Accounting 9706/32 October/November 2023: question paper and mark scheme

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1(a) Calculate the values of the following at cost. 3 Inventory of finished goods at 1 July 2022 = 20 000 (1) Cost of production = 190 000 (1) Inventory of finished goods at 30 June 2023 = 22 000 (1) 1(b) Prepare a corrected statement of profit or loss for the year ended 30 June 2023. 13 H plc Statement of profit or loss for the year ended 30 June 2023 $ $ Revenue (370 – 3) 367 000 (1) Inventory of finished goods at 25 000 1 July 2022 Cost of production W1 252 500 (2) Inventory of finished goods at (29 250) (2) 30 June 2023 W2 Cost of sales 248 250 Gross profit 118 750 Factory profit W3 50 500 (2) Administrative expenses W4 28 850 (4) Distribution costs W5 35 000 (1) (63 850) Profit for the year 105 400 (1)OF W1 (190 000 + 12 000) (1) × 1.25 = 252 500 (1) W2 (22 000 + 1400) (1) × 1.25 = 29 250 (1) W3 47 500 + (12 000 (1) × 0.25 (1)) = 50 500 W4 40 500 – 12 000 (1) + (850 (1) – 500 (1) = 28 850 (1)OF W5 31 000 + 4000 = 35 000 (1) 1(c) State the accounting concept being applied in the treatment of the goods sent on a sale or return basis in item 2. 1 realisation (1) OR prudence (1) 1(d) Explain your treatment of the legal proceedings in item 4. 3 Because the likelihood of having to pay the fine is less than 50% / possible or not probable (1) then this is a contingent liability (1) and should be disclosed in a note (1) to comply with IAS37 (1). Max 3 1(e) Advise the directors whether or not to stop the application of factory profit. Justify your answer. 5 Not stopping (max 2) It can be a motivator (1) and help in setting staff bonuses / performance appraisal (1). It enables the transfer cost to shadow the costs of buying goods in / can be used to set selling price (1). Stopping (max 2) The rate can be arbitrary (1) and its application can increase administration and accounting costs (1). It does not affect the overall profit of the business as it is included both as an extra cost and an extra income (1). Accept other valid responses. Decision supported by a comment (1)

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2(a) Calculate the balance on the life membership fund after the transfer to the income and expenditure account on 31 2 May 2023. 5100 + 4000 (1) – 1100 (1) = 8000 2(b) Calculate the surplus or deficit for the year ended 31 May 2023 by comparing the values of the accumulated fund. 3 $ At 31 May 2022 77 120 (1) At 31 May 2023 76 500 (1)OF Deficit 620 (1)OF 2(c) Calculate the profit or loss made on holding tournaments for the year ended 31 May 2023. 7 $ Income 15 200 (1) Cost of prizes W1 (3 150) (2) Expenses W2 (11 940) (3) Profit 110 (1)OF W1 2800 (1) + (980 – 630) (1) = 3150 W2 11 520 (1) + (520 – 115) (1) + (445 – 430) (1) = 11 940 2(d) Prepare the income and expenditure account for the year ended 31 May 2023. The balancing figure is to be called 10 ‘other operating expenses’. BU Club Income and expenditure account for the year ended 31 May 2023 $ $ Income Subscriptions W1 28 800 (4) Life membership fees 1 100 (1) Profit from tournaments 110 (1)OF 30 010 Expenditure Depreciation 8 050 } Wages 16 970 }(1) Irrecoverable debts 500 (1) Other operating expenses 5 110 (1)OF 30 630 Deficit 620 (1)OF W1 28 600 (1) + 500 (1) + (250 – 150) (1) + (450 – 850) (1) = 28 800 2(e) Advise the committee whether or not it should increase the entry fee for the tournament by 10%. Justify your 3 answer. For (max 1) If the number of entrants remained the same this would increase the profit from holding the tournaments (1) and eliminate the deficit (1). An increase of 5% might be more reasonable and still eliminate the deficit (1). Against (max 1) This might reduce the popularity of the tournaments (1) or even discourage membership of the club (1). Accept other valid responses. Decision supported by a comment (1)

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3(a) Prepare the corrected statement of cash flows for the year ended 31 December 2022 in accordance with IAS 7. 15 TG plc Statement of cash flows for the year ended 31 December 2022 $ $ Profit from operations (76000 + 15000 + 123 000 (1) 32000) Depreciation W1 120 000 (3) Profit on disposal (15 000) (1) Increase in inventory (14 000) } Increase in trade receivables (19 000) }(1) Increase in trade payables 11 000 } Cash from operations 206 000 Tax paid (26 000) (1) Interest paid (18 000) (1) Net cash from operating activities 162 000 (1) OF Cash flow from investing activities Purchase of machinery (348 000) Proceeds of sale of motor vehicles 71 000 Net cash used in investing activities (277 000) (1) 3(a) Cash flow from financing activities Loan received 30 000 (1) Proceeds of rights issue of ordinary 150 000 (1) shares Dividends paid (54 000) (1) Net cash from financing activities 126 000 (1) OF Net increase in cash and cash 11 000 equivalents Cash and cash equivalents on 1 January 2022 17 000 } Cash and cash equivalents on } (1)both w+f 31 December 2022 28 000 W1 300 000 (1) + (348 000 – 56 000) (1) – 472 000 (1) = 120 000 3(b)(i) Discuss, without making calculations, why the following changes might take place. 3 Decrease in earnings per share Any increase in profit is likely to be less than proportional to the increase in the number of shares (1). Investment in new non-current assets will take time to turn into profit increases (1). The majority of the increase in shares arises from a bonus issue which did not bring in funds to increase the asset base and production capability of the business (1). The bank loan will increase interest payable / other expenses which will tend to reduce profit (1). Accept other valid responses. Max 3 3(b)(ii) Increase in price earnings ratio 2 The expansion will cause increased investor interest in the company and confidence will rise (1) causing an increase in the market price of the shares (1). Earnings per share is expected to fall which would tend to increase the price earnings ratio (1). Accept other valid responses. Max 2 3(b)(iii) Decrease in dividend yield 2 The increased number of shares may well cause the dividend per share to be lower (1), especially if the benefit from the capital expenditure has not yet arisen (1). If confidence increases the market price of the shares will increase (1). Accept other valid responses. Max 2 3(c) Advise the directors whether or not another bonus issue would be beneficial. Justify your answer. 3 For (max 1) It might help keep shareholders happy / increase confidence (1). It avoids having to pay cash dividends, especially when the bank balance is not high in relation to dividends paid (1) It utilises capital reserves if available (1) Against (max 1) It will further deplete reserves (1). It would further depress earnings per share and dividend yield. (1) It does not raise cash which might limit dividend payments later (1). Decision supported by a comment (1) Accept other valid responses.