Accounting 9706/31 October/November 2023: question paper and mark scheme
Cambridge AS & A Level Accounting (9706), Paper 3 Financial Accounting, October/November 2023. 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) Calculate the revised profit for the year after making the necessary amendments for matters
1 to 5.
…… [7]
Additional information
When the draft financial statements were prepared, the market price of one share in CB plc was
$3.90. The directors calculated the price/earnings ratio at this time using the draft profit figure.
Amendments were made to the draft financial statements as in part (a).
When the final financial statements were published, the market price of one share was $3.10.
(b) Calculate, to two decimal places, the change between the price/earnings ratio which the directors calculated and the price/earnings ratio based on the published financial statements.
ratio based on published financial ratio calculated by directors statements
Change ……
[5]
(c) Advise the directors whether or not they should be concerned about the change in the price/earnings ratio. Justify your answer.
…… [4]
Additional information
The directors believe that the gearing ratio of the company is too high.
(d) Explain three measures which the company could take which would cause the gearing ratio to decrease.
1 ……
2 ……
3 ……
[6]
Additional information
Businesses prepare a statement of profit or loss to show how their profits have been calculated.
(e) State three other reasons a limited company has for preparing a statement of profit or loss.
1 ……
2 ……
3 ……
[3]
[Total: 25]
Mark scheme
1(a) Calculate the revised profit for the year which would be recorded if 7
amendments were made for any of the matters 1 to 5.
Draft profit 148 250
1 damages (12 000) (1)
2 irrecoverable debt (3 800) (1)
3 impairment (4 000) (1)
4 depreciation [5 120 (1) – 4 000 (1)] (1 120)
5 sale or return (2 500) (1)
Revised profit 124 830 (1) OF
1(b) Calculate, to two decimal places, the change between the price/earnings 5
ratio which the directors calculated and the price/earnings ratio based on
ratio ratio based on
directors financial
statements
earnings per 148 250 124 830
share 400 000 400 000
= 37.06 cents (1) = 31.21 cents (1) OF
price / 390 310
earnings 37.06 31.21
= 10.52 (1) OF = 9.93 (1) OF
Change: decrease of 0.59 (1) OF
1(c) Advise the directors whether or not they should be concerned about the 4
change in the price/earnings ratio. Justify your answer.
Not concerned
The decrease in the ratio is small and may not be significant (1).
The price earnings ratio indicates the demand for the company’s shares and if
there is no immediate plan to issue new shares a change will not have a direct
effect (1).
Concerned
The market is less confident in the prospects of the company (1).
The percentage change is higher for the earnings per share (1).
Accept other valid responses.
Max 3 for comments.
1 mark for decision supported with comment
1(d) Explain three measures which the company could take which would 6
cause the gearing ratio to decrease.
Issue new shares (1) to strengthen the equity base of the business / to raise
cash to repay long term loans or debentures. (1)
Revalue non-current assets upwards (1) to increase the reserves of the
company. (1)
Reduce the dividends paid / increase sales volume/increase selling
price/control expenses (1) to increase the retained earnings. (1)
Use any surplus funds / reduce funds tied up in assets (1) to reduce the non-
current liabilities of the company. (1)
Convert long term loans (1) by negotiating with lenders to accept shares in
place of their loans. (1)
Accept other valid responses.
Any three measures for max (2) each
(1 mark for identifying and 1 mark for development)
1(e) State three other reasons a limited company has for preparing a 3
statement of profit or loss.
It is required by company law / forms part of the statutory accounts (1).
It is required by the tax authorities (1).
It reports to shareholders about how their investment is performing (1).
It provides information for decision making (1).
It can be compared with prior years and with other businesses / ratio analysis
(1).
Accept other valid responses.
Max (3)
Read Source B in the insert.
(a) Advise Suhail whether or not he should have had his accounts audited before HJ Limited inspected them. Justify your answer.
…… [5]
Additional information
Once negotiations were complete HJ Limited took over Suhail’s business on 1 May 2023 for a purchase consideration of $135 000. This was settled by $25 000 cash and 50 000 ordinary shares of $1 each.
Suhail’s statement of financial position on 30 April 2023 was as follows:
$ $
Non-current assets 76 000
Current assets
Inventory 11 200
Trade receivables 16 400
Bank 3 100 30 700
Total assets 106 700
Capital 90 900
Current liabilities
Trade payables 15 800
Total capital and liabilities 106 700
Fees relating to the sale of the business, paid by Suhail, amounted to $2000.
HJ Limited took over all the assets and liabilities of the business except for the bank account and one vehicle which Suhail took over at a carrying value of $10 000. Trade payables were taken over at their carrying value. Assets were taken over at the following valuations.
$
Non-current assets 114 000
Inventory 9 700
Trade receivables 13 200
(b) Prepare the following accounts in Suhail’s books.
(i) Realisation account
…… [7]
(ii) Capital account
…… [7]
(c) Prepare the journal entry in HJ Limited’s books to record the purchase of Suhail’s business.
A narrative is not required.
…… [6]
[Total: 25]
Mark scheme
2(a) Advise Suhail whether or not he should have his accounts audited before 5
HJ Limited inspected them. Justify your answer.
For (max 2)
The purchasing company would be assured that the accounts give a true and
fair view (1).
It could make the negotiations proceed more smoothly (1).
It might be insisted upon by the purchasing company (1).
Increased certainty might enable Suhail to negotiate a better purchase
consideration (1).
It might reassure HJ plc about the existence of the assets (1).
Against (max 2)
A cost would be incurred (1).
Limited assurance might be given if the auditor was not professionally qualified
(1).
HJ Limited might have their own internal auditors who could check the validity
of the accounts (1).
An audit is not a requirement for a sole trader’s business (1).
The auditor might decide that some assets were overstated (1).
1 mark for decision supported with a comment.
Accept other valid responses.
2(b)(i) Prepare the following accounts in Suhail’s books. 7
(i) Realisation account
Realisation account
$ $
Non-current assets (1) Trade 15 800 (1)
76 000
payables
Inventory 11 200 HJ Limited 135 000 (1)
}(1)
Trade receivables Capital 10 000 (1)
16 400
(vehicle)
Bank (fees) 2 000 (1)
Capital (profit on
55 200 (1)OF
realisation)
160 800 160 800
2(b)(ii) Prepare the following accounts in Suhail’s books. 7
(ii) Capital account
Capital account
$ $
HJ Limited (shares) 110 000 (1) Balance b/d 90 900 (1)
Bank W1 26 100 (3) Realisation 55 200 (1)OF
Realisation 10 000 (1)
146 100 146 100
W1 3 100(1) + 25 000(1) – 2 000(1)
2(c) Prepare the journal entry in HJ Limited’s books to record the purchase of 6
Suhail’s business. A narrative is not required.
Debit Credit
$ $
Non-current assets 114 000
Inventory 9 700 }(1)
Trade receivables 13 200
Trade payables 15 800 (1)
Bank 25 000 (1)
Ordinary share capital 50 000 (1)
Share premium 60 000 (1)
Goodwill 13 900 (1)
Read Source C in the insert.
(a) Prepare the statement of cash flows for the year ended 30 June 2023 in accordance with
IAS 7.
…… [17]
(b) Discuss how shareholders are likely to view the changes in the company’s capital employed which would have taken place during the year. Calculations are not required.
Your answer should consider separately each element of capital employed.
…… [8]
[Total: 25]
Mark scheme
3(a) Prepare the statement of cash flows for the year ended 30 June 2023 in 17
accordance with IAS 7.
ZZ plc
Statement of cash flows for the year ended 30 June 2023
$000 $000
Profit from operations (118 + 40 + 52) 210 (1)
Depreciation 33 (1)
Profit on disposal (13) (1)
Increase in inventory (17) }
Increase in trade receivables (19) }(1)
Decrease in trade payables (11) }
Cash from operations 183
Tax paid (62) (1)
Interest paid (51) (1)
Net cash from operating activities 70 (1)OF
Cash flow from investing activities
Purchase of plant and machinery (200) (1)
Proceeds of sale of plant and machinery 91 (1)
Net cash used in investing activities (109) (1)OF
Cash flow from financing activities
Loan repayment (20) (1)
Proceeds of issue of ordinary shares 200 (1)
Dividends paid W1 (64) (2)
Net cash from financing activities 116 (1)OF
Net increase in cash and cash equivalents 77 (1)OF
Cash and cash equivalents on 1 July 2022 (46)
Cash and cash equivalents on 30 June (1)OF
31
2023
W1 200 000/1.25 = 160 000 new shares
640 000 + 160 000 = 800 000 (1)
800 000 × 0.08 = 64 000 (1)OF
3(b) Discuss how shareholders are likely to view the changes in the capital 8
employed of the company. Calculations are not required.
Your answer should consider separately each element of capital
employed.
Share capital and premium (max 2)
The proceeds of the share issue were used to increase the revenue generating
ability of the business (1). Control of the business may be diluted (1). This will
have reduced the gearing ratio (1) and the risk of the business (1). Unless the
profit can increase to compensate the increased number of shares in issue this
will tend to decrease the earnings per share/dividend per share (1).
Revaluation reserve (max 2)
The revaluation increased the equity of the business but as no new assets
were acquired it will not increase the revenue generating ability of the business
(1) and therefore will not affect the shareholders. The increase in the recorded
value of net assets may encourage an increase in the market price of the
shares (1) which may increase the price earnings ratio (1).
Retained earnings (max 2)
The profit for the year is higher than the dividend paid (1) which means that the
dividend could have been higher (1) but some profit has been ploughed back
into the business (1). This portion of the profit is therefore available for
reinvestment in the business, so that it can expand and earn more profits in the
future (1). Shareholders will want to calculate the earnings per share (1).
Loan repayment (max 2)
The repayment will decrease the amount of interest payable (1) which will
increase future profits/decrease cash outflows (1). The repayment of a long-
term loan decreases capital employed which increases ROCE (1).
Accept other valid responses.
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Accounting 9706/31 for October/November 2023 is out of 75 marks, with 1 hour 30 minutes to answer it, across 3 questions.
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