Accounting 9706/31 May/June 2025: question paper and mark scheme
Cambridge AS & A Level Accounting (9706), Paper 3 Financial Accounting, May/June 2025. Read both free below, or download them. Done the paper? Get it marked by AI against this mark scheme.
Read Source A in the insert.
(a) Explain why the club adopts the policy of spreading life membership fees over ten years equally.
…… [3]
(b) Calculate the profit/loss from operating the vending machine for the year ended
31 December 2024.
…… [4]
(c) Prepare the income and expenditure account for the year ended 31 December 2024.
…… [9]
(d) Prepare a statement showing the changes in the accumulated fund during the year ended
31 December 2024.
…… [4]
Additional information
The tenancy of the club’s premises will end on 31 December 2025. The landlord has indicated that the tenancy will not be renewed. The managing committee is considering purchasing the club’s own premises at a cost of $200 000. Meena, a member, offers to donate this amount with the condition that the name of the club will be changed to The Meena Social Club.
(e) Advise the managing committee whether or not Meena’s offer should be accepted.
Justify your answer.
…… [5]
[Total: 25]
Mark scheme
1(a) Explain why the club adopts the policy of spreading life membership fees over ten years equally. 3
Accrual / matching concept is applied (1) to match life membership over the years used. (1)
The number of years to spread over is the accounting policy of the club. (1)
Accept other valid responses.
1(b) Calculate the profit/loss from operating the vending machine for the year ended 31 December 2024. 4
$ $
Soft drink revenue 36 000
Cost of sales
Opening inventory 1 680 }*
Purchases W1 20 000 (1)
Closing inventory (1 900) }* (1)
19 780
Gross profit 16 220
Vending machine rental $800 x12 9 600 (1)
Profit from vending machine 6 620 (1)OF
W1
$20 800 + $6 500 – $7 300 = $20 000
1(c) Prepare the income and expenditure account for the year ended 31 December 2024. 9
Income and expenditure account for year ended 31 December 2024
$ $
Income
Subscription fee W1 125 300 (1)
Life membership W2 1 300 (2)
Profit from vending machine 6 620
133 220
Expenditure
Loss on disposal of equipment W3 350 (1)
Depreciation – club equipment W4 9 700 (2)
Club expenses W5 65 900 (1)
Social activities W6 36 300 (1) 112 250
Surplus 20 970 (1)OF
W1 $124 000 + (1 900 – $2 200) + (2 800 – 1 200) = 125 300
W2 ($5 000 × 10%) = $500(1) + ($8 000 × 10%)= $800 (1) = $1 300
W3 $3 500 – $3 150 = $350
W4 $37 600 + $14 400 – $38 800 (1) – $3 500 = $9 700 (1)OF
W5 $69 300 + $5 400 – $8 800 = $65 900
W6 $41 000 – $4 700 = $36 300
1(d) Prepare a statement showing the changes in the accumulated fund during the year ended 31 December 2024. 4
$
Accumulated fund at 1 January 2024 W1 45 780 (2)OF
Surplus for the year 20 970 (1)OF
Accumulated fund at 31 December 2024 66 750 (1)OF
W1
$
Club equipment – carrying value 37 600
Soft drinks inventory 1 680
Subscriptions received in advance (1 900)
Subscriptions in arrear 2 200
Soft drinks supplier payable (7 300)
Club expenses accrued (8 800)
Cash at bank 26 800
Life membership ($500/10%) x 90% (4 500) (1)
Accumulated fund at 1 January 2024 45 780 (1)OF
1(e) Advise the managing committee whether or not Meena’s offer should be accepted. Justify your answer. 5
For (Max 2)
No need to repay the donation
Otherwise, the club need to obtain finance such as a bank loan / interest will reduce the surplus
No rent to be paid
Against (Max 2)
The club will lose its identify of being a local club for the community
Meena may exercise undue influence over the affairs of the club
Membership may decline
Decision supported by a comment (1)
Accept other valid responses
Read Source B in the insert.
(a) Prepare the statement of changes in equity for the year ended 31 December 2024.
A total column is required.
…… [5]
(b) Calculate, to two decimal places, the return on capital employed for the year 2024.
…… [2]
(c) (i) Calculate, to two decimal places, the gearing ratio for both the years 2023 and 2024.
…… [2]
(ii) Comment on the gearing ratio with reference to the calculations in (c)(i).
…… [4]
Additional information
The 2023 interim dividend was $0.05 per share. TN plc had a dividend cover of 1.8 times in 2023.
In considering the proposed 2024 final dividend, the directors suggest that the dividend cover for
2024 should be increased to 2 times.
(d) (i) Calculate the proposed 2024 final dividend per share.
…… [3]
(ii) Explain why the directors want to increase the dividend cover for 2024.
…… [4]
Additional information
The market price of one share of TN plc at 31 December was as follows:
2024 2023
$4.65 $3.72
(e) Comment on the company’s 2024 price/earnings (PE) ratio as compared to the company’s
PE ratio in 2023. Support your answer with calculations.
…… [5]
[Total: 25]
Mark scheme
2(a) Prepare the statement of changes in equity for the year ended 31 December 2024. 5
A total column is required.
Ordinary Share Retained
shares premium earnings Total
$ $ $ $
Balance at 1 January 2024 400 000 23 000 199 000 622 000
Dividend – 2023 final W1 (70 000) (1) (70 000)
Bonus 40 000 ((1) (23 000) } (17 000) }(1)OF 0
Dividend – 2024 interim W2 (35 200) (1) (35 200)
Profit for the year 180 400 180 400
Balance at 31 December 2024 440 000 0 257 200 697 200 (1)OF
W1 200 000 × $0.35 = $70 000
W2 220 000 × $0.16 = $35 200
2(b) Calculate, to two decimal places, the return on capital employed for the year 2024. 2
($180 400 + $36 000) (1)/($697 200 + $700 000) × 100 = 15.49% (1)OF
Debenture interest $300 000 × 6% + $400 000 × 6% × 3/4 = $36 000
2(c)(i) Calculate, to two decimal places, the gearing ratio for both the years 2023 and 2024. 2
Gearing ratio for 2023
$300 000/($622 000 + $300 000) × 100 = 32.54% (1)
Gearing ratio for 2024
$700 000/($697 200 + $700 000) × 100 =50.10% (1)OF
2(c)(ii) Comment on the gearing ratio with reference to the calculations in (c)(i). 4
In 2023, 32.54% of capital employed was provided in the form of a long-term loan rather than from shareholders / the
company is regarded as low geared. (1)
This ratio increased to 50.10%, in excess of 50% which is regarded as high geared. (1)
A high geared company is perceived as more risky than a low geared company. (1)
TN plc may have difficulty to borrow further funds/ to repay non-current liabilities /have heavy burden on interest payment
(1)
Max 4
Accept other valid responses.
2(d)(i) Calculate the proposed 2024 final dividend per share. 3
Dividend for 2024 $180 400/2 = $90 200 (1)
$90 200/220 000 = $0.41 (1)OF
$0.41 – $0.16 = $0.25 (1)OF
2(d)(ii) Explain why the directors want to increase the dividend cover for 2024. 4
To increase the dividend cover means that the directors wish to reinvest more profit into the business (1) that will lead to
business expansion (1) and a further increase in profit in the future (1)
The directors want to be sure that the company will be able to maintain the current level in the future if profit falls / there are
less funds available for distribution. (1)
Max 4
Accept other valid responses.
2(e) Comment on the company’s 2024 price/earnings (PE) ratio as compared to the company’s PE ratio in 2023. 5
Support your answer with calculations.
2023
Total dividend ($0.35 + $0.05) × 200 000 = $80 000
Earnings per share ($80 000 × 1.8)/200 000 = $0.72
PE ratio $3.72/$0.72 = 5.17 (1)
2024
Earnings per share $180 400/220 000 = $0.82
PE ratio $4.65/$0.82=5.67 (1)
PE ratio of 2024 is better than 2023 (1)
There is a higher market price in relation to earnings. (1)
This suggests that the investors are confident in the future growth of the business. (1)
TN plc should also compare with the industry’s PE ratio. (1)
Max. 2 marks for calculations.
Max. 3 marks for comments.
Accept other valid responses.
Read Source C in the insert.
(a) State four uses of a statement of cash flows.
1 ……
2 ……
3 ……
4 ……
[4]
(b) Calculate the profit from operations for the year ended 31 December 2024.
…… [5]
(c) Prepare the statement of cash flows for the year ended 31 December 2024 in accordance with IAS 7.
Workings:
[11]
Additional information
To improve the cash flow, the directors plan to sell one of the office buildings and then rent it from the purchaser.
(d) Advise the directors whether or not they should carry out their plan. Justify your answer.
…… [5]
[Total: 25]
Mark scheme
3(a) State four uses of a statement of cash flows. 4
• To explain why profits are different from changes in cash and cash equivalents
• To show cash inflows and outflows during a period
• To show sources of internal and external financing
• To enable users to assess the efficiency of how cash has been used
• To help assess the liquidity of the business
• To allow comparisons year on year / with other businesses
Max 4
Accept other valid responses.
3(b) Calculate the profit from operations for the year ended 31 December 2024. 5
$
Retained earnings b/d 205 900
Profit for the year (Balancing) 87 150 (1)OF
Dividend paid (114 000) }
Transferred to general reserve (8 000) }(1)
Revaluation reserve 52 000 (1)
Retained earnings c/d 223 050
Profit for the year 87 150
Loan interest 8 900 (1)
Profit from operations 96 050 (1)OF
3(c) Prepare the statement of cash flows for the year ended 31 December 2024 in accordance with IAS 7. 11
Statement of cash flow for the year ended 31 December 2024
$ $
Cash flows from operating activities
Profit from operations 96 050
Depreciation charge – Office buildings 26 800 }
– Office equipment 14 400 }(1) 41 200
Profit on disposal of office building ($375 000 – $360 000) (15 000) (1)
Decrease in inventory 9 400 }
Increase in trade receivables (12 700) }
Increase in trade payables 12 000 }(1)
Cash from operations 130 950
Interest paid ($8 900 + $550) (9 450) (1)
Net cash from operating activities 121 500
Cash flows from investing activities
Purchase of office building ($670 000 + $360 000 – $580 000) (450 000) (1)
Proceeds from sale of office building 375 000 }
Purchase of office equipment (10 000) }(1)
Net cash used in investing activities (85 000) (1)OF
Cash flows from financing activities
Proceeds from issue of share capital 60 000 (1)
Dividend paid (114 000) }
Repayment of bank loan (15 000) }(1)
Net cash used in financing activities (69 000) (1)OF
Net decrease in cash and cash equivalents (32 500)
Cash and cash equivalents at 1 January 2024 25 600
Cash and cash equivalents at 31 December 2024 (6 900) (1)OF
3(d) Advise the directors whether or not they should carry out their plan. Justify your answer. 5
For (Max 2)
KM plc gets immediate cash.
KM plc retains full use of the office building.
There will be no maintenance / depreciation costs.
Extra cash can be used to repay the loan to reduce the interest expense.
Against (Max 2)
Profit will be reduced due to rent payments.
KM plc will be evicted from the property if the company cannot pay rent.
KM plc has little flexibility to deal with the property, for example, permission from the landlord is necessary for any major
renovations.
KM plc cannot enjoy the increase in value of the property.
The purchaser may increase the rent.
Decision supported by a comment (1)
Accept other valid responses
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Accounting 9706/31 for May/June 2025 is out of 75 marks, with 1 hour 30 minutes to answer it, across 3 questions.
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