Accounting 9706/32 October/November 2020: question paper and mark scheme
Cambridge AS & A Level Accounting (9706), Paper 3 Structured Questions, October/November 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) Explain two reasons why a factory profit is added in an income statement.
1 ……
2 ……
…… [4]
Additional information
After the preparation of the draft financial statements the following errors were discovered.
1 The rent expense, $60 000, should have been split 70% factory, 10% distribution centre and
20% offices. In error it had been split 50% factory, 10% distribution centre and 40% offices.
2 An item of factory machinery, cost $50 000, had been bought on 1 January 2019. This had been recorded in error as office equipment. Factory machinery is depreciated at the rate of
20% per annum and office equipment at 10% per annum.
3 An error had occurred in counting the inventory of finished goods at the year end. The value in the draft financial statements was based on an inventory of 5000 units but in fact there were only 4000 units.
(b) Calculate for the year ended 31 December 2019:
(i) the correct value for the production cost of manufactured goods
…… [3]
(ii) the correct value of factory profit.
…… [1]
(c) Prepare for the year ended 31 December 2019:
(i) the corrected provision for unrealised profit account
…… [3]
(ii) the corrected income statement.
…… [9]
Additional information
One of the directors has suggested that the company should stop accounting for factory profit.
(d) Advise the directors whether or not they should stop accounting for factory profit. Justify your answer.
…… [5]
[Total: 25]
PLEASE TURN OVER
Mark scheme
1(a) It completes the double entry (1) as the factory profit is a debit in the 4
manufacturing account and a credit in the income statement (1).
It enables the income statement to show the profit of the whole business (1)
from both manufacturing and trading/selling (1).
The increase in profit in the profit and loss section of the income statement (1)
cancels the increase in cost in the trading account (1).
Accept other valid answers.
Any two reasons up to (1+1) each Max 4
1(b)(i) 140 000 (– 30 000 + 42 000) (1) + 10 000 (1) = $162 000 (1)OF to include 3
base figure)
1(b)(ii) 162 000 × 20% = $32 400 (1)OF 1
1(c)(i) Provision for unrealised profit account 3
$ $
2019 2019
Dec 31 Income 2000 (1)OF Jan 1 Balance b/d 6000 (1)
statement
Balance c/d 4000 (1)
6000 6000
2020
Jan 1 Balance b/d 4000
1(c)(ii) FG Limited 9
Income statement for the year ended 31 December 2019
$ $
Revenue 320 800
Inventory 1 January 2019 36 000
Transfer price 194 400 (1)OF
230 400
Inventory 31 December 2019 24 000 (1)
Cost of sales 206 400
Gross profit 114 400 (1)OF
Factory profit 32 400 (1)OF
Change in provision for unrealised profit 2 000 (1)OF
Distribution costs 42 700 (1)
Administrative expenses 61 900 W1 104 600
Profit for the year 44 200 (1)OF
W1 78 900 (+ 12 000 – 24 000) (1) – 5000 (1) = 61 900
1(d) Using a transfer price may compare with the cost of buying from an external 5
supplier (1).
Using a transfer price may be used to assess departmental performance (1).
Using a transfer price may assist in calculating pay or bonuses (1).
Setting the rate of factory profit may be subjective (1).
Factory profit does not alter the total profit for the year (1).
Aids setting of selling price (1).
Accept other valid points
Max (4) for comments plus (1) for decision.
Read Source A2 in the insert.
(a) Prepare the statement of cash flows for the year ended 31 December 2019. (Ignore taxation.)
…… [19]
(b) Explain how a premium on an issue of shares is dealt with differently in a statement of cash flows as compared to the books of account of a company.
…… [3]
(c) State three reasons why a company might prepare a statement of cash flows.
1 ……
2 ……
3 ……
…… [3]
[Total: 25]
Mark scheme
2(a) RF plc 19
Statement of cash flows for the year ended 31 December 2019
$000 $000
Profit from operations (15 + 4) 19 (1)
Depreciation – plant and machinery 12 (1)
– motor vehicles 10 (1)
Profit on disposal of motor vehicle (3) (1)
Increase in inventory (17) (1)
Increase in trade receivables (3) (1)
Decrease in trade payables (6) (1)
Cash from operations 12
Interest paid (5) (1)
Net cash from operating activities 7 (1)OF
Cash flow from investing activities
Purchase of non-current assets (38) (1)
Proceeds of sale of motor vehicle 15 (1)
Net cash used in investing activities (23) (1)OF
Cash flow from financing activities
Proceeds from issue of shares 36 (1)
Dividend paid (8) (1)
Proceeds from new loan 5 (1)
Net cash from financing activities 33 (1)OF
Net increase in cash and cash equivalents 17 (1)OF
Cash and cash equivalents on 31 December 2018 (7) (1)
Cash and cash equivalents on 31 December 2019 10 (1)OF
2(b) In a statement of cash flows the amount of the share premium is added to the 3
par value to show total proceeds (1) whereas in the books of account it is
recorded separately from the par value (1) in a separate ledger account called
share premium account (1).
2(c) It may be a legal requirement (1) 3
To comply with IAS7 (1)
To explain why profit is not equal to increases or decreases in cash (1)
To concentrate attention on cash flows (1)
To show the extent to which the business relies on internal and external
financing (1)
To allow for comparisons with other businesses or previous years (1)
To give more information than that which is given in the income statement and
statement of financial position (1)
To assist for loan application (1)
Accept other valid points
Max 3
Read Source A3 in the insert.
(a) Suggest two items, purchased by a business, which could be included in its intangible assets.
1 ……
2 …… [2]
(b) Prepare, showing the adjustments made during the merger on 1 January 2020,
(i) the capital account of Babak
…… [3]
(ii) the capital account of Alice.
…… [6]
(c) Prepare the statement of financial position of the partnership immediately after the merger on
1 January 2020.
……[9]
Additional information
Whilst operating as sole traders both Alice and Babak maintained their books of account on a manual basis. Babak has suggested that the partnership should use a computerised accounting system.
(d) Advise Alice whether or not she should agree to using a computerised accounting system.
Justify your answer.
…… [5]
[Total: 25]
PLEASE TURN OVER
Mark scheme
3(a) Purchased goodwill (1) 2
Patents (1)
Trademarks (1)
Franchises (1)
Copyrights (1)
Accept other valid points
Max 2
3(b)(i) Capital account – Babak 3
$ $
Vehicle 800 (1) Balance b/d 24 800 (1)
Balance c/d 24 000 (1)OF
24 800 24 800
Balance b/d 24 000
3(b)(ii) Capital account – Alice 6
$ $
Inventory 400(1) Balance b/d 30 600 (1)
Balance c/d 48 000(1)OF Premises 14 000 (1)
Vehicle 2 000 (1)
Bank 1 800 (1)OF
48 400 48 400
Balance b/d 48 000
3(c) Alice and Babak 9
Statement of financial position at 1January 2020
$ $
Non-current assets
Intangible asset 200 (1)
Tangible assets
Premises 32 000 }
Equipment 16 300 }(1)
Vehicles 4 400 (1) + 2 000 (1) 6 400 54 700
54 900
Current assets
Inventory 7 200 (1)
Trade receivables 4 400 (1)
Bank 7 600 (1)OF 19 200
Total assets 74 100
Capital – Alice 48 000 }(1)OF
Babak 24 000 }
72 000
Current liabilities
Trade payables 2 100 (1)
Total capital and liabilities 74 100
3(d) Advantages 5
Calculations would be done instantly, and time would be saved. (1)
Calculations would be accurate. (1)
Security could be organised (passwords etc.). (1)
Documents such as invoices could be produced automatically. (1)
Reports and accounts could be generated automatically. (1)
Accept other valid points
Disadvantages
It would require expenditure on hardware. (1)
It would require expenditure on software/other set up costs. (1)
The partners would have to take time to familiarise themselves with the
system/training would be needed. (1)
The opening balances would have to be transferred to the new system. (1)
Accounts would have to be backed up. (1)
There could be inputting errors. (1)
Accept other valid points
Decision (1)
(1) mark for decision Max (2) marks for advantages Max (2) for
disadvantages
Read Source A4 in the insert.
(a) Calculate the working capital cycle ratio. Round up your answer to the next whole day.
…… [8]
Additional information
The industry average for the working capital cycle ratio is 100 days.
(b) Compare your answer to (a) with the industry average. Suggest reasons for the difference.
…… [5]
(c) Explain why having cash sales and cash purchases might affect the usefulness of the working capital cycle ratio to the directors.
…… [2]
(d) Calculate the net working assets to revenue ratio.
…… [4]
Additional information
The industry average for the net working assets to revenue ratio is 21%.
(e) Compare your answer to (d) with the industry average. Suggest reasons for the difference.
…… [3]
Additional information
One of the directors has suggested offering cash discount to credit customers.
(f) Advise the directors whether or not the company should start offering cash discount to credit customers. Justify your answer.
…… [3]
[Total: 25]
Section B: Cost and Management Accounting
Answer all questions.
Mark scheme
4(a) 1500 }(1) 8
Trade receivables turnover = × 365 = 76 days (1)OF
7260 }
760 }(1)
Trade payables turnover = × 365 = 60 days (1)OF
4670 }
1400 }(1)
Inventory turnover = × 365 = 107 days (1)OF
4800 }
Working capital cycle = (107 + 76 – 60) ((1)OF all three) = 123 days (1)OF
4(b) RP Limited’s ratio is worse (1)OF 5
Comparison is difficult without knowing the components of the average ratio
(1).
The ratio indicates that the company may be holding too much inventory (1),
which is possible given that items are held for more than three months (1).
The ratio indicates that the company may be giving too much credit to its
customers (1) which is possible given that debtors are taking about two and a
half months to pay (1).
The ratio indicates that the company is paying its suppliers too quickly (1) but
this is not likely since it is taking on average two months to pay (1).
Accept other valid points.
Max 5 for comments.
4(c) The ratio assumes that all sales and purchases are on credit (1). However the 2
proportion of total sales which are for cash is broadly similar to the proportion
of total purchases which are for cash and so the effect is likely to be small (1).
Accept other valid points.
Max 2
4(d) 1650 (1) + (1500 – 760) (1) 4
× 100 = 28.45% (1)OF
(1140 + 7260) (1)
4(e) RP Limited’s ratio is worse (1)OF. 3
This suggests that the inventory held is higher than the industry average (1)
and that trade receivables are also higher (1).
4(f) Cash discount should encourage credit customers to pay earlier (1) which 3
would reduce the value of trade receivables (1) and assist the cash flow (1)
and reduce both of the ratios (1). It might help avoid irrecoverable debts and
so increase profit (1).
However the cash received would be lower (1) and as an expense in the
income statement it would tend to reduce profit (1).
Decision (1)
Max (2) for comments
Read Source B1 in the insert.
(a) State three factors which might affect the accuracy of a sales budget.
1 ……
2 ……
3 …… [3]
Additional information
It is the policy of WJ plc to keep an inventory of finished goods sufficient to meet the budgeted sales for the first week of the coming period.
(b) Prepare the production budget (in units) for each of the periods 1 to 3.
…… [8]
Additional information
Each unit of production requires five kilos of raw material. It is the policy of the company to keep an inventory of raw material sufficient for the production process for the first two weeks of the coming period.
The raw material costs $10 per kilo.
(c) Prepare the purchases budget for both period 1 and period 2:
(i) in kilos
…… [7]
(ii) in dollars.
…… [2]
Additional information
One of the directors has made two suggestions to increase profits.
Suggestion 1 to continue to use the same supplier of raw materials but to buy a lower quality of raw materials
Suggestion 2 to continue to buy the same quality of raw materials but to use a cheaper supplier
(d) Advise the directors whether or not they should accept either of these suggestions. Justify your answer. Ignore the effect on variances.
…… [5]
[Total: 25]
Mark scheme
5(a) Competitors changing their prices (1) 3
Inflation (1)
Recession in the national economy (1)
Changes in demand/fashion (1)
A change in import/export duty (1)
A change in indirect taxes (1)
Sanctions (1)
Accept other valid points.
Max 3.
5(b) period 1 period 2 period 3 8
units units units
sales 6000 5600 6400 (1)row
closing inventory 1400 1600 1800 (1)
7400 7200 8200
opening inventory (1500) (1) (1400) (1) (1600) (1)
production 5900 (1)OF 5800 (1)OF 6600 (1)OF
5(c)(i) period 1 period 2 7
kilos kilos
production 29 500 29 000 (1)OFBoth
closing inventory 14 500 (1)OF 16 500 (1)OF
44 000 45 500
opening inventory (14 750) (1)OF (14 500) (1)OF
purchases 29 250 (1)OF 31 000 (1)OF
5(c)(ii) period 1 period 2 2
$ $
purchases 292 500 (1)OF 310 000 (1)OF
5(d) Existing supplier will have a track record as to reliability. (1) 5
New supplier may be less reliable leading to shortages if deliveries are not
made on time. (1)
Lower quality materials may take more time to process or lead to more
wastage. (1)
Lower quality materials may lead to lower quality finished goods. (1)
Lower quality may affect reputation. (1)
This might decrease sales or increase sales returns. (1)
Could a better deal be negotiated with the existing supplier for the existing
quality of goods? (1)
A saving on materials will raise profit. (1)
Accept other valid points
(1) mark for decision plus (1) mark each for max four comments
Read Source B2 in the insert.
(a) Calculate for the month of March:
(i) the amount of direct materials used (in kilos)
…… [3]
(ii) the amount paid per kilo for the direct materials
…… [3]
(iii) the labour rate variance
…… [2]
(iv) the labour efficiency variance
…… [2]
(v) the actual profit.
…… [5]
(b) Prepare a statement reconciling the profit of $476 000 from the flexed budget with the actual profit.
…… [6]
(c) Name two other variances which the directors could calculate if they wished to do further analysis of the change in the fixed overheads.
1 ……
2 …… [2]
(d) Suggest one reason for the company’s:
(i) materials price variance
…… [1]
(ii) materials usage variance.
…… [1]
[Total: 25]
Mark scheme
6(a)(i) $22 800 }(1) 3
28 000 (1) – = 24 200 kilos (1)OF
$6 }
6(a)(ii) 36 300 }(1)OF 3
+ 6 (1) = $7.50 per kilo (1)OF
24 200 }
6(a)(iii) Labour rate variance = 21 280 (1) A (1) 2
6(a)(iv) Labour efficiency variance= 28 000 (1) F (1) 2
6(a)(v) $ 5
sales 1 456 000 (1)
direct material 181 500 (1)OF
direct labour 553 280 (1)
fixed overheads 200 000 (1)
profit 521 220 (1)OF
6(b) $ 6
profit from flexed budget 476 000
sales price variance 56 000 (1)
materials price variance (36 300) }
materials usage variance 22 800 } (1)
labour rate variance (21 280) (1)OF
labour efficiency variance 28 000 (1)OF
FO expenditure variance 10 000 }
FO volume variance (14 000) }(1)
actual profit 521 220 (1)OF
6(c) fixed overhead capacity variance (1) 2
fixed overhead efficiency variance (1)
6(d)(i) price of materials increased / bought a higher grade of materials /expensive 1
supplier (1)
Accept other reasonable answers
6(d)(ii) used less material / had lower rate of wastage / improved quality (1) 1
Accept other reasonable answers
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