Accounting 9706/31 October/November 2022: question paper and mark scheme

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1(a) Amit 11 Manufacturing account for the year ended 31 December 2021 $ $ Inventory of raw materials at 1 January 2021 2 810 Purchases of raw materials 81 750 Carriage inwards 400 (1) 84 960 Inventory of raw materials at 31 December 2021 2 350 Cost of raw materials consumed 82 610 (1)OF Direct costs Machine operators’ wages 53 000 (1) Prime cost 135 610 (1)OF Factory overheads Factory supervisor’s salary 26 000 Rent and rates 6 760 (1) Depreciation of factory machinery 14 520 (1) General expenses 7 140 (1) 54 420 190 030 Inventory of work in progress at 1 January 2021 1 190 Inventory of work in progress at 31 December 2021 1 100 90 (1) Cost of production 190 120 (1)OF Factory profit (25%) 47 530 (1)OF Transfer to income statement 237 650 (1)OF 1(b) Amit 9 Income statement for the year ended 31 December 2021 $ $ Revenue 288 830 Inventory of finished goods at 1 January 2021 6 700 Cost of production at transfer price 237 650 (1OF) 244 350 Inventory of finished goods at 31 December 2021 6 900 Cost of sales 237 450 (1)OF Gross profit 51 380 Factory profit 47 530 (1)OF Administrative salaries 28 500 Increase in provision for unrealised profit 40 (1) Rent and rates 3 640 (1) Depreciation of office equipment 1 710 (1) Selling and distribution costs 14 700 Administrative expenses 16 100 General expenses 3 060 (1) 67 750 Profit from operations 31 160 Finance costs 1 080 (1) Profit for the year 30 080 (1)OF 1(c) 600 m2 (1) 1 1(d) current assets (1) 1 1(e) Health and safety of visitors in an area with machinery (1) 3 Possibility of contamination of food stuffs in the factory (1) Costs of staff to act as guides during the tours (1) Prices he could charge in the gift shop (1) Costs of staff to work in the gift shop (1) Anticipated level of sales in the gift shop (1) Accept other valid points Max 3

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2(a) NM plc 18 Statement of financial position at 31 December 2021 $ Assets Non-current assets Property, plant and equipment W1 609 340 (2) Current assets Inventory 18 900 Trade receivables W2 37 400 (2) 56 300 Total assets 665 640 Equity Ordinary share capital ($1 shares) 250 000 (1) Share premium 65 000 (1) Revaluation reserve 72 000 (1) General reserve 45 000 (1) Retained earnings W3 171 140 (7) 603 140 Non-current liabilities Bank loan 32 000 (1) Current liabilities Trade payables 21 900 Bank loan 8 000 (1) Bank overdraft 600 (1) 30 500 Total equity and liabilities 665 640 W1 612 000 – impairment losses (1 300 (1) + 1 360 (1)) = 609 340 W2 36 200 – 800 (1) + 2 000 (1) = 37 400 W3 267 500 +25 000 (1) – 72 000 (1) – 45 000 (1) – impairment losses 2 660 (1)OF –900 (1) – 800 (1) = 171 140 (1)OF 2(b) 5 January 2022 – non-adjusting (1) 2 6 January 2022 – adjusting (1) 2(c) To make its statement of financial position more realistic (1) so that depreciation charges to be based on the revalued 2 amounts giving a more meaningful cost (1) Accept other valid answers. 2(d) A provision for doubtful debts would not stop irrecoverable debts (1) as it is only a paper entry which does not stop credit 3 customers from defaulting (1). However, a provision would match the loss arising from irrecoverable debts with the income from the sales which generated the debts (1) and would stop assets from being overstated (1), applying matching/prudence (1). Decision (1) Accept other valid points Max (2) for comments plus (1) for decision

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3(a) It measures the time between a business paying its trade payables for inventory and receiving funds from its trade 1 receivables arising from the sale of that inventory (1) OR the time taken for cash to travel through the working capital of a business (1) 3(b) AB plc has a longer inventory turnover period (1) which may be due to holding a higher level of inventory (1). 4 It has a longer trade receivables turnover period (1) as it receives payments slower (1). It has a shorter trade payables turnover period (1) as it pays its credit suppliers faster (1). Any two reasons, (1) mark for identification of effect on ratio plus (1) mark for development 3(c) 12 Formula 2021 2020 Earnings per share Profit for the year (1) $0.46(1) $0.49(1) Number of shares Dividend per share Dividend paid (1) $0.23 (1) $0.24 (1) Number of shares Price earnings ratio Market price of share (1) 4.76 (1)OF 3.94 (1)OF Earnings per share Dividend yield Dividend paid and proposed per share/ (1) 10.50% 12.44% (1)OF Market price of share × 100 (1)OF 3(d) Earnings per share has fallen. Although profit for the year has increased, it has not increased in proportion with the 6 increase in the number of shares (1). Dividend per share has fallen. Although the dividend has increased in absolute terms it has not increased in proportion with the increase in the number of shares (1). The price earnings ratio has increased which suggests an increase in investor confidence (1) The dividend yield has fallen because of the increase in the share price and the fall in the dividend per share (1). The market value has risen because investors feel positive about the expansion of the business which is taking place (1). The benefits from the expansion are not yet being fully felt as the expansion is not yet ‘bedded in’ (1) and investors expect an increase in dividends and profits in the future (1). Accept other valid points Max (6) 3(e) Information needs to be timely to be useful (1). 2 Performance of the business may already have changed (1). There is almost a full year of performance about which the investor knows nothing (1). Accept other valid points. 1 mark for identification and 1 mark for development.

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4(a) $ 8 2020 subscriptions (6 × 50) 300 (1) Receipts from new members (8 × 50 + 11 × 30) 730 (1) Receipts from existing members Members at start 210 Resigned (1) }(1) Paid previously (8) } Transferred to life membership (5) *}(1) Not yet paid (4) *} 192 × 50 9 600 (1)OF 2022 subscriptions (14 × 55) 770 (1) 11 400 Life membership (5 × 750) 3 750 (1) Total receipts 15 150 (1)OF 4(b) 6 Subscriptions account $ $ Balance b/d 350 * Balance b/d 400 *(1) both Income and expenditure (1) 10 930 (1)OF Receipts and payments 11 400 (1)OF Irrecoverable debt 50 (1) Balance c/d 770 ** Balance c/d 200 **(1) both 12 050 12 050 Marking guidance – income and expenditure figure may be a balancing figure for (1of) or, should anyone calculate it, (210 – 1 – 5 + 8) × 50 plus (11 × 30) = 10 930 4(c)(i) 8 × 750 × 1/10 = $600 (1) 1 4(c)(ii) $ 3 joining in 2020 3 × 750 × 8/10 1800 (1) joining in 2021 5 × 750 × 9/10 3375 (1) 5175 (1)OF 4(d) Grants (1) 2 Donations (1) Profit from trading activity (1) Fund raising/special events (1) Accept other valid points Max 2 4(e) This would bring in additional income (1) but there may be increased costs. (1) 5 Junior members may go on to become regular members in time. (1) This may raise the club’s profile in the community. (1) Junior members may require more supervision. (1) With a lower subscription regular members may be subsidising the junior section of the club. (1) Decision (1) Accept other valid points Max (4) for comments plus (1) for decision

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5(a) Cash flows in payback are not discounted (1). Although net cash flows may cover the purchase price in absolute terms (1) 2 they may not do so once discounted (1) especially if the distribution of cash flows is biased towards the later years of the project’s life (1). Max (2) Accept other valid answers. 5(b) 5 Decrease in number Cost savings Repairs Total change of services $ $ $ 1 27 } 8 100 (2 000) 6 100 2 30 }(1) 9 000 (5 600) 3 400 3 39 *} 11 700 (12 600) (900) 4 36 *}(1) 10 800 (19 900) (9 100) (1)OF (1) column (1)OF column column 5(c) 5 Discounted Total change Discount factor cash flow $ $ 1 6 100 0.909 5 545 } 2 3 400 0.826 2 808 } (1)OF 3 (900) 0.751 (676) }* 4 (9 100) 0.683 (6 215) }*(1)OF Increase in NPV 1 462 (1)OF Existing NPV (180) (1) Revised NPV 1 282 (1)OF 5(d) The NPV is now positive (1)OF 5 However, breakdowns become more likely involving disruption to production/increased repair costs (1) which might mean that some orders are not fulfilled on time (1) with loss of reputation amongst customers (1). If spare parts are not available delays in repairs will be inevitable (1). Workers may need to be paid overtime premiums in order to catch up once the machine is fixed (1) Decision (1) Accept other valid answers Max (4) for comments plus (1) for decision 5(e) 1 282 (1)OF = 1 877(1)OF 4 0.683 (1) 16 000 – 1 877 = $14 123 (1)OF 5(f) IRR involves the use of two different discount rates (1) to calculate two separate NPV values (1), usually one positive and 4 one negative (1). An intermediate point is then calculated where the NPV would be zero (1).

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6(a)(i) 96 000 / (3 × 10 000) = $3.2 (1) 1 6(a)(ii) $ 3 Direct materials (2 × 8 × 9 000) 144 000 }(1) Direct labour (3 × 10 × 9 000) 270 000 } Fixed overhead (3.2 × 3 × 9 000) 86 400 (1OF) Total standard cost 500 400 (1OF) 6(b) $ $ $ 13 Total standard cost 500 400 Variance Favourable Adverse Materials price 19 800 x (8 – 7.5) 9 900 (2) Materials usage 8 x (18 000 – 19 800) 14 400 (2) Labour rate 31 500 x (10 – 9) 31 500 (2) Labour efficiency 10 x (27 000 – 31 500) 45 000 (2) Fixed overhead expenditure 96 000 - 94 000 2 000 (2) Fixed overhead volume (10 000 – 9 000) x 3 x 3.2 9 600 (2) 43 400 69 000 25 600 Actual cost 526 000 (1)both* * to be CF for actual and OF for standard Marks for variances – (1) for amount and (1) for direction 6(c) For (Max 2) 5 Using the same standards would be simple / less time consuming than calculating separate ones (1). Using the same standards would make it easier to compare results/variances between the two factories (1). Against (Max 2) Labour rates/rent/rates are likely to be different in the different countries (1) The material cost is likely to be less in France as the cost of transportation to Indonesia will not be included (1). Decision (1) Accept other valid points 6(d)(i) A fixed budget is based on the budgeted output level (1) whereas a flexed budget is based on the actual output level (1). 2 6(d)(ii) To be able to compare like with like/to make variances more meaningful (1) 1