ 2024 2024 Mar 31 Motor vehicles (1) 10 000 Mar 31 Provision for depreciation of motor vehicles (1)OF 4 880 Bank (1) 2 900 Dec 31 Income statement (1)OF 2 220 10 000 10 000 2(c) $ 2 Cost of vehicle 12 500 Number plates 215 (1) Total 12 715 (1)OF 2(d) Advantages opening a shop 5 There would be no motor expenses/no delivery costs (1) Can utilise his time on other aspects of the business (1) Might increase sales/increase customers/increase profits (1) He could sell his vehicle/vehicle is no longer required (1) Accept other valid points Max (3) Disadvantages of opening a shop Cost of converting the farm building into a shop (1) Cost of running the shop (1) Customers may not be willing to travel/may prefer their goods delivered/ no guarantee that customers will come/ may spoil relationship with customers (1) New van has just been purchased (1) Accept other valid points Max (3) Overall Advantages and Disadvantages Max (4) Recommendation (1) 2(e) Mo 4 Rental income account Date Details $ Date Details $ 2024 2024 Jan 1 Balance b/d (1) 160 Mar 1 Bank } 320 Dec 31 Income statement Sep 1 Bank }(1) 720 (12  $80) (1) 960 Dec 31 Balance c/d 80 1 120 1 120 2025 Jan 1 Balance b/d (1)OF 80 2(f)(i) They may sell different types of produce (1) 1 Mo has a higher selling price that Barry (1) Mo’s cost of producing/cost of sales is lower than that of Barry (1) Accept other valid points Max (1) 2(f)(ii) Barry has to pay rent whereas Mo does not (1) 1 Mo has lower expenses/controls his expenses better (1) Using different accounting methods e.g. different depreciation methods (1) Accept other valid points Max (1)

This question in 0985/21 May/June 2025

4 H Limited prepares its financial statements to 30 April each year. During the year ended 30 April 2025, the following took place: 1 The company made a profit for the year of $26 700 after charging debenture interest. 2 A transfer of $5000 was made to the general reserve. 3 A dividend of $5340 was paid. No other dividends are payable for the year. REQUIRED (a) Prepare the statement of changes in equity for H Limited for the year ended 30 April 2025. H Limited Statement of Changes in Equity for the year ended 30 April 2025 Ordinary General Retained Total share reserve earnings Details capital $ $ $ $ On 1 May 2024 120 000 20 000 33 635 173 635 … … … … … … … … … … … … … … … On 30 April 2025 … … … … [4] H Limited provided the following ledger account balances at 30 April 2025. $ Fixtures and equipment at book value 155 000 Motor vehicles at book value 16 875 Inventory 28 120 Trade payables 26 815 Trade receivables 33 000 Provision for doubtful debts 990 Bank overdraft 5 195 5% Debentures (repayable 2029) 5 000 REQUIRED (b) Prepare the statement of financial position for H Limited at 30 H Limited Statement of Financial Position at 30 Ap … … … … … … … … … … … … … … … … … … … … … … … … … … (c) State the meaning of the term ‘equity’. … … … [1] (d) Calculate the return on capital employed for the year ended 30 April 2025. State your answer to two decimal places. … … … … … [3] The directors of H Limited would like to expand the business. They are considering issuing debentures for $60 000 to fund an expansion. These debentures would carry interest of 3%. REQUIRED (e) Advise the directors whether or not they should issue the debentures to fund an expansion. Justify your answer by providing two points for and two points against issuing the debentures to fund an expansion. … … … … … … … … … … … … [5] [Total: 20] Question 5 starts on page 16.

20 marks

Mark scheme: 4(a) H Limited 4 Statement of Changes in Equity for the year ended 30 April 2025 Details Ordinary General Retained Total Share capital reserve earnings $ $ $ $ On 1 May 2024 120 000 20 000 33 635 173 635 Profit for the year …………… …………… 26 700 26 700 (1) row Transfer to general reserve …………… 5 000 (5 000) – (1) row Dividends paid …………… …………… (5 340) (5 340) (1) row On 30 April 2025 120 000 25 000 49 995 194 995 (1)OF row 4(b) H Limited 7 Statement of Financial Position as at 30 April 2025 $ $ $ Assets Non-current assets at book value Fixtures and equipment 155 000 Motor vehicles 16 875 171 875 (1) Current Assets Inventory 28 120 Trade receivables 33 000 Less Provision for Doubtful Debts 990 32 010 (1) 60 130 (1)OF Total assets 232 005 Equity and Liabilities Equity and Reserves Ordinary share capital 120 000 } General reserves 25 000 }(1)OF Retained earnings 49 995 } 194 995 Non-current Liabilities 5% Debentures 5 000 (1) Current Liabilities Trade payables 26 815 (1) Bank overdraft 5 195 (1) 32 010 Total Equity and Liabilities 232 005 4(c) The total funds provided by the owners of a business (1) The difference between the assets and liabilities of a business (1) 1 Max (1) 4(d) 26 700 + 250 * 26 950 (1) 100 3 =  = 13.48% (1)OF 194 995 OF + 5 000 199 995 (1)OF 1 Alternative calculation 26 700 + 250 * 26 950 (1) 100 =  = 13.48% (1)OF 171875 + 60 130 OF − 32 010 199 995 (1)OF 1 *Profit adjusted for interest on debentures 250 (5%  5 000)] 4(e) Points for issuing debentures 5 There will be no liability once the debentures have been repaid (1) Issue of debentures will not reduce shareholders’ stake in the company/ debenture holders do not take an active part in running the company/debenture holders do not have a vote (1) Only have relatively low amount of loans at present (1) Funds may be available quickly/relatively easy to obtain (1) Accept other valid points Max (2) Points against issuing debentures Interest on the debentures has to be paid/ debenture interest reduces profit/ fixed amount of debenture interest each year/ debenture interest needs to be paid even if the company makes a loss (1) May be secured against the assets of the company/are repaid before shareholders if company liquidated (1) Debentures have to be repaid/increase liabilities (1) Funds must be available when repayment is due (1) Already have commitment to repay existing debentures (1) Accept other valid points Max (2) Overall For and Against: Max (4) Recommendation (1)

This question in 0985/21 May/June 2025

4 AY Limited has provided the following performance data for the last two years of trading. Ratio Year 1 Year 2 ended ended 31 March 2024 31 March 2025 Return on capital employed (ROCE) 10.67% 10.05% Gross margin 22% 23.5% Profit margin 11.5% 11.0% Rate of inventory turnover 9.46 times 11.45 times Trade payables turnover 34 days 30 days Trade receivables turnover 32 days 36 days Liquid (acid test) ratio 1.42:1 0.95:1 All sales and purchases are on credit and are subject to a 30‑day credit period. REQUIRED (a) Complete the following table by indicating whether the ratio has improved or deteriorated at the end of year 2, and give two reasons which may have caused the change. The Return on capital employed (ROCE) has been completed as an example. Ratio Improved or Possible reasons for the change deteriorated Return on capital Introduction of additional capital or loans. Deteriorated employed Profit for the year has decreased. (ROCE) Gross margin Profit margin Rate of inventory turnover (times) Liquid (acid test) ratio [10] The directors at AY Limited were concerned that the trade receivables turnover rate had deteriorated and so increased the provision for doubtful debts from 2% to 3% for the year ended 31 March 2025. The trade receivables balances were as follows: $ 31 March 2024 346 000 31 March 2025 399 000 REQUIRED (b) Write up the provision for doubtful debts account in AY Limited’s ledger for the year ended 31 March 2025. Balance the account and bring down the balance at 1 April 2025. AY Limited Provision for doubtful debts account Date Details $ Date Details $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [3] (c) (i) Explain what is meant by ‘a provision for doubtful debts’. … … [1] (ii) Name the accounting principle being applied when creating a provision for doubtful debts. … [1] The directors of AY Limited have been considering buying a new piece of equipment costing $75 000. A machinery supplier has approached them, offering a 15% discount on this equipment if they make an immediate purchase. The supplier has indicated that the purchase would need to be on a cash basis. AY Limited’s accountant has suggested that they may be able to finance the purchase of the equipment by delaying payments to their trade payables. REQUIRED (d) Advise the directors of AY Limited whether or not delaying payments to their trade payables would be a good way to secure the purchase of the equipment. Justify your answer by providing points for and against delaying payments to their trade payables. … … … … … … … … … … … … [5] [Total: 20]

20 marks

Mark scheme: 4(a) 10 Ratio Improved or Deteriorated Possible reasons for the change Return on Capital Deteriorated Introduction of additional capital/loans Employed (ROCE) Profit for the year decreased. Gross margin Improved } Sold goods at higher prices (1) Bought goods at cheaper prices (1) Improved rate of trade discount received (1) Max 2 Profit margin Deteriorated }(1) both Increased expenses (1) Other income decreased (1) Percentage of expenses to revenue increased (1) Decreased sales volume / revenue (1) Max 2 Rate of inventory Improved } Increased demand (1) turnover (times) Less goods purchased / lower closing inventory (1) Reduced selling prices leading to higher sales (1) Max 2 Liquid (acid test) Deteriorated } (1) both Increased trade payables / current liabilities (1) ratio Decreased trade receivables / bank /cash (1) Max 2 4(a) Ratio Improved or Deteriorated Possible reasons for the change Return on Capital Employed (ROCE) Gross margin Deteriorated Sold goods at lower prices (1) Bought goods at higher prices (1) Lower rate of trade discount received (1) Max 2 Profit margin Improved Decreased expenses (1) Other income increased (1) Percentage of expenses to revenue decreased (1) Increased sales volume / revenue (1) Max 2 Rate of inventory Deteriorated Decreased demand (1) turnover (times) More goods purchased / higher closing inventory (1) Increased selling prices leading to lower sales (1) Max 2 Liquid (acid test) Improved Decreased trade payables / current liabilities (1) ratio Increased trade receivables / bank /cash (1) Max 2 Please note that the ‘Own Figure Rule’ applies to this question. 4(b) 3 A Limited Provision for doubtful debts account Date Details $ Date Details $ 2024 April 1 Balance b/d 6 920 (1) 2025 2025 March 31 Balance c/d 11 970 March 31 Income statement 5 050 (1)OF 11 970 11 970 2025 April 1 Balance b/d 11 970 (1) 4(c)(i) It is an estimate of the amount which a business will lose in a financial year because of irrecoverable debts. (1) 1 4(c)(ii) Prudence (1) 1 OR Matching (1) 4(d) In favour of delaying payment to trade payables (Max 3) 5 Able to purchase the equipment at a cheaper price (1) No finance costs (1) No need to source other methods of finance (1) No security required (1) Against delaying payment to trade payables (Max 3) Damage supplier relations / not supply goods (1) Increased interest payments (1) Loss of any cash discounts (1) May not be sufficient cash available to pay for the equipment (1) Other sources of finance available (1) Accept other valid responses Recommendation (1)

This question in 0985/22 Oct/Nov 2025