Accounting 9706/31 May/June 2020: question paper and mark scheme
Cambridge AS & A Level Accounting (9706), Paper 3 Structured Questions, May/June 2020. Read both free below, or download them. Done the paper? Get it marked by AI against this mark scheme.
Read Source A1 in the Insert.
(a) State three differences between a statement of cash flows and a cash budget.
1 ……
2 ……
3 ……
[3]
(b) Prepare a statement reconciling the profit from operations with the cash from operations for the year ended 31 December 2019.
Workings:
[9]
(c) Prepare a statement of cash flows for the year ended 31 December 2019. Start your answer with cash from operations from (b).
…… [7]
(d) Discuss the effect of an increase in general reserve during the year on cash flow.
…… [2]
Additional information
The bank loan of $100 000 was to be repaid in 2022. The directors made an early repayment in part on 30 September 2019.
(e) Discuss whether or not the directors were right in repaying part of the bank loan during the year ended 31 December 2019. Justify your answer.
…… [4]
[Total: 25]
Mark scheme
1(a) Statement of cash flows Cash budget 3
• use historical data • use predicted figures
• format is prescribed by accounting standard, i.e. IAS7 • no prescribed format, suit management purpose
• investors to make financial decisions • management to make management decisions
• prepared on an annual basis • may be monthly or other periodic basis
(1 marks) × 3 pairs of contrast
Max 3
Accept other valid points
1(b) $ 9
Profit from operations 55 950
Premises depreciation 20 000 W1 (1)
Machinery depreciation 27 000 W2 (1)
Motor vehicles depreciation 39 800 W3
Loss on disposal of MV 6 500 W4 (1)
Decrease in inventory 3 950 (1)
Increase in trade receivables (3 100) (1)
Increase in trade payables 4 300 (1)
Cash from operations 154 400 (1)OF
W1 400 000 – 380 000
W2 202 000 + 28 000 – 203 000
W3 118 000 + 74 000 – 113 200 (1) – (65 000 – 26 000)(1)
W4 (65 000 – 26 000) – 32 500
1(c) Statement of cash flows for the year ended 31 December 2019 7
$ $
Operating activities
Cash from operations 154 400 OF
Tax paid (13400+12600-13400) (12 600) (1)
Interest paid (8250+2500-750) (10 000) (1)
Net cash from operating activities 131 800
Investing activities
Purchase of machinery (28 000) }
Purchase of motor vehicle (74 000) }
Sale proceeds of motor vehicle 32 500 }(1)
Net cash used in investing activities (69 500)
Financing activities
Receipts from issue of share capital 60 000 (1)
Repayment of loan (70 000) (1)
Dividend paid (44 000) (1)
Net cash used in financing activities (54 000)
Net increase in cash and cash equivalents 8 300 (1)OF
Cash and cash equivalents at the start of the year 8 100
Cash and cash equivalents at the end of the year 16 400
Must have opening cash from operations from (b) for the OF mark
1(d) Increase in general reserve is due to a transfer from retained earnings to general reserve, not a cash transaction. (1) 2
There is no impact on the cash flow.(1)
1(e) Responses could include: 4
• there is still net increase in cash and cash equivalents even though part of the loan was repaid (1)
• but it is only small increase (1)
• additional shares were issued / large net cash inflows from operating activities (1)
• saved from paying loan interest / gearing ratio is improved (1)
• had to pay dividend and additional non-current assets. (1)
1 mark for decision plus Max 3 marks for justification.
Accept other valid points
Read Source A2 in the Insert.
(a) State:
(i) the meaning of the term ‘work in progress’.
…… [1]
(ii) how work in progress is valued.
…… [2]
(b) Prepare the manufacturing account (for watches) for the year ended 31 December 2019.
…… [7]
(c) Calculate the gross profit for the year ended 31 December 2019 on the sale of watches and clocks.
Use the table below to present your calculations.
Watches Clocks
$ $
[2]
(d) Prepare an extract from the income statement for the year ended 31 December 2019, showing the gross profit, the manufacturing profit and the adjustment of the provision for unrealised profit.
…… [3]
(e) Explain the accounting treatment in the income statement and the statement of financial position of the provision for unrealised profit. Support your answer with reference to the accounting concepts.
…… [5]
Additional information
The directors are considering whether they should stop selling watches and sell only clocks in the future.
(f) Advise the directors whether they should sell only clocks in the future. Justify your answer with reference to your calculations in (c) and (d).
…… [5]
[Total: 25]
3 Read Source A3 in the Insert.
(a) Calculate the purchase consideration payable by X Limited.
…… [4]
(b) Prepare the realisation account.
…… [7]
Additional information
It was agreed that the allocation of X Limited’s shares to the partners and the final settlement by the partners to or from the partnership bank account will go through the partners’ capital accounts.
(c) Prepare partners’ capital accounts in a columnar form.
…… [6]
Additional information
After issuing 50 000 ordinary shares to Ang and Kim, X Limited had an issued ordinary share capital of $300 000.
Ang and Kim were appointed as directors of X Limited and each received $25 000 per annum as director fees.
X Limited forecasted that the profit for 2020, after acquisition of the partnership business, would increase by $60 000 to $260 000.
It is expected that the dividend paid for 2020 will be $0.65 per share.
(d) Suggest three reasons for the forecast increase in profit in 2020.
1 ……
2 ……
3 ……
[3]
(e) Discuss whether or not Ang and Kim had made the right decision to sell the partnership business to X Limited. Justify your answer giving both financial and non-financial reasons.
…… [5]
[Total: 25]
4 Read Source A4 in the Insert.
(a) Prepare the summarised draft statement of financial position at 31 December 2019.
…… [4]
Additional information
1 Further analysis of the equity at 31 December 2019 is as follows:
$ ordinary share capital ($1 shares) 300 000 share premium 40 000 general reserve 28 000 retained earnings 112 000
480 000
2 The current market price of one ordinary share is $2.40.
3 The price earnings ratio is 10 and the dividend yield is 5%.
4 An amount of $10 000 had been transferred from retained earnings to the general reserve during the year ended 31 December 2019.
(b) Prepare an extract from the statement of changes in equity for the year ended
31 December 2019 showing the movement of retained earnings.
Workings:
[6]
Additional information
During their review of the draft financial statements, the auditors brought two issues to the attention of the directors.
Issue 1
During the year ended 31 December 2019, M plc had bought a specialised machine. The machine had been designed by M plc and made by an overseas manufacturer. The following costs had been incurred:
$
Design 7 000
Manufacture 26 000
Installation 3 000
Repair and maintenance 4 000
M plc had capitalised the manufacture cost, $26 000, and all other costs were charged to the income statement. The company depreciates the machinery at 25% per annum using the straight-line method. A full year’s depreciation is charged in the year of purchase.
Issue 2
M plc owns a warehouse. It was purchased on 1 January 2015 at a cost of $150 000. It has a useful life of 25 years with no expected residual value. Its carrying value had been included in the total value of non-current assets, without taking into account its fair value of $100 000 and value in use of $112 000.
(c) Define the term ‘impairment of assets’.
…… [4]
(d) Explain how the directors should adjust the draft financial statements to account for:
(i) issue 1
…… [2]
(ii) issue 2.
…… [3]
(e) Calculate the adjusted profit for the year after considering issue 1 and issue 2.
…… [6]
[Total: 25]
Section B: Cost and Management Accounting
Answer all questions.
5 Read Source B1 in the Insert.
(a) Calculate the total budgeted profit for August.
…… [2]
Additional information
Actual output and sales for August were 4300 units, selling for $80 per unit.
Actual costs for August were as follows.
$
Total direct materials cost (22 790 kilos) 95 718
Total direct labour costs (12 040 hours) 150 500
Fixed overheads 43 600
(b) Calculate the actual profit for August.
…… [1]
(c) Calculate the following variances:
(i) sales price variance
(ii) sales volume variance (use standard profit margin per unit)
(iii) labour rate variance
(iv) labour efficiency variance
(v) fixed overhead expenditure variance
(vi) fixed overhead volume variance.
[12]
Additional information
Material price variance and material usage variance have been calculated at $4558 (adverse) and
$5160 (adverse).
(d) Prepare a statement reconciling the budgeted profit at 4000 units level with the actual profit.
You should start the statement with the budgeted profit in (a).
…… [5]
Additional information
After analysing the direct materials variances, the directors of T Limited plan to purchase raw materials from a new supplier who provides better quality raw materials but at a higher price and with no trade discount.
(e) Advise the directors whether or not T Limited should change to the new supplier. Justify your answer.
…… [5]
[Total: 25]
6 Read Source B2 in the Insert.
(a) Calculate the total production cost and the unit cost for each product.
…… [5]
Additional information
V Limited normally adds 40% to the cost of each product to set the selling price.
(b) Calculate the unit selling price for each product.
…… [2]
Additional information
V Limited is considering implementing an activity based costing (ABC) system. The management accountant has prepared the following cost analysis.
Overhead Occurrences
Activity costs Cost driver Standard Premium
$
Materials handling 80 000 Number of purchase orders 30 10
Machine setups 90 000 Number of setups 65 25
Inspection 70 000 Number of units produced 10 000 4000
240 000
(c) Define the term ‘cost driver’.
…… [1]
(d) State three benefits of adopting ABC.
1 ……
2 ……
3 ……
[3]
(e) Calculate the total production cost and unit cost for each product if ABC is used.
Workings:
[5]
(f) Calculate the unit selling price for each product if ABC is used.
…… [2]
(g) Explain the difference in total production cost for each product in respect of (a) and (e).
…… [3]
Additional information
V Limited plans to manufacture only the Premium product from 2021.
(h) Explain why V Limited would find ABC useful in 2020 but not in 2021.
…… [4]
[Total: 25]
Mark scheme
2(a)(i) Work in progress are goods in the process of production that have not yet been completed. (1) 1
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Accounting 9706/31 for May/June 2020 is out of 150 marks, with 3 hours to answer it, across 6 questions.
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