Limitations of accounting statements — Paper 2 · IGCSE Accounting (9-1) 0985

1 Dev owns a business selling furniture. The following transactions took place during August 2020. Transaction Date Details $ 1 August 9 Sold goods on credit to Petra 675 2 14 Petra returned damaged goods to Dev 120 3 23 Banked cash sales 412 4 29 Petra settled her outstanding balance at 1 August by credit transfer after taking a cash discount of 5% On 1 August 2020, the balance on credit customer Petra’s sales ledger account was $940 debit. REQUIRED (a) Complete the table to name each business document and book of prime entry for the following transactions in Dev’s accounting records. Transaction Business document Book of prime entry 2 3 4 [6] (b) Prepare the account of Petra for August 2020 as it would appear in Dev’s sales ledger. Balance the account and bring down the balance on 1 September 2020. Dev Petra account Date Date 2020 Details $ 2020 Details $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [6] (c) Identify the section of Dev’s statement of financial position at 31 August 2020 in which the balance on Petra’s account would appear. … [1] Dev allows his credit customers a cash discount of 5% for prompt payment. He is considering reducing this to 2%. REQUIRED (d) State one advantage and one disadvantage to Dev of this proposal. … … … … [2] Dev is considering turning his business into a limited company. REQUIRED (e) Advise Dev whether or not he should form a limited company. Justify your answer with two advantages and two disadvantages of forming a limited company. … … … … … … … … … … … [5] [Total: 20]

20 marks

Mark scheme: 1(a) Transaction Business document Book of prime entry 2 Credit note (1) Sales returns journal (1) 3 Paying-in slip (1) Cash book (1) 4 Bank statement (1) Cash book (1) 6 1(b) Dev Petra account 2020 $ 2020 $ Aug 1 Balance b/d 940 Aug 14 Sales returns 120 (1) 9 Sales 675 (1) 29 Bank 893 (1) Discount allowed 47 (1) 31 Balance c/d 555 1 615 1 615 2020 Sept 1 Balance b/d 555 (1)OF + (1) dates 6 1(c) Current assets (1) OF 1 1(d) Advantage Increase profit for the year (1) Increase cash inflow (1) Accept other valid responses Max (1) Disadvantage May lose customers/sales may fall (1) Customers may take longer to pay (1) Accept other valid responses Max (1) 2 Question Answer Marks 1(e) Advantages Dev will have limited liability for the debts of the company (1) The limited company will have a separate legal identity to Dev (1) Dev will have access to different forms of finance/increase in capital employed (1) Accept other valid responses Max (2) Disadvantages The limited company will have greater regulation than Dev as a sole trader (1) The accounting requirements of the limited company will be more complex than for Dev as a sole trader (1) The financial statements of the limited company may be viewed by the public unlike those of Dev as a sole trader (1) Accept other valid responses Max (2) Recommendation (1) 5

This question in 0985/22 Oct/Nov 2020

1 Rahat is a trader. The following transactions took place in March 2021. March 3 Cash sales, $580, were paid directly into Rahat’s business bank account 6 Paid insurance, $360, by direct debit 9 Paid $196 to GH Limited by telephone transfer, having deducted 2% cash discount from the amount due 13 Paid $75 cash for stationery 17 Cash sales, $140 27 Sold old office equipment to Burgess, who paid $50 by cheque in full settlement 30 Paid $340 to Colin by cheque in full settlement of a debt of $350 REQUIRED (a) Complete Rahat’s cash book on the page opposite. Balance the cash book and bring down the balances on 1 April 2021. [11] $ Bank 1980 … … … … … … … … … … … … $ Cash … … … … … … … … … … … … … $ Discountreceived … … … … … … … … … … … … … b/d Details Balance … … … … … … … … … … … … 1 Date 2021 March … … … … … … … … … … … … Book Rahat Cash $ Bank … … … … … … … … … … … … … $ 150 Cash … … … … … … … … … … … … $ Discountallowed … … … … … … … … … … … … … b/d Details Balance … … … … … … … … … … … … (b) Complete the following table by placing a tick (3) in the correct column to indicate whether each item would be used to update the cash book or would appear in the bank reconciliation statement. Update the Bank cash book reconciliation statement Cheque from Burgess dishonoured Cheque to Colin unpresented Overdraft interest Standing order paid for rates [4] Rahat is concerned about the level of her bank overdraft. She is considering applying for a bank loan. This would enable her to pay off her bank overdraft and to purchase new office furniture. REQUIRED (c) Advise Rahat whether she should apply for the bank loan. Justify your answer by providing two advantages and two disadvantages. … … … … … … … … … … … [5] [Total: 20] PLEASE TURN OVER

20 marks

Mark scheme: 1(a) Rahat Cash Book Date 2021 Mar 1 3 17 27 31 Apr 1 Details Balance b/d Sales (1) Sales (1) Disposal (1) Balance c/d Balance b/d Disc. $ Cash $ 150 140 290 215 (1)OF Bank $ 580 50 2246 2876 Date 2021 Mar 1 6 9 13 30 31 Apr 1 Details Balance b/d Insurance (1) GH Limited (1) Stationery (1) Colin (1) Balance c/d Balance b/d Disc. $ 4 10 14 (1)OF Cash $ 75 215 290 Bank $ 1980 360 196 340 2876 2246 (1)OF +(1) dates 1(b) Updating cash book Bank reconciliation statement Cheque from Burgess dishonoured  (1) Cheque to Colin unpresented  (1) Overdraft interest  (1) Standing order paid for rates  (1) 4 Question Answer Marks 1(c) Advantages Loan interest may be lower than overdraft interest (1) No interest on overdraft to pay (1) Have a longer time to repay a loan (1) May improve relationship with bank (1) Bank balance would be improved/liquidity would be improved (1) New office furniture should lead to a better working environment (1) Accept other valid points (Max 2) Disadvantages Loan will have to be repaid (1) Loan interest will have to be paid (1) Early repayment may not be allowed (1) The bank may require security (1) No income/profit is generated from the office furniture (1) Accept other valid points (Max 2) Recommendation (1) 5

This question in 0985/21 May/June 2021

1 Nakul is a trader. He buys and sells goods on credit. He buys most of his supplies from one supplier, Nadia, who allows Nakul a trade discount of 20%. The following transactions took place in January 2022. Jan 2 Paid $441 by cheque to Nadia, in full settlement of $450 owed to her at 1 January 2022. 12 Bought goods on credit from Nadia, list price $350 14 Returned faulty goods to Nadia, list price $80 18 Bought goods on credit from Nadia, list price $400 23 Sold goods on credit, $800 29 Bought goods on credit, $60, from Sophie 30 Returned goods to Sophie, $9 REQUIRED (a) Prepare the purchases journal for January 2022. Total the journal and indicate the ledger account to which the total would be posted. Nakul Purchases journal Date Details $ $ … … … … … … … … … … … … … … … … … … … … … … … … [4] (b) Prepare the purchases returns journal for January 2022. Total the journal and indicate the ledger account to which the total would be posted. Nakul Purchases returns journal Date Details $ $ … … … … … … … … … … … … … … … … … … … … [3] (c) Prepare the account for Nadia, for January 2022, as it would appear in the books of Nakul. Balance the account and bring down the balance on 1 February 2022. Nakul Nadia account Date Details $ Date Details $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [6] (d) Complete the table by placing a tick (3) to show where each item is shown on the statement of financial position. Current liabilities Non-current liabilities Trade payables Bank overdraft [2] Nakul has a bank overdraft and would like to reduce it. He is considering paying his suppliers later than he currently does in order to help him reduce his bank overdraft. REQUIRED (e) Advise Nakul whether or not he should take longer to pay his suppliers. Justify your answer by providing two advantages and two disadvantages. … … … … … … … … … … … … [5] [Total: 20]

20 marks

Mark scheme: 1(a) Nakul Purchases journal Date Details $ 2022 Jan 12 18 29 31 Nadia (350 – 70) Nadia (400 – 80) Sophie Transfer to purchases account 280 320 60 660 (1) (1) (1) (1)OF 4 1(b) Nakul Purchases returns journal Date Details $ 2022 Jan 14 30 31 Nadia (80 – 16) Sophie Transfer to purchases returns account 64 9 73 (1) (1) (1)OF 3 1(c) Nakul Nadia account Date 2022 Jan 2 14 31 Details Bank (1) Discount (1) Purchases returns (1) Balance c/d $ 441 9 64 536 1050 Date 2022 Jan 1 12 18 Feb 1 Details Balance b/d (1) Purchases } (1) Purchases } Balance b/d (1)OF $ 450 280 320 ____ 1050 536 6 Question Answer Marks 1(d) Current liabilities Non-current liabilities Trade payables (1) Bank overdraft (1) 2 1(e) Advantages Would delay the outflow of cash/will reduce bank overdraft (1) May reduce bank overdraft charges/interest (1) Overdraft charges may be higher than cash discount offered by suppliers (1) May currently be paying Nadia/suppliers quicker than is necessary (1) Max (2) Disadvantages May lose the cash discount allowed by Nadia/suppliers (1) Nadia/suppliers may charge interest on late payment (1) Nadia/suppliers may stop supplying or reduce the amount they supply/may damage relationship with suppliers (1) There may be better methods of improving cash flow (e.g. selling on cash terms) (1) Max (2) Accept other valid points (1) for recommendation 5

This question in 0985/21 May/June 2022

2 Stalla started trading on 1 April 2021. All receipts are paid into the bank and all payments are made from the bank. She has not kept a full set of books but has provided the following information. Summary of receipts and payments for the year ended 31 March 2022 $ Receipts Capital introduced 8 000 Loan received (repayable 2027) 5 000 Sales (all cash) 36 000 Payments Trade payables 17 850 Fixtures and fittings 12 000 General expenses 1 920 Rent and insurance 7 100 Drawings ? Bank balance at 31 March 2022 2 330 REQUIRED (a) Record the total receipts and total payments to Stalla’s bank account showing the cash drawings for the year ended 31 March 2022. Balance the bank account and bring the balance down on 1 April 2022. Stalla Bank account Date Details $ Date Details $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [4] During the year ended 31 March 2022, Stalla took goods from the business for her own personal use. The selling price of these goods is $3375. Her mark-up is 25%. REQUIRED (b) Calculate Stalla’s total drawings for the year ended 31 March 2022. … … … … [2] Stalla has provided a list of balances at 31 March 2022. $ Fixtures and fittings (net book value) 10 800 Inventory 2 150 Prepaid rent 500 Balance at bank 2 330 Trade payables 1 875 Loan (repayable 2027) 5 000 Capital ? REQUIRED (c) Prepare a statement of affairs to calculate Stalla’s capital at 31 March 2022. Stalla Statement of Affairs at 31 March 2022 $ $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [5] (d) Calculate Stalla’s profit for the year ended 31 March 2022. … … … … … … [4] Stalla is now considering whether she should start to sell at least some of her goods on credit. REQUIRED (e) Advise Stalla whether or not she should start selling on credit terms. Justify your answer. … … … … … … … … … … … … … [5] [Total: 20]

20 marks

Mark scheme: 2(a) Stalla Bank account Date Details $ Date Details $ 2022 2022 Mar 31 Total receipts (1) 49 000 Mar 31 Total payments (1) 38 870 Drawings (1)OF 7 800 Balance c/d 2 330 49 000 49 000 Apr 1 Balance b/d (1) 2 330 4 2(b) $ Drawings – goods 3 375  100/125 2 700 (1) Drawings – cash 7 800 Total drawings 10 500 (1)OF Accept alternative format 2 Question Answer Marks 2(c) Stalla Statement of Affairs at 31 March 2022 $ $ Non-current assets Fixtures and fittings at book value 10 800 (1) Current assets Inventory 2 150 Other receivables 500 Bank 2 330 4 980 (1) Total assets 15 780 Capital and liabilities Capital (balancing figure) 8 905 (1)OF Non-current liabilities Loan 5 000 (1) Current liabilities Trade payables 1 875 (1) Total capital and liabilities 15 780 5 2(d) $ Closing capital 8 905 (1)OF Drawings 10 500 (1)OF 19 405 Capital introduced (8 000) (1) Profit for the year 11 405 (1)OF Accept alternative format 4 Question Answer Marks 2(e) For Competitors may allow credit terms (1) May increase sales if offer credit terms (1) May improve relationship with customers (1) May ensure cash is received on time if cash discount is offered (1) Max (2) Against She should obtain credit references for new and existing customers (1) Payment is not received at time of sale (1) If customers pay later she could face cash flow \ liquidity problems (1) Risk of irrecoverable debts (1) Max (2) Accept other valid points. Recommendation (1) 5

This question in 0985/22 May/June 2022

1 BC a sole trader prepared the following trial balance from his accounts on 31 August 2022. Dr Cr $ $ Purchases 120 000 Revenue 231 500 Sales returns 3 600 Inventory 1 September 2021 11 100 Capital 111 900 Bank 4 100 Non-current assets at cost Premises 98 000 Machinery 52 000 Provision for depreciation of non-current assets Machinery 28 400 Commission receivable 2 200 Trade receivables 19 200 Trade payables 7 300 Discount allowed 600 Discount received 1 400 Insurance 9 600 Repairs 12 400 Salaries 53 900 Rates 6 000 Carriage inwards 400 386 800 386 800 Additional information 1 The closing inventory at 31 August 2022 was valued at $12 000. 2 Commission received of $800 was owing at 31 August 2022. 3 The balance shown for salaries covers the 11 months to 31 July 2022. Salaries for August 2022 are due and unpaid. There have been no salary increases over the previous 12 months and an equal amount is paid each month. 4 At 31 August 2022 rates were prepaid by $300. 5 The insurance included $700 covering a private insurance premium for BC. 6 The repairs included $4000 that related to a new attachment for machinery. 7 Machinery is to be depreciated at the rate of 20% per annum by the reducing balance method. A full year’s depreciation is charged regardless of the date of any purchases. There were no disposals during the year. Premises are not depreciated. REQUIRED (a) Prepare the income statement of BC for the year ended BC Income Statement for the year ended 31 …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … (b) Calculate the working capital at 31 August 2022. … … … … … … … … … … … … … … [3] BC has been making future plans for the business and he needs to purchase $6000 of machinery immediately. There are two options to finance the purchase. Option 1 On credit with the full amount of $6000 payable in 60 days Option 2 Obtain a $6000 8% loan repayable in 5 years REQUIRED (c) Advise BC on which option he should use. Justify your answer. … … … … … … … … … … … … … [5] [Total: 20]

20 marks

Mark scheme: Question Answer Marks 1(a) BC 12 Income Statement for the year ended 31 August 2022 $ $ Revenue 231 500 Sales returns 3 600 227 900 (1) Cost of sales Opening inventory 11 100 Purchases 120 000 Carriage inwards 400 (1) 131 500 Closing inventory 12 000 119 500 (1) OF Gross profit 108 400 (1) OF Commission receivable (2 200 + 800) 3 000 (1) Discount received 1 400 ** 112 800 Discount allowed 600 (1) ** both Insurance (9 600 – 700) 8 900 (1) Repairs (12 400 – 4 000) 8 400 (1) Salaries (53 900 + 4 900) 58 800 (1) Rates (6 000 – 300) 5 700 (1) Depreciation machinery (27 600 x 20%) 5 520 (1) 87 920 Profit for the year 24 880 (1) OF 1(b) $ $ 3 Current assets Inventory 12 000 Trade receivables 19 200 Commission received 800 Rates prepaid 300 32 300 (1) Current liabilities Trade payables 7 300 Salaries owing 4 900 Bank 4 100 16 300 (1) Working capital 16 000 (1) OF 1(c) Option 1 Credit 5 Only payback the original amount of $6000/no interest (1) Credit may not be granted as already has an overdraft (1) Working capital/funds may be adequate provided trade receivables pay on time (1) Consider whether adequate funds will be available in 60 days (1) Working capital will be reduced (1) Accept other valid points Max (2) Option 2 Loan Interest each year will have to be paid (1) Interest will reduce profit each year (1) Consider whether funds will be available to repay the loan (1) Loan may not be granted as already has an overdraft (1) Accept other valid points Max (2) Recommendation (1)

This question in 0985/22 Oct/Nov 2022

2 MC is a trader who maintains a full set of accounting records and prepares control accounts at the end of each month. REQUIRED (a) Complete the table to name the book of prime entry which MC would use to obtain information when preparing control accounts. Item Book of prime entry Discount received from credit suppliers Purchases returns Contra entries Interest charged by credit suppliers [4] (b) Explain how a contra entry is treated in the ledger accounts. … … … … [2] MC has provided the following information for the month of July 2022. $ On 1 July 2022 Purchases ledger control account credit balance b/d 21 400 Purchases ledger control account debit balance b/d 130 Totals for the month Credit purchases 259 600 Credit purchases returns 9 800 Cash purchases 240 Cheques paid to credit suppliers 228 200 Discount received 12 900 Cash paid to credit suppliers 500 Interest charges by credit suppliers 150 Contra sales ledger 2 260 At 31 July 2022 the purchases ledger control account had a credit balance c/d of $180. REQUIRED (c) Prepare the purchases ledger control account for the month of July 2022. Balance the account and bring down the balances on 1 August 2022. MC Purchases ledger control account Date Details $ Date Details $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [9] Currently MC purchases all goods from a local supplier. He has been offered a monthly price reduction of $2000 if he changes to an annual contract purchasing all goods from a new overseas supplier. REQUIRED (d) Advise MC whether he should change to the new overseas supplier. Justify your answer. … … … … … … … … … … … … [5] [Total: 20]

20 marks

Mark scheme: 2(a) 4 Item Book of prime entry Discount received from credit suppliers Cash book (1) Purchases returns Purchase returns journal (1) Contra entries General journal (1) Interest charged by credit suppliers General journal (1) 2(b) A balance on a purchase ledger account is transferred to an account for the same business in the sales ledger (1) 2 Purchase ledger account is debited, and the sales ledger is credited (1) 2(c) MC 9 Purchase ledger control account Date Date 2022 Details $ 2022 Details $ Jul 1 Balance b/d 130 * Jul 1 Balance b/d 21 400 (1)* both 31 Purchase returns 9 800 (1) 31 Purchases 259 600 (1) Bank 228 200 (1) Interest charges 150 (1) Discount received 12 900 (1) Balance c/d 180 Cash 500 (1) Contra 2 260 (1) Balance c/d 27 540 _______ 281 330 281 330 Aug 1 Balance b/d 180 ** Aug 1 Balance b/d 27 540 (1) OF** both 2(d) Reduce cost of goods/increase gross profit/lower selling price (1) 5 Reliability of new supplier/guaranteed supplier (1) Must consider whether low price will be maintained/currency fluctuations (1) Must consider whether goods will be of an acceptable quality (1) Possible language differences/difficulty of communications (1) May be more difficult in case of problems/disputes (1) May experience delivery problems (1) Contract is binding for one year (1) Accept other valid points Max (4) Recommendation (1)

This question in 0985/22 Oct/Nov 2022

3 MG has been in business for a number of years as a furniture manufacturer. On 31 August 2022 the bank column of his cash book showed the business had $25 600 in the bank account. The bank statement on this date showed a credit balance of $24 815. The following transactions were included only in the cash book. $ Cheque paid to JW 680 Cheque received from TH 910 In addition, an error had been identified. A standing order for rates of $205 had incorrectly been recorded in the cash book as $255. The following transactions were included only on the bank statement. $ Dishonoured cheque received from RJ 420 Insurance paid by direct debit 110 Bank charges 75 REQUIRED (a) Update the cash book of MG. Bring down the updated balance on 1 September 2022. MG Cash book (bank columns only) Date Details $ Date Details $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [5] (b) Prepare a bank reconciliation statement at 31 August 2022. MG Bank reconciliation statement at 31 August 2022 … … … … … … … [4] (c) State two reasons why a business would prepare a bank reconciliation statement. 1 … … 2 … … [2] (d) State two possible reasons why the cheque from RJ was dishonoured. 1 … … 2 … … [2] (e) Explain the differences between a direct debit and a standing order. … … … … … … [2] (f) A potential new customer has asked MG for a 5% discount on any orders placed. Advise MG on whether to accept or decline these terms. Justify your answer. … … … … … … … … … … … … … … … [5] [Total: 20]

20 marks

Mark scheme: 3(a) MG 5 Cash book (bank columns only) Date Details $ Date Details $ 2022 2022 Aug 31 Balance b/d 25 600 Aug 31 RJ (dis cheque) 420 (1) Rates (SO) 50 (1) Insurance (DD) 110 (1) Bank charges 75 (1) ______ Balance c/d 25 045 25 650 25 650 Sep 1 Balance b/d 25 045 (1) OF 3(b) MG 4 Bank reconciliation statement at 31 August 2022 $ Balance shown in cash book 25 045 (1) OF Add unpresented cheques JW 680 (1) 25 725 Less uncredited deposits TH (910) (1) Balance shown on bank statement 24 815 (1) Alternative presentation: $ Balance shown on bank statement 24 815 (1) Add uncredited deposits TH 910 (1) 25 725 Less unpresented cheques JW (680) (1) Balance shown in cash book 25 045 (1) OF 3(c) Identify/correct either errors or omissions in the cash book (1) 2 Identify errors on the bank statement (1) Update the cash book/obtain correct bank balance (1) Assist in discovering fraud/deter or reduce risk of fraud (1) Identify amounts not credited (1) Identify cheques not presented (1) Identify out-of-date (stale) and dishonoured cheques (1) Accept other valid points Max 2 3(d) Insufficient funds in the bank account (1) 2 No/incorrect signature (1) No date (1) No amount (1) No payee (1) Words and figures disagree (1) Accept other valid points Max 2 3(e) A standing order is when a person instructs their bank to pay a fixed sum at fixed intervals to another person (1) 2 A direct debit is when permission is given for a named person to collect an amount from their bank. The dates and amounts can vary (1) Max 2 3(f) Accept – Order 5 Sales/revenues will increase (1) May lead to future orders (1) Increase in profit for the year (1) Could lose order if no discount given (1) Accept other valid points Max 2 Decline – Order Existing customers may request a similar discount (1) Reduction in profit if discount given to all existing customers (1) May damage relationship of existing customers (1) Reduction in gross margin (1) Accept other valid points Max 2 Recommendation (1)

This question in 0985/22 Oct/Nov 2022

4 Salman owns a footwear factory. He sells to all of the three local shoe shops. Salman prepares his financial statements to 30 April each year. At 30 April 2023, Salman’s ledger account balances included the following. $ Inventory at 1 May 2022 Raw materials 8 190 Work in progress 15 200 Finished goods 23 860 Purchases of raw materials 78 420 Purchases of finished goods 90 144 Wages Factory supervisor 27 500 Factory operatives 52 396 Rates and insurance 17 528 Factory electricity 11 442 General factory expenses 8 244 Factory equipment – at cost 90 000 Factory equipment – provision for depreciation 43 920 Balance at bank 31 000 debit Additional information 1 Inventory at 30 April 2023 Raw material 8 000 Work in progress 16 100 Finished goods 24 590 2 Salman applies a mark-up of 50% to his cost of sales. 3 Rates and insurance are to be apportioned three quarters to the factory and one quarter to the office. 4 At 30 April 2023, factory electricity of $1048 was unpaid. 5 Factory equipment is depreciated at 20% per annum using the reducing balance method. REQUIRED (a) Prepare Salman’s manufacturing account for the year ended 30 April 2023. Salman Manufacturing Account for the year ended 30 April 2023 $ $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [10] (b) Prepare the trading section of Salman’s income statement for the year ended 30 April 2023. Salman Income Statement (trading section) for the year ended 30 April 2023 $ $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [5] Salman is considering converting some of his office space into additional factory capacity. (c) Advise Salman whether he should convert some of his premises from office use to factory use. Justify your answer by providing arguments for and against this conversion of office space into additional factory capacity. … … … … … … … … … … … … [5] [Total: 20]

20 marks

Mark scheme: 4(a) Salman Manufacturing Account for the year ended 30 April 2023 $ $ Cost of material consumed Opening inventory of raw material 8 190 Purchases of raw material 78 420 86 610 8 000 Less Closing inventory of raw material 78 610 (1) Direct wages 52 396 (1) Prime cost 131 006 (1)OF Factory overheads Wages of factory supervisor 27 500 (1) Rates and insurance (17 528  3/4) 13 146 (1) Factory electricity (11 442 + 1 048) 12 490 (1) General expenses 8 244 Depreciation of factory equipment (90 000 – 43 920)  20% 9 216 (1) 70 596 201 602 (1)OF Add opening work-in-progress 15 200 * 216 802 Less closing work-in-progress 16 100 * Cost of production 200 702 (1)OF * (1) for both opening and closing work-in-progress 10 Question Answer Marks 4(b) Salman Income statement (trading section) for the year ended 30 April 2023 $ $ Revenue 435 174 (1)OF Cost of sales Opening inventory 23 860 Cost of production 200 702 (1)OF Purchases of finished goods 90 144 (1) 314 706 Closing inventory 24 590 290 116 (1)OF Gross profit 145 058 (1)OF 5 4(c) Advantages of converting office space Will be more profitable use of space/increase output (1) Manufacturing appears to be profitable (1) May not need to purchase finished goods (1) Have high bank balance which will help to pay for conversion (1) Accept other valid points Max (3) Disadvantages of converting office space May not be able to sell the extra output (1) Conversion of office space may be costly (1) May have to purchase additional factory equipment (1) May be more appropriate/more profitable to use the funds for other things (1) The space is necessary for office purposes (1) Accept other valid points Max (3) Max (4) (1) for recommendation 5

This question in 0985/21 May/June 2023

1 Omer is a trader. The following transactions took place in April 2023. April 3 Paid $1000 into the bank from his own personal money 7 Paid $360 to a supplier, Alexander, by telephone transfer 10 Cash sales, $695, were paid directly into the bank account 12 Purchased goods, $340, on credit from Alexander 15 Paid $68 cash for petrol 16 Paid rent, $400, by standing order 23 Received a cheque, $384, from a credit customer, Esme, in full settlement of an invoice for $400 27 Paid $323 by cheque to Alexander, having deducted $17 cash discount 28 Purchased goods, $235, on credit from Alexander REQUIRED (a) Complete Omer’s cash book on the page opposite. Balance the cash book and bring down the balances on 1 May 2023. [11] $ 477 Bank … … … … … … … … … … … … … … … … $ Cash … … … … … … … … … … … … … … … … … … $ Discountreceived … … … … … … … … … … … … … … … … … … Details b/d Balance … … … … … … … … … … … … Date 2023 1Apr … … … … … … … … … … … … Book Omer Cash $ Bank … … … … … … … … … … … … … … … … … … … … … … … … $ 120 Cash … … … … … … … … … … … … … … … … … … … … … … … … $ Discountallowed … … … … … … … … … … … … … … … … … … … … … … … … Details b/d Balance … … … … … … … … … … … … (b) Prepare the account for Alexander for April 2023. Balance the account and bring down the balance at 1 May 2023. Omer Alexander account Date Details $ Date Details $ 2023 … … … Apr 1 Balance b/d 360 … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [4] Omer buys all his supplies from Alexander who does not allow Omer any trade discount. Omer is now considering also purchasing supplies from Tahir who would offer him 3% trade discount but no cash discount. REQUIRED (c) Advise Omer whether he should choose: Option 1 – purchase supplies from Alexander only, or Option 2 – purchase supplies from both Alexander and Tahir Justify your answer by providing three advantages and one disadvantage of the option you have chosen. … … … … … … … … … [5] [Total: 20]

20 marks

Mark scheme: 1(a) Omer Cash Book Date Details Disc. Cash Bank Date Details Disc. Cash Bank 2023 $ $ $ 2023 $ $ $ Apr 1 Balance b/d 120 Apr 1 Balance b/d 477 3 Capital (1) 1 000 7 Alexander (1) 360 10 Sales (1) 695 15 Motor expenses (1) 68 23 Esme (1) 16 384 16 Rent payable (1) 400 27 Alexander (1) 17 323 30 Balance c/d 52 519 16* 120 2079 17 (1)* 120 2079 May 1 Balance b/d 52 519 (1)OF (1)OF *both discount totals +(1) dates Question Answer Marks 1(b) Omer Alexander account Date Details $ Date Details $ 2023 2023 Apr 7 Bank (1) 360 Apr 1 Balance b/d 360 27 Bank } 323 12 Purchases } 340 Discount received } (1) 17 28 Purchases } (1) 235 30 Balance c/d 235 935 935 May 1 Balance b/d (1)OF 235 4 1(c) Option 1 – buy from Alexander only Advantages A offers cash discount but T does not (1) A offers 5% cash discount (1) A’s cash discount is a higher % than T’s trade discount (1) Maintain good relationship with A (1) Familiar with A’s quality/reliability (1) (Max 3) Disadvantages T offers trade discount but A does not (1) May lose cash discount by not paying on time (1) Depending on one supplier only (1) A has no incentive to offer more competitive terms (1) (Max 1) Accept other valid points 5 Question Answer Marks Option 2 – buy from both Alexander and Tahir Advantages T offers trade discount but A does not (1) Trade discount is deducted from invoice and does not depend on when payment is made (1) Cost of buying goods from T is reduced (1) Not dependent on one supplier (1) A may offer more competitive terms to compete with other supplier (1) (Max 3) Disadvantages A offers cash discount but T does not(1) T’s trade discount is a lower % than A’s cash discount (1) May damage relationship with A (1) Not familiar with T’s quality/reliability (1) (Max 1) Accept other valid points Recommendation (1)

This question in 0985/22 May/June 2023

1 Addo is a trader who only sells on credit. His trade receivables at 1 April 2024 were as follows: $ Nuru 920 Mahia 1145 Ava 1378 Rachel 215 3658 During April 2024, the following transactions took place: April 2 Sold goods to Ava, list price $150, less 6% trade discount 9 Received telephone transfer from Ava, $689 12 Sold goods to Nuru, $165 13 Received cheque, $627, from Mahia, in full settlement of an invoice for $660 19 Received $760 from Nuru by electronic transfer. Nuru had deducted 5% cash discount 20 Nuru returned goods $30 21 Sold goods to Mahia, list price $480, trade discount 5%, cash discount 5% if invoice paid within 30 days 30 Rachel has become bankrupt and Addo decides to write off the amount owing from her, as irrecoverable REQUIRED (a) Prepare the sales journal for April 2024. Total the sales journal and indicate the ledger account to which the total would be posted. Addo Sales journal Date Details $ $ … … … … … … … … … … … … … … … … … … … … [3] (b) Prepare the journal entry to write off the amount owing by Rachel. A narrative is required. Addo Journal Date Details $ $ … … … … … … … … … … … … … … … … … … … … [3] (c) Calculate: (i) the total amount of money which Addo received from trade receivables during April 2024. … … … … [1] (ii) the total amount of cash discount which Addo allowed in April 2024. … … … … [2] (d) Prepare Addo’s sales ledger control account for April 2024. Addo Sales ledger control account Date Details $ Date Details $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [6] Addo is considering changing his credit terms. He would introduce more credit checks on new customers and would increase cash discount to 7½% for payment within 30 days. REQUIRED (e) Advise Addo whether or not he should make these changes to his credit terms. Justify your answer by providing two advantages and two disadvantages of changing his credit terms. … … … … … … … … … … … … [5] [Total: 20]

20 marks

Mark scheme: 1(a) Addo Sales journal Date Details $ 2024 Apr 2 12 21 30 Ava (150 – 9) Nuru Mahia (480 – 24) Transfer to sales account 141 165 456 ___ 762 (1) (1) (1)OF 3 1(b) Addo Journal Date Details Debit $ Credit $ 2024 April 30 Irrecoverable debts (1) Rachel (1) Amount due from Rachel written off as irrecoverable (1) 215 215 3 1(c)(i) Total amount received = $689 +$627 + $760 = $2 076 (1) 1 1(c)(ii) Total cash discount = $40(1) + $33 = $73 (1)OF 2 Question Answer Marks 1(d) Addo Sales ledger control account Date 2024 April 1 30 May 1 Details Balance b/d Sales (1)OF Balance b/d (1)OF $ 3 658 762 ____ 4 420 2 026 Date 2024 April 30 Details Sales returns (1) Bank (1)OF Discount allowed (1)OF Irrecoverable debts (1) Balance c/d $ 30 2 076 73 215 2 026 4 420 6 1(e) Advantages Increased cash discount may encourage new customers/existing customers to buy more/increase sales (1) More customers may pay early because of extra discount/improve liquidity (1) Irrecoverable debts may be reduced (1) Increased credit check indicates ability to pay (1) Accept other valid points Max (2) Disadvantages More credit checks would take more time/cost more money (1) Less money coming in from sales (1) No guarantee that customers will pay early (1) Less profit on each sale/profit for the year will be reduced/expenses increased if give cash discount (1) No guarantee that there will not be any irrecoverable debts (1) Accept other valid points Max (2) Recommendation (1) 5

This question in 0985/21 May/June 2024

3 Zahra and Panya are the shareholders and directors of Q Limited. The company directors of Q Limited have provided the following trial balance. Q Limited Trial Balance at 31 January 2024 Debit Credit $ $ Revenue 78 000 Purchases 38 200 Rent and insurance 10 600 Directors’ salaries 19 000 General expenses 3 420 Advertising 5 400 Dividends paid 2 500 Fittings at cost 18 000 Provision for depreciation of fittings 5 400 Inventory at 1 February 2023 2 950 Cash at bank 915 Trade payables 2 288 Ordinary share capital 13 000 Retained earnings 2 297 100 985 100 985 Additional information 1 Inventory at 31 January 2024 was valued at $4720. 2 Depreciation on fittings is to be charged at 10% per annum using the straight-line method. 3 Payment for advertising, $75, is outstanding at 31 January 2024. 4 No dividends were outstanding at 31 January 2024. REQUIRED (a) Prepare the income statement for Q Limited for the year ended 31 January 2024. Q Limited Income statement for the year ended 31 January 2024 $ $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [6] (b) Calculate the retained earnings at 31 January 2024. … … … … … [3] (c) Prepare the statement of financial position for Q Limited at 31 January 2024. Q Limited Statement of financial position at 31 January 2024 $ $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [6] Zahra and Panya would like to expand the company and increase sales. In order to do this they are considering increasing the amount spent on advertising by 100%. (d) Advise Zahra and Panya whether or not they should go ahead with the 100% increase in the amount spent on advertising. Justify your answer by providing two points in favour and two points against this increase. … … … … … … … … … … … … [5] [Total: 20]

20 marks

Mark scheme: 3(a) Q Limited Income statement for the year ended 31 January 2024 $ $ Revenue 78 000 Less: Cost of sales Opening inventory 2 950 Purchases 38 200 41 150 Less Closing inventory 4 720 36 430 (1) Gross profit 41 570 (1)OF Less Rent and insurance 10 600 } Directors’ salaries 19 000 }(1) General expenses 3 420 } Advertising (5 400 + 75) 5 475 (1) Depreciation of fittings (10%  18 000) 1 800 (1) 40 295 Profit for the year 1 275 (1)OF 6 3(b) Retained earnings: $ Opening balance 2 297 Profit for the year 1 275 (1)OF 3 572 Less Dividend paid (2 500) (1) Closing balance 1 072 (1)OF 3 Question Answer Marks 3(c) Q Limited Statement of financial position at 31 January 2024 $ $ $ Non-current assets Cost Accumulated depreciation Net book value Fittings 18 000 7 200 (1)OF 10 800 (1)OF Current assets Inventory 4 720 Bank 915 5 635 (1) 16 435 Equity and Liabilities Ordinary share capital 13 000 Retained earnings 1 072 (1)OF 14 072 Current liabilities Trade payables 2 288 Other payables 75 (1) 2 363 (1)OF 16 435 6 Question Answer Marks 3(d) For May increase in sales/result in more customers (1) May help reduce the level of inventory (1) May benefit future years (1) Increase in gross profit more than the extra cost of advertising may increase profit for the year (1) Accept other valid points Max (2) Against May not be able to afford the increase in advertising costs (1) May need to borrow money for increased advertising costs (and borrowing would incur interest) (1) There is no guarantee that sales would increase (1) Profit may reduce/may result in a loss/expenses will increase because of extra advertising (1) Accept other valid points Max (2) Recommendation (1) 5

This question in 0985/21 May/June 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

3 Ahmed has a vehicle breakdown recovery business. He owns a recovery vehicle and has provided the following information about the vehicle: • Purchase date: 1 October 2021 • Purchase price: $80 000 paid by bank transfer • Estimated residual value: $30 000 • Estimated working life: 5 years Ahmed provides a full year’s depreciation in the year of purchase but charges no depreciation in the year of disposal. He depreciates his vehicles using the reducing balance method at 20% per annum. His recovery vehicle is now 4 years old and is no longer reliable. Ahmed considered replacing his recovery vehicle on 31 August 2025. Ahmed’s financial year ends on 30 April. REQUIRED (a) Calculate the depreciation charge for each year of the recovery vehicle’s working life, assuming Ahmed replaces the recovery vehicle on 31 August 2025. Show your workings. $ … … … … … … … … … … … … … … … … … … … … … … … … … … [4] (b) State one advantage and one disadvantage of the reducing balance method of depreciation. Advantage … … … Disadvantage … … … [2] On 1 February 2025, a local dealer offered to buy the recovery vehicle from Ahmed for $35 000 cash. REQUIRED (c) Calculate the profit or loss on disposal if Ahmed had sold his recovery vehicle to the local dealer on 1 February 2025. Show your workings, and state whether it would have been a ‘profit’ or ‘loss’. … … … … … … … … … … … [3] (d) (i) Prepare Ahmed’s motor vehicles account for the year ended 30 April 2025 if Ahmed had sold his recovery vehicle to the local dealer on 1 February 2025. Ahmed Motor vehicles account Date Details $ Date Details $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [2] (ii) Prepare Ahmed’s disposal of motor vehicles account for the year ended 30 April 2025 if Ahmed had sold his recovery vehicle to the local dealer on 1 February 2025. Ahmed Disposal of motor vehicles account Date Details $ Date Details $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [4] Ahmed sold his recovery vehicle. Since the sale, he has been hiring a recovery vehicle capable of recovering larger vehicles and is now considering buying a similar vehicle. He would finance the purchase of this new vehicle using the money received from selling his old recovery vehicle, and the balance will come from a bank loan repayable in 5 years. Delivery of the new vehicle is estimated to be in 6 months. REQUIRED (e) Advise Ahmed whether he should buy this new recovery vehicle. Justify your answer by providing advantages and disadvantages of buying the new recovery vehicle. … … … … … … … … … … … … [5] [Total: 20]

20 marks

Mark scheme: 3(a) $ 4 Cost 80 000 Depreciation for the year ended 30 April 2022 16 000 (1) Net Book Value 64 000 Depreciation for the year ended 30 April 2023 12 800 (1) Net Book Value 51 200 Depreciation for the year ended 30 April 2024 10 240 (1)OF Net Book Value 40 960 Depreciation for the year ended 30 April 2025 8 192 (1)OF Net Book Value 32 768 3(b) Advantages (Max 1) 2 Matches cost with revenue (1) Appropriate when greater benefits are gained from the non-current assets in the early years (1) May provide a more accurate depreciation / net book value for the asset / non-current asset (1) Disadvantages (Max 1) Depreciation has to be recalculated each year / more complicated to calculate (1) The charge against profits is greater in the early years of the non-current asset’s life (1) Accept other valid responses 3(c) $ 3 Cost 80 000 Depreciation for the year ended 30 April 2022 16 000 Depreciation for the year ended 30 April 2023 12 800 Depreciation for the year ended 30 April 2024 10 240 (39 040) Net Book Value at 01 May 2024 40 960 (1OF) Sale proceeds 35 000 (1) Loss on disposal 5 960 (1OF) 3(d)(i) Ahmed 2 Motor vehicles account Date Details $ Date Details $ 2021 2025 Oct 1 Bank 80 000 (1) Feb 1 Disposal 80 000 (1) 3(d)(ii) 4 Ahmed Disposal of motor vehicles account Date Details $ Date Details $ 2025 2025 Feb 1 Motor 80 000 (1) Feb 1 Provision for 39 040 (1)OF Vehicles depreciation Cash 35 000 (1) April 30 Income 5 960 (1)OF statement 80 000 80 000 3(e) Advantages (Max 3) 5 Saving on hire costs (1) Improve revenue / profit (1) Less risk because he has already trialled it / hired for short period (1) Increases non-current assets (1) Disadvantages (Max 3) A larger recovery vehicle which will cost more than a smaller vehicle (1) Hire costs will have to be paid for six months (1) Interest charges on loan (1) Bank may not agree the loan / may require some form of security / loans have to be repaid (1) Proceeds from sale may have been used elsewhere (1) Accept other valid responses. Recommendation (1)

This question in 0985/22 Oct/Nov 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