AC1025 2008-Principles of Accounting Main EQP and Commentaries AC1025 2008-Principles of Accounting Main EQP and Commentaries

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AC1025 2008-Principles of Accounting Main EQP and

commentaries
Principles of accounting (University of London)
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This paper is not to be removed from the Examination Halls
UNIVERSITY OF LONDON 279 0025 ZA

996 D025 ZA
BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the
Social Sciences, the Diploma in Economics and Access Route for Students in the
External Programme
Principles of Accounting
Friday, 16th May 2008 : 2.30pm to 5.45pm
Candidates should answer NINE of the following SEVENTEEN questions: SIX from
Section A (5 marks each), ONE from Section B (30 marks) and TWO from Section C (20
marks each). Candidates are strongly advised to divide their time accordingly.
Workings should be submitted for all questions requiring calculations. Any necessary
assumptions introduced in answering a question are to be stated.
Extracts from compound interest tables are given after the final question on this paper.
8-column accounting paper is provided at the end of this question paper. If used, it must be
detached and fastened securely inside the answer book.
A calculator may be used when answering questions on this paper and it must comply in all
respects with the specification given with your Admission Notice. The make and type of
machine must be clearly stated on the front cover of the answer book.
© University of London 2008

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SECTION A
Answer six questions from this section (5 marks each).
1. Distinction is often made between financial and management accounting. Briefly

explain the differences between these terms.
2. The chairman of Lateen Ltd has obtained the following figures for the first year’s
operations of a competitor.
Sales £260,000
Total assets £268,750
Current liabilities £125,000
Administration expenses £33,250
Current ratio 1.75:1
Quick (acid test) ratio 1.05:1
Average age of outstanding customer debts (based on a 52 week year) 12 weeks
Gross profit margin 20%
Required:
From the information above, prepare in as much detail as possible, the year end balance
sheet of the competitor.
3. Galleon Ltd commenced business on 1st October 2006. Tangible fixed assets of the
company for the two years to 30th September 2008 were:
(1) Plant
1st October 2006 purchased plant for £25,000 with a residual value of £1,800.
1st November 2007 purchased plant for £15,200 with a residual value of nil.
Depreciation for plant is on a straight-line basis over 8 years.
(2) Motor vehicles

1st October 2006 purchased a vehicle for £16,000.
1st December 2007 sold the vehicle for £3,200.
5th January 2008 purchased a new vehicle for £18,500.
Depreciation for motor vehicles is 25% on the reducing balance method.
Galleon charges a full year’s depreciation in the year of purchase and none in the year
of disposal.
Required:
Show extracts for tangible fixed assets from the profit and loss accounts for the years
ended 30th September 2007 and 2008 and balance sheets of Galleon Ltd as at those
dates.
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4. Dhow Ltd’s outline balance sheet as at 31st March 2008 was as follows:
£m
Net assets 108
Long term loans (20)
88
Ordinary shares of £1 each 40
Retained earnings 48
88
The following transactions are forecast for the year ended 31st March 2009.
(1) The directors will make a one-for-four bonus issue of £1 ordinary shares out of
retained earnings and, later in the year, will make a one-for-five rights issue at a
price of £1.80.
(2) The directors will issue £10 million loan stock at par.
(3) The profit after tax for the year ended 31st March 2009 is expected to be £12
million.
Required:
(a) Prepare a forecast outline balance sheet for Dhow Ltd as at 31st March 2009,
incorporating the above transactions.
(b) Describe how each of the share issues in the year ended 31st March 2009 will
affect the earnings per share of Dhow Ltd.
5. The following data show the trading transactions of Carrack Ltd for its first six months
of trading. Carrack operates the FIFO assumption for calculation of closing stocks and
the cost of sales is calculated whenever a sale is made.
(1) 2007 Purchases Sales
July 20 units at £1,000 each
August 40 units at £ 900 each
September 25 units
October 20 units at £1,100 each
November 10 units at £ 700 each
December 10 units at £1,200 each 40 units
The December sale occurred before the purchase in that month.
(2) The 10 units purchased in November incurred a transport charge of £2,500 to
move them to the company premises. This amount has been charged to
distribution expenses in the draft profit and loss account.
(3) On 31st December 2007 the 10 units purchased in December were damaged by
flooding of the company’s premises, a risk for which the company was not
insured. These units were sold for salvage at £600 each on 2nd January 2008.
Required:
Calculate the value of closing stock of Carrack Ltd for inclusion in its balance sheet as
at 31st December 2007 and the cost of sales for the six months to that date.
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6. Skiff Plc manufactures goods for many markets including one item, S19 that is sold
only through supermarkets. Currently three large supermarket chains (A, B and C)
purchase this item; it sells S19s to the supermarkets at £8 per unit and the standard
product cost is £5 per unit.
Distribution costs vary according to whether delivery is made to a central warehouse or

direct to the supermarket. Discounts on the sale price are negotiated by each customer.
Marketing costs are specific to each customer. Details of these costs and sales are set
out below.
A B C
Sales in units 80,000 50,000 40,000
Distribution costs 5% 5% 5%
Discounts 20% 15% 10%
Marketing costs £7,000 £19,000 £9,000
Note: Distribution costs and discounts are calculated as a percentage of the basic sales
value of £8 per unit.
Required:
Calculate the profit earned on sales to each of the customers and the net profit margin
for each customer (A, B and C). Briefly comment on your answers.
7. Xebec Ltd manufactures three perfumes, Silk, Musk and Opia. The selling prices and
the variable costs per unit of each product are as follows:
Silk Musk Opia

£ £ £
Selling price 15 20 30
Variable cost 10 14 20
Xebec’s fixed costs are £150,000 per year.
There is a shortage of the raw material called Essence which is used in all three
products. Silk uses 2 kilos, Musk uses 1 kilo and Opia uses 3 kilos of Essence per unit
of output. Only 120,000 kilos of Essence will be available for the year.
In addition, market constraints are expected to restrict the production and sales of each
product for the year to:
Units
Silk 40,000
Musk 8,000
Opia 15,000
Required:
Calculate the mix of sales which would enable Xebec Ltd to maximise profits, and
calculate the profit for the year which would be achieved by that sales mix.
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8. Dinghy Products Ltd makes two products, masts and booms. There are two production
departments, Turning and Finishing. There is also a sales administration office and a
storeroom for parts and materials. The following information is available.
Turning Finishing Office Storeroom
Floor space (m2) 300 150 10 40
Issues of parts and materials per month 20 5
Direct labour hours per mast 3 4
Direct labour hours per boom 4 3
The following are the budgeted output and costs for a month:
Output of masts 200
Output of booms 800
Factory rent £1,000
Salary of storeman (all storeroom costs) £1,300
Salary of office clerk (all office costs) £1,500
These are the only indirect costs of production and a direct labour hour basis of
absorption should be used for the two production departments.
Required:
Calculate the indirect cost of producing a mast and a boom.
9. What factors should be considered when deciding whether to use full or marginal
costing?
10. Lugger Ltd is a small engineering company in which one department manufactures a
specialised component for another company. Currently the annual demand for this
component is 10,000 units and the price is £18 per unit. The annual budgeted costs for
the component are set out below.
£
Materials 60,000
Direct labour 30,000
Machine lease costs 25,000
Other fixed costs 45,000
Total costs 160,000
Direct labour represents the full cost of employing the two workers who operate the
machine, their wages are not dependent on the level of production. Recently Lugger has
discussed the possibility of leasing a different machine. This would enable cheaper raw
materials to be used, costing only £3 per unit. The new machine would have an annual
lease payment of £55,000.
Required:
(a) Calculate the break-even point and margin of safety for the present machine,
using current demand. Give your answers in terms of units produced.
(b) Comment on the proposal to lease the new machine, giving calculations to support
your comments.
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11. Proa Ltd is considering whether or not to invest in a project to develop and sell a new
product. Initial expenditure on a range of development expenses will be £150,000 at the
start of year 1 to get the project up and running. Sales of the product will start in year 2,
and it is anticipated that annual net cash inflows will be as follows:
Year £
2 68,000
3 71,000
4 54,000
5 28,000
6 10,000
Demand for the product is expected to decline after year 6 to the point where it will not
be worth continuing production.
The £150,000 of initial expenditure is treated as a fixed asset, to be depreciated on a

straight-line basis over six years, with an assumption of nil residual value at the end of
year six.
Required:
(a) Calculate the average accounting rate of return over the life of the project.
(b) Calculate the payback period for the project.
12. Glautier and Underdown state that ‘Planning is the most basic of all management
functions’ and they suggest that planning consists of five stages. Identify the five stages
of planning described by Glautier and Underdown.
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SECTION B
Answer all three parts of the question in this section (30 marks).
13. Clipper Ltd is a wholesale supplier of goods to department stores and gift shops. The
following balances were extracted from the accounting records as at 31st December
2007.
£
10% loan repayable in 2012 25,000
Suspense account (debit balance) 50,200
Cash at bank 4,800
Directors’ remuneration 55,500
Distribution costs 42,000
Administrative costs 62,000
Selling costs 59,500
Dividend paid 15,000
Ordinary share capital (£1 shares, fully paid) 165,000
Motor vehicles at cost 103,000
Plant and equipment at cost 180,000
Provision for depreciation of motor vehicles as at 1st January 2007 22,000
Provision for depreciation of plant and equipment as at 1st January 2007 54,000
Purchases 655,000
Retained profit at 1st January 2007 11,100
Sales 1,059,000
Stock of goods at 1st January 2007 66,000
Trade creditors 48,600
Trade debtors 91,700
(1) The accountant of Clipper Ltd has now reviewed the accounting records and has
discovered the following errors which require adjustment:
(i) A motor vehicle was sold for cash in January 2007 for £1,000. The cash
received had been recorded in the cash book but no other entries had been
made. The motor vehicle originally cost £8,000 on 1st January 2006.
(ii) Stocks were counted on 31st December 2007 and valued at £57,000. This
figure had been credited to purchases account but no other entries have
been made.
(iii) The balance on the provision for doubtful debts account at 1st January
2007 of £5,100 had been omitted from the list of balances.
(iv) Goods sold on credit were returned on 30th December 2007 because they
were not needed by a customer but no accounting record has been made of
the return and the goods were not included in the end of year stock count.
The goods were originally invoiced and recorded at a sale price of £9,000.
The sale was made at a 50% mark-up on cost.
(v) The remaining balance on the suspense account, after the appropriate
adjustments arising from the above, was due to an addition error in the
debtors control account.
(questions continues on next page)
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(2) Depreciation is to be provided on fixed assets at the following rates:
Plant and equipment 10% on cost

Motor vehicles 25% using the reducing balance method
No depreciation is provided in the year of disposal of a fixed asset.
(3) A customer who owes £3,000 has been declared bankrupt and none of this amount
is expected to be recovered. It should be written off and the provision for
doubtful debts adjusted to 5% of the remaining trade debtors.
(4) Provision is to be made for the audit fee, £4,000 and for a full year’s interest of
10% on the loan, which was due on 31st December 2007 but not paid until 3rd
January 2008.
(5) The company rents its premises and on 30th November 2007 it paid £9,000 as
three months’ rent in advance. Rent is included in administrative costs.
(6) A provision of £30,000 is to be made for taxation on the profit for the year ended
31st December 2007.
Required:
(a) Show the adjustments necessary to eliminate the balance on the suspense account.
(5 marks)
(b) A profit and loss account for Clipper Ltd for the year ended 31st December 2007
and a balance sheet as at that date, in a form suitable for presentation to the
directors. (21 marks)
(c) One of the directors of Clipper Ltd has sent you the following e-mail.
‘Why do we only have £4,800 in the bank when we have retained profits in excess
of £30,000?’
Draft a brief email, without any figures, in response to the director.

(4 marks)
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SECTION C
Answer two questions from this section (20 marks each).
14. The following are the summarised accounts of Sloop plc for the two years ended 31st
March 2008 and 2007:
2008 2007
st
Balance Sheets as at 31 March £m £m
Fixed assets
Tangible assets 1200 1166
Investments 154 118
1354 1284
Current assets
Stocks 870 628
Debtors 480 462
Prepayments 90 30
Cash at bank 18 106
1458 1226
Creditors falling due within 1 year (844) (734)
Net current assets 614 492
Total assets less current liabilities 1968 1776
Creditors falling due after 1 year:
Loans (660) (724)
1308 1052
Capital and reserves
Called up share capital – ordinary
shares of £1 each 740 494
Share premium 30 98
Retained earnings 538 460
1308 1052
Profit and Loss accounts for the year ended 31st March
2008 2007
£m £m
Turnover 4940 3960
Cost of sales (3608) (2816)
Gross profit 1332 1144
Distribution costs (392) (324)
Administrative expenses (274) (224)
Operating profit 666 596
Investment income 30 8
Interest (36) (42)
Profit on ordinary activities before taxation 660 562
Taxation of profit on ordinary activities (320) (280)
Profit on ordinary activities after taxation 340 282
Dividends paid (160) (140)
Retained profit for the year 180 142
(question continues on next page)
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The following further information is available:
(1) The following movements on the tangible fixed assets accounts occurred during
the year.
Cost Accumulated Net

Depreciation
£m £m £m
st
As at 1 April 2007 1542 376 1166
Addition at cost 324 324
Disposal (220) (80) (140)
Depreciation for year ____ 150 (150)
As at 31st March 2008 1646 446 1200
The assets were disposed of for sale proceeds of £160m, any profit or loss was
included as part of expenses in the profit and loss account.
(2) The fixed asset investments are shares held in another company. The increase
from 2007 to 2008 is the cost of additional shares purchased during the year.
(3) Creditors falling due within one year are made up of:
2008 2007
£m £m
Trade 124 144
Taxation 320 280
Bank overdraft 390 302
Accrued interest 10 8
844 734
(4) A bonus issue of 200 million ordinary £1 shares was made on 1st April 2007. The
bonus issue was made partly by utilising all of the share premium and the balance
by capitalising retained earnings.
There was a further issue of shares at a premium for cash consideration made on
30th September 2007.
Required:
(a) Prepare a cash flow statement for Sloop Plc for the year ended 31st March 2008.
(16 marks)
(b) It has been argued that cash flow statements are more reliable than financial
statements prepared under the accruals convention. Briefly examine this
argument. (4 marks)
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15. Cleenahull Ltd operates a small boat cleaning service. Boats are cleaned using a special
machine that requires a skilled operator and are finished using unskilled labour.
Cleanahull has produced a standard cost schedule as all boats go through the same
process. Overheads are absorbed using standard labour hours. The materials come in
packs; each boat cleaned should use one pack of materials. Cleanahull budgets to clean
288 boats per month.
Standard cost for cleaning a boat

£
Skilled labour: 2 hours at £8 per hour 16
Unskilled labour: 1 hour at £5 per hour 5
Materials: 1 pack at £3 per pack 3
Variable overheads: 3 hours at £2 per hour 6
Fixed overheads: 3 hours at £10 per hour 30
Total standard cost 60
Profit mark-up at 30% cost 18
Price charged 78
Actual results for May 2008

£ £
Sales: 330 boats cleaned 26,400
Less costs
Skilled labour: 594 hours 5,049
Unskilled labour: 396 hours 1,881
Materials: 350 packs 1,190
Variable overheads 1,815
Fixed overheads 8,500
Total costs for May 18,435
Profit for May 7,965
Required:
(a) Prepare an operating statement, reconciling budgeted and actual profit for
Cleanahull Ltd for May 2008 showing two variances for sales and for each cost
category. (13 marks)
(b) Prepare a brief report to the owner of Cleanahull Ltd commenting on the
performance in May 2008 suggesting possible reasons for any unexpected results.
(7 marks)
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16. Yawl Ltd is considering the launch of a new product.
The accounts department has produced budgeted profit and loss statements for each year
of the project’s five-year life.
Market research has been undertaken at a cost of £40,000, paid in 2008.
An investment of £480,000 in capital equipment on 1st January 2009 would be required

and this equipment is expected to be sold for scrap on 31 December 2013 for £80,000.
Year end Year end Year end Year end Year end
31.12.2009 31.12.2010 31.12.2011 31.12.2012 31.12.2013
£000’s £000’s £000’s £000’s £000’s
Sales 800 800 800 640 400
Materials (480) (480) (480) (384) (240)
Other variable costs (80) (80) (80) (64) (40)
Fixed overheads (40) (40) (48) (48) (48)
Depreciation (80) (80) (80) (80) (80)
Net profit/(loss) 120 120 112 64 (8)
When production is started it will be necessary to raise material stock levels by £60,000
and other working capital by £40,000 immediately. These sums will be released at the
end of the project.
Customers receive one year’s credit from the firm so that sales in 2009 for example,
will be paid for at the end of 2010.
The fixed overhead figures in the budgeted accounts have two elements – 60 per cent is
due to a reallocation of existing overheads, 40 per cent is directly incurred because of
the take-up of the project.
For the purposes of this appraisal you may regard all receipts and payments as occurring
at the year-end to which they relate, unless otherwise stated.
The company’s cost of capital is 12% per year.
Required:
(a) Use the net present value method of project appraisal to advise the management of
Yawl Ltd whether to go ahead with the product. (12 marks)
(b) List and briefly explain the key points you would make to a management team
unfamiliar with discounted cash flow appraisal techniques. (8 marks)
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17. Ketch plc has just ceased production of a pump that it has made for many years. The
pumps were made to order only and there are none in stock. However one customer has
asked if he can order a final batch of 1,000 pumps. The sales department has produced
the following price calculation but is concerned because the customer has indicated that
he is expecting a much lower price for each pump.
£
Material A 4.50
Material B 3.00
Labour: ½ hour at £8 per hour 4.00
Variable overheads: ½ hour at £3 per hour 1.50
Fixed overheads: ½ hour at £12 per hour 6.00
Total production cost 19.00
Profit mark-up at 35% on cost 6.65
Price per unit 25.65
The sales manager now requires a calculation of the break-even price. The following
information has been ascertained:
(1) Material A can only be used to make this particular pump. There is enough
material in stock to make 2,000 pumps and Ketch had arranged to sell this amount
for £2,000. Any amount of the material can be sold at the same price per unit.
(2) Material B is in general use in Ketch. A 5% price rise has just been advised by the
supplier with immediate effect.
(3) No additional labour would be required to complete this project but half of the
work would be done by overtime. Overtime is paid at a rate 50% higher than
normal.
(4) Variable overheads include supervisors’ labour and packaging costs. Supervisors
will be covering the overtime periods already at a monthly cost of £1,200. The
customer requires a special form of packaging that costs an extra 50p per pump.
(5) There would be no additional fixed costs incurred by this order. The machine
required to manufacture this pump would be kept in operation for a further month;
the monthly depreciation is £700. The monthly maintenance contract on this
machine of £250 will be extended for an additional month. There is no alternative
use for this machine.
Required:
(a) Prepare a break-even price for this final order. Explain why you have included
each cost and the value you have attributed to each. Explain why any costs
referred to in the above data have been excluded. (14 marks)
(b) Prepare a brief report to the sales manager that identifies three key issues that the
sales manager should take into account when deciding whether or not to accept
this order. (6 marks)
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Present value of £1
P
%
R 1 2 3 4 5 6 7 8 9 10
Period
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
%
" 11 12 13 14 15 16 17 18 19 20
Period
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
Annuity of £1
% 1 2 3 4 5 6 7 8 9 10
Period
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
% 11 12 13 14 15 16 17 18 19 20
Period
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
END OF PAPER
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This paper is not to be removed from the Examination Halls
UNIVERSITY OF LONDON 279 0025 ZB

996 D025 ZB
BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the
Social Sciences, the Diploma in Economics and Access Route for Students in the
External Programme
Principles of Accounting
Friday, 16th May 2008 : 2.30pm to 5.45pm
Candidates should answer NINE of the following SEVENTEEN questions: SIX from
Section A (5 marks each), ONE from Section B (30 marks) and TWO from Section C (20
marks each). Candidates are strongly advised to divide their time accordingly.
Workings should be submitted for all questions requiring calculations. Any necessary
assumptions introduced in answering a question are to be stated.
Extracts from compound interest tables are given after the final question on this paper.
8-column accounting paper is provided at the end of this question paper. If used, it must be
detached and fastened securely inside the answer book.
A calculator may be used when answering questions on this paper and it must comply in all
respects with the specification given with your Admission Notice. The make and type of
machine must be clearly stated on the front cover of the answer book.
© University of London 2008

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SECTION A
Answer six questions from this section (5 marks each).
1. Distinction is often made between financial and management accounting. Briefly

explain the differences between these terms.
2. The following information is available in respect of Bagehot Ltd for the year ending 31st
December 2007.
(1) Debtors amount to £33,600 and the debt collection period is one month.
(2) Gross profit percentage is 25%
(3) Opening stock at 1st January 2007 was £28,000.
(4) Purchases total £360,000.
(5) Net profit margin is 5%.
(6) The ratio of sales to written down value of fixed assets is 4:1.
(7) Creditors are equal to one month’s purchases.
(8) The quick (acid test) ratio is 2:1 at 31st December 2007.
(9) There is a long term bank loan of £29,520 at 31st December 2007.
(10) Share capital is 39,120 shares of £1 each.
Required:
Prepare for Bagehot Ltd a profit and loss account for the year ended 31st December
2007 and a balance sheet as at that date, in as much detail as possible, taking into
account all the above information.
3. In the books of Beveridge Ltd the creditors ledger control account shows as at 31st
December 2007 a credit balance of £321,700. The list of individual creditors’ balances
extracted from the creditors ledger on the same date shows credit balances totalling
£330,800. The following errors have been identified since then:
(1) A debit balance of £1,700 in a supplier’s account has been listed in error as a
credit balance.
(2) A credit note received from a supplier for £3,600 is still to be accounted for.
(3) A cash payment to a supplier of £250 was correctly recorded in the cash book but
was entered as £520 in the creditors ledger.
(4) An invoice for £600 recorded in the purchases day book was not recorded in the
supplier’s account in the creditors ledger.
(5) A returns outwards day book page has been totalled as £43,000 instead of
£40,000.
(6) The remainder of the errors arose from the failure to post a payment to a
supplier’s account.
Required:
(a) Calculate the corrected creditors ledger control account balance, and,
(b) reconcile this with the total of the individual creditors’ balances in the creditors
ledger.
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4. Hicks Plc’s outline balance sheet as at 31st March 2008 was as follows:
£m
Net assets 82
Long term loans (10)
72
72
The following transactions are forecast for the year ended 31st March 2009.
(1) The directors will make a one-for-four bonus issue of £1 ordinary shares out of
retained earnings and, later in the year, will make a one-for-five rights issue at a
price of £1.80.
(2) The directors will issue £10 million loan stock at par.
(3) The profit after tax for the year ended 31st March 2009 is expected to be £12
million.
Required:
(a) Prepare a forecast outline balance sheet for Hicks Plc as at 31st March 2009,
incorporating the above transactions.
(b) Describe, without calculations, how each of the share issues in the year ended 31st
March 2009 will affect the earnings per share of Hicks Plc.
5. Explain, with examples, the terms ‘monetary assets’ and ‘non-monetary’ assets and
describe their treatment in historical cost accounting and one alternative valuation
convention.
6. Clark Distributors Ltd began business on 1st July 2007 as distributors of a single
product. The directors plan to publish the first set of accounts for a six month period in
order to establish the accounting year end as 31st December each year.
The following data show the trading transactions for the six months to 31st December
2007.
2007 Purchases Sales
July 20 units at £1,000 each
August 40 units at £900 each
September 25 units
October 20 units at £1,100 each
November 10 units at £700 each
December 10 units at £1,200 each 40 units
The December sale occurred before the purchase in that month. The cost of a sale is
calculated whenever a sale is made.
Required:
Using only the data in the table above, calculate the cost of sales and closing stock
figures for inclusion in the accounts for the six months to 31st December 2007 under
both the FIFO and LIFO assumptions.
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7. Smith Plc manufactures and sells a range of small household products. The following
information relates to the ‘Adam’ for the month of July.
Budgeted volume 6,000 units

Budgeted selling price £6.00 per unit.
Budgeted variable cost £2 per unit
Budgeted fixed overheads for July £6,000.
During July 8000 ‘Adams’ were actually sold for £40,000.
Required:
(a) Compute the following variances for product ‘Adam’ for July.
i. Sales price variance.

ii. Sales contribution volume variance.
iii. Sales margin volume variance.
(b) Explain and reconcile the difference between your answers to ii. and iii.
8. A summary of Pareto Company’s profit statement for last year is presented below.
Except as noted, the cost and sales relationship for the current year is expected to follow
the same pattern. The company is operating at full capacity.
£
Sales (1,000,000 bottles at £0.50) 500,000
Variable costs 300,000
Fixed costs 100,000
Total costs 400,000
Profit 100,000
Required:
(a) What is the break-even point in units?
(b) What is the margin of safety in units?
(c) If an extension to the factory is built it would add £50,000 to the fixed costs and
increase production capacity by 60 per cent. Variable costs per unit are also
expected to increase by 10 per cent. The management of the company feels that it
should earn at least £10,000 each year on the new investment. Calculate whether
the proposed extension provides sufficient capacity for the company to maintain
existing profits and earn the minimum required on the new investment, assuming
that all of the increased capacity can be sold.
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9. Rickwood Ltd manufactures three different product lines. Each product passes through
four successive production departments. There are also three service departments, the
costs of which should be included in the total absorption cost of the units.
Explain, briefly, the steps by which overheads (indirect costs) should be incorporated
into the total absorption cost per unit of each of Rickwood Ltd’s product lines.
10. In the context of cost-volume-profit analysis explain the meaning, and give an example,
of each of the following terms:
(a) Non-linear variable costs.

(b) Stepped fixed costs.
(c) Relevant range.
11. Hayek Plc is considering investing in either project P or project Q:
Time Project P Project Q

(years) £ £
Equipment cost 0 100,000 100,000
Expected annual profit/loss 1 34,000 4,000
2 24,000 4,000
3 14,000 12,000
4 4,000 16,000
5 (36,000) 4,000
Estimated resale value of
equipment 5 20,000 20,000
Hayek Plc depreciates equipment on the straight-line basis. Profits and losses are earned
evenly throughout the year.
Required:
(a) Calculate the payback period for each project and on this basis advise Hayek Plc
which project to invest in.
(b) Briefly explain two disadvantages of payback period as a method of investment

appraisal.
12. Glautier and Underdown state that ‘planning is the most basic of all management
functions’ and they suggest that planning consists of five stages.
Identify the five stages of planning.
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SECTION B
Answer all three parts of the question in this section (30 marks).
13. Keynes Plc is a company incorporated on 1st May 1999, which manufactures and sells
specialist mountaineering equipment. The following balances for the year ended 30th
April 2008 have been extracted from the accounting records by the bookkeeper.
£
Share capital: ordinary shares at £1 each 660,000
Share premium account 428,000
10% Loan (repayable 2010) 180,000
Leasehold property, at cost 440,000
Plant and equipment, at cost 2,940,000
Accumulated depreciation/amortization
Leasehold property 110,000
Plant and equipment 1,318,000
Stocks at cost, at 30th April 2008 483,000
Debtors 224,000
Creditors 389,400
Bank overdraft 6,600
Sales 3,960,000
Cost of goods sold 2,420,000
Dividends paid 12,000
Loan interest paid 9,000
Administration costs 500,000
Retained profit as at 1st May 2007 540,000
As accountant for Keynes Plc you discover a number of errors and omissions from these
records which require adjustment in preparing the financial statements for the year:
(1) The bookkeeper has not yet reconciled the cash book balance at 30th April 2008
and in doing so he discovers that bank interest paid of £900 and the whole year’s
standing orders for an administration cost (£1,000 per month) have not been
entered in the accounting records.
The bookkeeper was not certain how to record three amounts received and paid
into the bank during the year and no accounting entries have been made in the
cash book or elsewhere for these items. These were as follows:
(i) £20,000 compensation received from an insurance company in respect of a

piece of equipment destroyed by fire in May 2007. The equipment had been
purchased on 1st May 2004 for £100,000.
(ii) £5,000 refund from a supplier for faulty goods for resale.
(iii) £12,000 from a customer which had been written off as a bad debt in the
previous financial year.
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(2) No provision has been made for depreciation for the year ended 30th April 2008.
The business uses the straight-line method for all fixed assets as follows:
(i) Plant and equipment is depreciated over 10 years. There are no fully
depreciated fixed assets.
(ii) Leasehold property is amortised over the lease period which commenced on
1st May 2002.
(3) Provision is required for outstanding loan interest, auditors’ remuneration of

£5,000 and accrued energy costs of £10,000. Energy costs are allocated 50% to
cost of sales and 25% to each of distribution costs and administrative costs.
Administrative costs include insurance of £12,000 of which one quarter relates to
the period from 1st May 2008 to 31st July 2008.
(4) The directors have reviewed the trade debtors in the accounts and have identified
a customer with a balance of £18,000 which they believe will not now be
recovered and is to be written off.
(5) The directors have reviewed the stocks held at 30th April 2008 and have identified
one product line where the current selling price is less than cost. The cost of the
product was £10 per unit and the estimated selling price is now £6 per unit; there
are 6,000 units of it in stock at 30th April 2008.
(6) Corporation tax based on the year’s profit was estimated at £3,000 and this will be
paid on 1st October 2008.
Required:
(a) Show any necessary adjustments to the bank balance according to the cash book
as at 30th April 2008. (3 marks)
(b) Prepare a profit and loss account for Keynes Plc for the year ended 30th April
2008 and a balance sheet at that date in a form suitable for the directors.
(22 marks)
(c) One of the directors has stated that ‘I do not understand the figures as I am sure
that the leaseholds are worth more than they are shown in the accounts and in my
view the plant and equipment could not be sold for the amount at which they are
shown’.
Draft a note in response to the director’s statement. (5 marks)
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SECTION C
Answer two questions from this section (20 marks each).
14. The following are the summarised accounts of Toynbee Plc for the two years ended 31st
December 2007 and 2006:
2007 2006
Balance sheets as at 31 December £m £m
Fixed assets
Tangible assets 900 866
Investments 164 128
1064 994
Current assets
Stocks 944 702
Debtors 480 462
Prepayments 100 40
Cash at bank 26 114
1550 1318
Creditors falling due within 1 year (844) (734)
Net current assets ____ 706 _____ 584
Total assets less current liabilities 1770 1578
Creditors falling due after 1 year:
Loans (462) (526)
1308 1052
Called up share capital – ordinary
shares of £1 each 740 494
Share premium 30 98
Retained earnings 538 460
1308 1052
Profit and Loss accounts for the year ended 31st December
2007 2006
£m £m
Turnover 4940 3960
Cost of sales (3608) (2816)
Gross profit 1332 1144
Distribution costs (392) (324)
Administrative expenses (274) (224)
Operating profit 666 596
Investment income 30 9
Interest (36) (43)
Profit on ordinary activities before 660 562
taxation
Taxation of profit on ordinary activities (320) (280)
Profit on ordinary activities after taxation 340 282
Dividends paid (160) (140)
Retained profit for the year 180 142
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The following further information is available:
(1) The following movements on the tangible fixed assets account occurred during
the year.
Depreciation
£m £m £m
As at 1st January 2007 1242 376 866
Addition at cost 324 324
Disposal (220) (80) (140)
Depreciation for year - 150 (150)
As at 31st December 2007 1346 446 900
The assets were disposed of for sale proceeds of £160m, any profit or loss was
included as part of expenses in the profit and loss account.
(2) The fixed asset investments are shares held in another company. The increase
from 2006 to 2007 is the cost of additional shares purchased during the year.
(3) Creditors falling due within one year are made up of:
2007 2006
£m £m
Trade 124 144
Taxation 320 280
Bank overdraft 390 302
Accrued interest 10 8
844 734
(4) A bonus issue of 200 million ordinary £1 shares was made on 1st January 2007.
The bonus issue was made partly by utilising all of the share premium and the
balance by capitalising retained earnings.
There was a further issue of shares at a premium for cash consideration made on
30th June 2007.
Required:
(a) Prepare a cash flow statement for Toynbee Plc for the year ended 31st December
2007. (16 marks)
(b) It has been argued that cash flow statements are more reliable than financial
statements prepared under the accruals convention. Briefly examine this
argument. (4 marks)
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15. Coase Ltd is a single-product manufacturing company which uses a marginal costing
system for internal management reports. The company’s annual profit and loss accounts
for external reporting purposes are based on full absorption costing.
The following data refer to the years ended 30th June 2007 and 2008:
2007 2008
£ £
Selling price per unit 90
Marginal costs per unit
Direct materials 21 23
Direct labour 19 22
Marginal factory overheads 8 10
Marginal selling and administrative expenses 2 3
Fixed factory overheads 170,000 180,000
Units Units
Opening stock 1,500 2,000
Closing stock 2,000 1,500
Sales 20,000 25,000
The normal volume used for the purpose of absorption costing is 28,000 units in both
years.
The company uses the first-in first-out assumption for the calculation of cost of sales.
Required:
(a) Prepare internal management profit statements for the year ended 30th June 2008
using marginal costing. (7 marks)
(b) Prepare a draft profit and loss account for the year ended 30th June 2008 using full
absorption costing. (8 marks)
(c) Give calculations showing why the profits for 2008 are not the same in your
answers to (a) and (b) above. Explain your answer. (5 marks)
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16. Wilkes Ltd has spent £20,000 researching the prospects for a new range of products. If
it were decided that production is to go ahead an investment of £240,000 in capital
equipment on 1st January 2009 would be required.
The accounts department has produced budgeted profit and loss statements for each year
of the project’s five-year life. At the end of the fifth year the capital equipment will be
sold and production will cease.
The capital equipment is expected to be sold for scrap on 31 December 2013 for
£40,000.
Year end Year end Year end Year end Year end
31.12.2009 31.12.2010 31.12.2011 31.12.2012 31.12.2013
£000’s £000’s £000’s £000’s £000’s
Sales 400 400 400 320 200
Materials (240) (240) (240) (192) (120)
Other variable costs (40) (40) (40) (32) (20)
Fixed overheads (20) (20) (24) (24) (24)
Depreciation (40) (40) (40) (40) (40)
Net profit/(loss) 60 60 56 32 (4)
When production is started it will be necessary to raise material stock levels by £30,000
and other working capital by £20,000 immediately. These sums will be released at the
end of the project.
Customers receive one year’s credit from the firm so that sales in 2009, for example,
will be paid for at the end of 2010.
The fixed overhead figures in the budgeted accounts have two elements – 60 per cent is
due to a reallocation of existing overheads, 40 per cent is directly incurred because of
the take-up of the project.
For the purposes of this appraisal you may regard all receipts and payments as occurring
at the year-end to which they relate, unless otherwise stated.
The company’s cost of capital is 12% per year.
Required:
(a) Use the net present value method of project appraisal to advise the management of
Wilkes Ltd whether to go ahead with the proposed project. (12 marks)
(b) List and briefly explain the key points you would make to a management team
unfamiliar with discounted cash flow appraisal techniques. (8 marks)
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17. The production manager of your company has approached you for advice on a special
order for an overseas customer that he intends to tender for. He has supplied the
following cost estimates:
£
Material A 4,000
Material B 8,000
Direct Labour 6,000
Supervision cost 2,000
Variable overhead 12,000
32,000
You ascertain the following:
(1) Material A is in stock and the original cost is given above. There is no other use
for material A, apart from using it on the special order within the factory and it
would cost £1,750 to dispose of. Material B would have to be ordered at the cost
shown above.
(2) Direct labour costs of £6,000 relate to workers who will be transferred to the
special order from another project. Extra labour will need to be recruited to the
other projects at a cost of £7,000.
(3) Supervision costs have been charged to the project on the basis of 331/3% of
labour costs. Supervision will be carried out by existing staff within their normal
duties.
(4) Variable overheads have been charged to the project at the rate of 200% on direct
labour.
(5) The project will need machinery that will have no other use to the company apart
from the special order. The machinery will have to be purchased at a cost of
£10,000 and then disposed of for £5,250 when the special order is completed.
The production manager tells you that the overseas customer is prepared to pay up to a
maximum of £30,000 and he has been informed that a competitor is prepared to fulfill
the order at that price. His costing indicates that he cannot charge less than £40,000 and
this does not take into consideration the cost of the machine and profit to be taken on
the project.
Required:
(a) Cost the project for the production manager, clearly stating how you have arrived
at your figures and giving reasons for the exclusion of other figures.
(10 marks)
(b) State whether the company should tender for the project, giving the reasons why
and the price, bearing in mind that the competitor is prepared to undertake the
project for £30,000. (6 marks)
(c) Identify four non-monetary factors that should be taken into account before
tendering for this project. (4 marks)
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Present value of £1
P
%
R 1 2 3 4 5 6 7 8 9 10
Period
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
%
" 11 12 13 14 15 16 17 18 19 20
Period
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
Annuity of £1
% 1 2 3 4 5 6 7 8 9 10
Period
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
% 11 12 13 14 15 16 17 18 19 20
Period
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
END OF PAPER
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Examiners’ commentaries 2008
Examiners’ commentary 2008
25 Principles of accounting
General remarks
Learning outcomes
At the end of this unit and having completed the essential reading and
activities, you should be able to:
• distinguish between different uses of accounting information and
relate these uses to the needs of different groups of users
• explain and apply financial accounting concepts and conventions
• prepare basic financial statements from both structured and
unstructured data
• analyse, interpret and communicate the information contained in
basic financial statements, and explain the limitations of such
statements and their analysis
• categorise cost behaviour, and prepare and contrast stock
valuations under different costing methods
• describe the budgeting process and discuss the use of budgets in
planning and control
• explain, discuss and apply relevant techniques to aid internal users
in decision-making.
General remarks
The examination paper covers a range of financial and management
accounting topics; all of which the well-prepared student will have
studied. The questions are designed to encourage students to think
about the theories and principles of accounting and to demonstrate the
ability to apply relevant concepts in a variety of situations or to a given
set of information. Where appropriate, questions are sub-divided to
help students answer in a logical manner. The examination will always
include questions designed to test students’ ability in interpretation and
analysis of financial information.
The rubric of the examination paper is set out on the front cover and
students should ensure that they precisely follow these instructions. It
is very important that students do not waste time and effort in
answering more questions than required, as marks will only be
awarded to the correct number of questions. Students are advised to
read all of the questions before deciding which to answer in each
section. Time allocation is an important factor in accounting
examinations. Students should decide on how much time to spend on
each question, based on the overall marks for the question and for each
section, and should then adhere to these time allocations.

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The rubric of the examination states that workings be submitted for all
questions requiring calculations. The importance of this cannot be
overstated, as in the absence of workings simple arithmetic errors
cannot be distinguished from errors of principle and understanding.
Thus the absence of workings will very often lead to an over
penalisation of errors. Of course, arithmetic errors may in some
instances result in some loss of marks and students should always be
careful to check their arithmetic. The rubric also states that any
necessary assumptions introduced into answering a question should be
stated. If you do not understand what a question is asking, a
circumstance the Examiners endeavour to avoid, then you must state
any consequent assumptions that you have made. Even if you do not
answer in precisely the way the Examiners had hoped you may get a
good mark providing your assumptions are reasonable.
The most frequent reason for failing to do well in the examination,
apart from lack of knowledge, is an unwillingness to answer the
question actually set. You should take time to read each question
carefully, and then attempt to answer everything that the Examiner
requires. Far too many students include every scrap of knowledge they
have on a topic without specifically addressing the question and this
can have a disastrous effect on their marks. Read the question carefully
and tailor your answer to precisely what it asks and you should do
well.
Accounting is a progressive subject where it is essential to understand a
particular topic before you go on to the next. Make sure that you
understand the basic concepts and can apply them in an appropriate
manner so that there is a logical structure to your answers. Do not
write something that you do not understand for, if you do, you are
likely to produce a muddled response. In answering computational
questions think carefully about the layout and logical progression of
your answer before writing and set out your answer in a structured and
easily readable format. You will be rewarded for an appropriate, logical
and sensible method even if the figures may contain errors. The subject
guide and textbook contain numerous worked examples, which you
should have carefully studied, and practice questions with solutions
which should form a key part of your study and revision.
Eight-column accounting paper is incorporated into the answer
booklet. It may be found particularly useful where tables of figures are
required because it keeps answers neat and saves ruling lines for
different columns. You are strongly advised to practise using it while
you are preparing answers as part of your study of accounting. A sheet
is given on the external system website:
http://londonexternal.ac.uk/current_students/programme_resources/ls
e/news/index.shtml and in the VLE and you can print off as many
sheets of the paper as you need.
This subject does not require a lot of reading beyond the core text of
Glautier and Underdown, but it is essential that you adopt an approach
of thorough study, plenty of practice answering questions and an
ability and willingness to think logically.

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All major topics are covered at the appropriate level in the

recommended text by Glautier and Underdown and others are covered
in the subject guide. References presented in the ‘Specific comments on
questions’ for Zone A and Zone B are to where certain topics may be
found in the current edition of the subject guide which is an essential
part of the study material for this unit. You are also encouraged to read
the financial press, including accounting journals and listen to, or
watch, financial programmes and visit appropriate web sites on the
internet. This will enable you to keep abreast of current issues and help
you develop your ideas and opinions about them.

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Specific comments on questions Zone A

SECTION A
Question 1
Distinction is often made between financial and management accounting.
Briefly explain the differences between these terms.
This question requires explanation of the differences between financial
accounting and management accounting. These differences are covered
on pages 16 and 17 of the subject guide. Good answers would link the
attributes of the two types of accounting, for example:
Financial accounting Management accounting

Is concerned with the preparation of Is concerned with the preparation of accounting
accounting information for the needs of information for the needs of users who are internal
users who are external to the business. to the business.
Question 2
The chairman of Lateen Ltd… [For full question please refer to the
examination paper.]
Accounting ratios are an important element of the syllabus; this
question requires ratios to be used in constructing a balance sheet. The
information given was sufficient to determine the following balance
sheet figures:
Current assets (1.75 x 125,000) = £218,750
Quick assets (1.05 x 125,000) = £131,250
Debtors (260,000 x 12) = £60,000
( 52)
Cash = (Quick Assets – Debtors) = £71,250
Stock = (Current Assets – Quick Assets) = £87,500
Fixed assets = (Total Assets – Current Assets) = £50,000
Retained profits = (Gross Profit – expenses)
= ((260,000 x 20%) – 33,250) = £18,750
Share capital = (Net assets – retained profits)
= (143,750 – 18,750) = £125,000
Using these figures and the amount given for current liabilities, a
complete summarised balance sheet can be constructed. The topic of
accounting ratios is dealt with on pp.106–113 of the subject guide and
in Chapter 16 of Glautier and Underdown.

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Question 3
Galleon Ltd commenced business… [For full question please refer to the
examination paper.]
Depreciation is one of the fundamental accounting issues and this
question tests students’ ability to apply a given depreciation policy to a
set of facts. Part (a) requires computation of the profit and loss account
depreciation charge for each of two years (2007: £6,900; 2008:
£9,425) together with the loss on disposal of the vehicle (2008:
£8,800).
Part (b) requires the relevant balance sheet values of cost (2007:
£41,000; 2008: £8,700) and accumulated depreciation (2007: £6,900;
2008: £12,325). In this type of question the presentation of clear
workings is essential. There are examples of these calculations in the
subject guide (pp.57–61).
Question 4
Dhow Ltd’s… [For full question please refer to the examination paper.]
(a) Prepare a forecast outline balance sheet for Dhow Ltd as at 31st March
2009, incorporating the above transactions.
(a) It is important to understand the practical implications of different
types of share issue on a company’s shareholders funds in the
balance sheet. This question involves a bonus issue and a
subsequent rights issue at a premium. The question also involves
an issue of loan stock. These transactions give rise to the following
forecast balance sheet:
£m
Forecast balance sheet as at 31st March 2009
Net assets 148

Loans (20 + 10) (30)
118

Share Premium 8
118
In this type of question, clear workings are essential; in particular, in

the calculation of the impact of each transaction on the company’s
retained earnings and net assets.
The relevant issues are dealt with on pages 88 and 89 of the subject
guide.
(b) Describe how each of the share issues in the year ended 31st March 2009
will affect the earnings per share of Dhow Ltd.
(b) This section requires descriptions of how each share issue will
affect the earnings per share (EPS) but did not ask for calculations
of EPS. The answers could be quite short as follows:
• Bonus issue increases shares and thus will reduce the EPS.

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• Rights issue will increase shares but also generate profits from new
funds therefore impact will probably be to increase EPS.
Earnings per Share is explained on page 113 of the subject guide.
Question 5
The following data… [For full question please refer to the examination
paper.]
The calculation of stock value by application of a specific accounting
base is a common and relatively straightforward examination question.
This question requires the use of the FIFO method and the basic data
gives a closing stock at 31st December 2007 of £35,500 and cost of
sales for the six months ending on that date of £61,500.
The above figures needed to be adjusted for the two additional pieces
of information. The transport charge should be included in the cost of
the relevant units, thus closing stock increases by £2,500. However, as
this amount will also be included in purchases, the cost of sales figure
remains unchanged. The closing stock figure should be written down
by £6,000 to net realisable value. However, this amount should not be
included as cost of sales but reflected in the profit and loss account as
an exceptional charge. Inventory, purchases and sales calculations are
given on pages 52 and 53 of the subject guide.
Question 6
Skiff Plc… [For full question please refer to the examination paper.]
Required:
Calculate the profit earned on sales to each of the customers and the net
profit margin for each customer (A, B and C). Briefly comment on your
answers.
This question involves the calculation of profit for different customers
where each has different trading terms with the reporting company.
The results obtained are as follows:
A B C
£ £ £
Profit after customer costs 73,000 51,000 63,000
Net profit margin 11.4% 12.75% 19.7%
The question required brief commentary on these results: The gross
profit figures simply show that the largest sales produce the highest
gross profit, but the picture becomes more complex when the customer
related expenses are included. A, the largest customer, still produces
the highest profit, but not the best margin, as B and C are higher. In
fact, C the smallest customer produces the highest margin.
Question 7
Xebec Ltd manufactures… [For full question please refer to the examination
paper.]
Required:
Calculate the mix of sales which would enable Xebec Ltd to maximise profits,
and calculate the profit for the year which would be achieved by that sales
mix.

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This question requires an application of contribution analysis. The

limited factor is clearly identified as raw material ‘Essence’ and thus
the first stage is to calculate the contribution per kilo of Essence for
each product (Silk £2.50; Musk £6; Opia £3.33). Having established
this, the products are ranked in order of contribution per kilo and after
applying the maximum market demand constraint the optimum
production schedule is:
Units
Musk 8,000
Opia 15,000
Silk 33,500
The resulting maximum net profit is £215,500. An example of this type

of calculation is found on pages 159–160 of the subject guide.
Question 8
Dinghy Products Ltd… [For full question please refer to the examination
paper.]
Required:
Calculate the indirect cost of producing a mast and a boom.
The topic of overhead (indirect cost) absorption using traditional full
cost methods is covered on pages 142–145 of the subject guide (a
further example is given on page 148) and in detail in Chapter 26 of
Glautier and Underdown. This topic has not been tested before in this
format therefore a full answer is given below:
Turning Finishing Office Storeroom Total
Indirect costs £ £ £ £ £
Storeman’s salary 1,300 1,300
Office clerk’s salary 1,500 1,500
Rent (basis: floorspace) 600 300 20 80 1,000
Sub-total 600 300 1,520 1,380 3,800
Reapportion (basis: issues) 1,104 276 (1,380) -
Total departmental costs 1,704 576 1,520 - 3,800
Total direct labour hours (W) 3,800 3,200
Indirect cost per labour hour 0.448 0.18
Indirect cost per mast 1.344 0.72 2.064
Indirect cost per boom 1.792 0.54 2.332
The use of a columnar format would be essential in answering this
question.
Question 9
What factors should be considered when deciding whether to use full or
marginal costing?
This question requires a discussion of the factors which should be
considered in deciding whether to use full or marginal costing. This
topic is specifically dealt with on page 145 of the subject guide.
Answers which explained the two techniques in detail would not
specifically answer the question being asked. This is a common mistake
made by candidates and clearly illustrates the need to read the

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question (even very short ones) carefully and to address the specific
issues raised.
Question 10
Lugger Ltd… [For full question please refer to the examination paper.]
Required:
(a) Calculate the break-even point and margin of safety for the present
machine, using current demand. Give your answers in terms of units
produced.
(b) Comment on the proposal to lease the new machine, giving calculations
to support your comments.
Break-even and contribution analysis are key areas of the management
accounting syllabus. Part (a) of this question needs a calculation of the
contribution per unit of £12 (£18−£6). Note that this is not reduced by
the direct labour cost which is clearly identified as being not dependent
on the level of production and thus a fixed cost for this calculation. The
contribution per unit is then used to calculate break-even point
(18,333 units) and margin of safety (1.667 units).
Part (b) requires comment on the leasing proposal including
supporting calculations. The break-even point is higher (8.661 units)
and margin of safety is lower (1,333 units). At 10,000 units the current
and proposed machines give the same total cost and profit figures.
Thus, there is no compelling financial support for the leasing of the
new machine.
This type of analysis is covered on pages 157–161 of the subject guide
and in Chapter 31 of Glautier and Underdown.
Question 11
Proa Ltd… [For full question please refer to the examination paper.]
Required:
(a) Calculate the average accounting rate of return over the life of the
project.
(b) Calculate the payback period for the project.
Investment appraisal using accounting rate of return (ARR) and
payback are recurring themes in this examination. In answering part
(a) it is necessary to adjust the annual cash flows for depreciation to
give average annual profit (£13,500) and to calculate average
investment (£7,500). Thus average ARR is 18 per cent.
Part (b) uses the annual cash flows to give a payback period of three
years two months. These calculations are explained on pages 166–171
of the subject guide.
Question 12
Glautier and Underdown… [For full question please refer to the examination
paper.]
The five stages of planning identified by Glautier and Underdown
(page 353) are summarised as follows:
1. Setting organisational objectives

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2. Assessing the environment in which the organisation will be

operating by reference to the external factors which are likely to
affect its operations. For this purpose forecasts have to be made
which attempt to predict what will happen in the future, with and
without policy changing on the part of the planning organisation.
3. Assessing existing resources, for management is concerned with
making the most efficient use of those scarce resources, often called
the four Ms: men, machines, materials and money. This aspect of the
planning function involves making an estimate both of external
resources which are accessible, and resources already held which are
either idle or which might be more efficiently utilised.
4. Determining the strategy for achieving the stated objectives by
means of an overall plan which specifies strategic goals. Strategic
decisions are concerned with establishing the relationship between
the firm and its environment.
5. Designing a programme of action to achieve the selected
strategic goals by means of both long-range programmes and short-
range programmes; the latter covering a period of a year or less and
containing sets of instructions of the type found in annual budgets.
Once more it is necessary to read the question carefully; it is quite
specific and answers which dealt with, for example, only the
advantages of budgets as part of planning would be insufficient.
SECTION B
Question 13
Clipper Ltd… [For full question please refer to the examination paper.]
Required:
(a) Show the adjustments necessary to eliminate the balance on the suspence
account. (5 marks)
(a) This question requires a statement showing how the balance on the
suspense account should be eliminated. Although this statement
could be in any appropriate format a double entry based approach
would be shown as follows:
Suspense account
50,200 Purchases 57,000
B/ (closing stock)
Balance d
Disposal proceeds 1,000
Provisions 5.100
Debtors (Bal.fig) 700 ______
57,000 57,000
(b) A profit and loss account for Clipper Ltd for the year ended 31st December
2007 and a balance sheet as at that date, in a form suitable for
presentation to the directors. (21 marks)
(b) Students are strongly advised to use the eight-column accounting
paper in answering this type of question. Often only brief workings
are required and therefore a complete set of ‘T’ accounts or
journals is a waste of time. Such workings can be effectively shown
on the face of the profit and loss account and balance sheet.
However the adjustments necessary to arrive at amounts for cost of

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sales, debtors and fixed assets were quite involved and therefore
separate clear workings would be necessary to enable candidates to
be awarded with all appropriate marks.
The profit and loss account and balance sheet for Clipper plc
should be properly headed. An acceptable layout with appropriate
sub-headings is given in the subject guide (Chapter 6, examples 6.1
and 6.2).
The final accounts of Clipper Ltd should be as follows:
Clipper Ltd
Profit and loss account for the year ended
st
31 December 2007
£ £
Sales 1,050,000
Cost of sales 715,000
Gross profit 335,000

Selling costs 59,500
Directors remuneration 55,500
Audit fee 4,000
Bad debts 1,850
Depreciation 36,750
Loss on disposal 5,000 260,600
Profit before interest and tax 74,400

Interest 2,500
Profit before interest 71,900
Taxation 30,000
Profit for the year 41,900
Dividend paid 15,000
Retained profit for the year 26,900
Clipper Ltd
th
Balance sheet as at 30 December 2007
£ £ £
Fixed assets Depn/Amor
Motor vehicles 95,000 (38,750) 56,250

Plant and equipment 180,000 (72,000) 108,000
164,250
Current assets
Stock (483-24) 63,000
Debtors 75,050
Prepayments 6,000
Bank 4,800
148,850
Creditors: due within one year
Trade (48,600)
Accruals (6,500)
Taxation ( 30,000) (85,100)
Net current assets (working capital) 63,750
Total assets less current liabilities 228,000
Loans (25,000)
203,000
Ordinary share capital 165,000
Retained Earnings 38,000
203,000

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(c) One of the directors of Clipper Ltd has sent you the following e-mail.
‘Why do we only have £4,800 in the bank when we have retained profits
in excess of £30,000?’
Draft a brief email, without any figures, in response to the director.
(4 marks)
(c) This question requires a brief explanation of the accounting issues,
the confusion is caused by viewing profits as being the same as
cash surpluses. Profits represent the increase in the net assets of
the firm, that is all assets less all liabilities. Cash represents only
one element of the company’s resources and profit is the increase
in these resources over the year. If you wish to reconcile the
increase/decrease in cash balances and the profits for the year you
should refer to the cash flow statement attached to the accounts.
These fundamental issues are covered in chapter 2 of the subject guide.
SECTION C
Question 14
(a) Prepare a cash flow statement for Sloop Plc for the year ended 31st March
2008. (16 marks)
(a) This question requires preparation of a cash flow statement. Using
the eight-column accounting paper is recommended. The direction
of cash flows (outflows or inflows) is clearly a key issue and care
should be taken to ensure that this is correct. The layout and
preparation of a cash flow statement is given on pages 92–94 of the
subject guide.
The cash flow statement of Sloop plc should be as follows:

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Cash flow statement for the year ended 31st March 2008
£m £m
Operating profit 666
Depreciation 150
Profit on disposal of fixed assets (20)
Increase in stock (242)
Increase in debtors (18)
Increase in prepayments (60)
Decrease in trade creditors (20)
Net cash flow from operating activities 456
Returns on investment and servicing of finance

Investment income
Interest paid 30
(34) (4)
Taxation (280)
Capital expenditure
Purchase of tangible fixed assets (324)
Disposal of tangible fixed assets 160
Purchase of fixed asset investments (36) (200)
Equity dividends paid (160)
Net cash flow before financing (188)
Financing
Issue of ordinary shares 76
Repayment of loans (64) 12
Decrease in cash balances (176)
Reconciliation of cash balances
Decrease in cash at bank 88
Increase in bank overdraft 88
176
(b) It has been argued that cash flow statements are more reliable than
financial statements prepared under the accruals convention. Briefly
examine this argument. (4 marks)
(b) The argument proposed is that cash flow statements are more
reliable than accruals-based financial statements. Answers should
examine the comparative objectivity of cash flow statements and
the subjective nature of some accruals-based estimates and
judgments. Good answers would clearly identify the trade-off
between relevance and reliability and assess the usefulness of both
conventions in isolation and as a total reporting package.
Question 15
Cleanahull Ltd… [For full question please refer to the examination paper.]
Required:
(a) Prepare an operating statement, reconciling budgeted and actual profit
for Cleanahull Ltd for May 2008 showing two variances for sales and for
each cost category. (13 marks)
(a) Budgetary control, performance evaluation and variance analysis
are frequently examined in this paper. It is very important that full

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workings are shown and that students ensure they understand and
clearly indicate the direction (favourable or unfavourable) of the
variances computed.
A straightforward layout of the operating statement is given below.
Operating statement for Cleanahull for May 2008
£
Budgeted profit for month (288 x £18) 5,184
Sales margin volume variance 756
Standard profit for actual sales 5,940
Sales price variance 600
6,600
Cost variances Fav Unfav
£ £
Material
Price variance 140
Efficiency variance 60
Skilled labour
Price variance 297
Unskilled labour
Price variance 99
Variable overheads
Spending variance 165
Efficiency variance - -
Fixed overheads
Spending variance 140
Volume variance 1,260 ___
2,192 827 1,365
Actual profit for month 7,965
(b)Prepare a brief report to the owner of Cleanahull Ltd commenting on the

performance in May 2008 suggesting possible reasons for any unexpected
results. (7 marks)
(b) This part of the question requires a brief report which comments on
the variances and suggests possible reasons for unexpected results.
Good answers should go beyond statements of the facts, e.g.
‘unfavourable labour variances show they were paid more’; instead
they should give a more meaningful analysis. Again using labour
cost as an example a good answer might be as follows:
Skilled labour has been used very efficiently with 10% less hours than standard;
this has resulted in a substantial favourable variance. However the unskilled labour
is a similar amount over budget (66 hours), thus producing an unfavourable
variance. It appears that Cleanahull is short of skilled labour and may have
substituted unskilled. This has led to a cost saving of £198 (66 x [£8-£5]). As
long as there has been no loss in quality this is satisfactory, although Cleanahull
should establish whether the use of unskilled labour has been the cause of the overuse
of materials. The shortage of skilled labour may also be the cause of the skilled
labour price variance – labour may be short and those workers may work overtime or
be paid more than budget. The unskilled labour is being paid below budget by 5%
which again suggests there is no shortage.
Variance analysis, with comprehensive examples, is covered on pages

198–206 of the subject guide.
10

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Question 16
Yawl Ltd… [For full question please refer to the examination paper.]
(a) Use the net present value method of project appraisal to advise the
management of Yawl Ltd whether to go ahead with the product.
(12 marks)
Required:
(a) Investment appraisal using discounting methods is a key part of the
syllabus. This question combines application of the Net Present
Value method of investment appraisal with an understanding of
opportunity costs.
It is important to adopt a well-organised approach to the layout of
the answer. In answering this type of question it is strongly advised
that the eight-column accounting paper be used to produce a table
of cash flows and present values for each of the relevant years.
The most appropriate way of presenting the answer to this question
is as follows:
£000s 2009 2009 2010 2011 2012 2013 2014
start end
Sales 0 800 800 800 640 400
Equipment (480) 80
Stock (60) 60
Working capital (40) 40
Overheads (16) (16) (19.2) (19.2) (19.2)
Material (480) (480) (480) (384) (240)
Variable costs (80) (80) (80) (64) (40)
Cash flow (580) (576) 224 220.8 332.8 520.8 400
Discount factor 0 0.893 0.797 0.712 0.636 0.567 0.507
Discounted cash flow (580) (514.4) 178.5 157.2 211.7 295.3 202.8
NPV = − £48,900
A negative NPV indicates that the project is expected to earn less than the opportunity cost of capital of the
finance providers. This firm would serve its shareholders best by not proceeding with this project.
(b) List and briefly explain the key points you would make to a management
team unfamiliar with discounted cash flow appraisal techniques. (8 marks)
(b) The key points should explain the following:
• the time value of money
• discounting cash flows to a common point in time
• opportunity cost of investors’ funds
• minimum rate of return required on a project
• NPV = shareholder wealth increase
• NPV decision rule
• the significance of being cash flow-based rather than profit-based
• only incremental cash flows are considered.
The relevant examples and discussion of disconnected cash flow
appraisal techniques is covered in Chapter 13 of the subject guide and
pp.490–500 of Glautier and Underdown.
11

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Question 17
Ketch plc… [For full question please refer to the examination paper.]
Required:
(a) Prepare a break-even price report… [For full question please refer to the
examination paper.] (14 marks)
(a) This question requires application of a number of decision-making
techniques; in particular the identification of relevant costs, sunk
costs and opportunity costs. A key part of the requirement is the
explanation of each cost included in the final amount and the
reasons for exclusion of any costs which are referred to in the
original data. Good answers would clearly link all of the costs
included and excluded, with the explanations. A brief summary of
these are given below:
Break-even for final order for pump

£
Material A (note 1) 1,000
Material B (1,000 x £3.15 – note 2) 3,150
Labour (1,000 x ½ x ½ x £12 – note 3) 3,000
Variable overheads - supervisors’ overtime (note 4) -
- packaging 1,000 x 50p (note 5) 500
Fixed costs - depreciation (note 6) -
- maintenance (note 7) 250
7,900
Notes:
1. Opportunity cost being half of the sale proceeds.
2. Replacement cost will include the 5 per cent price increase.
3. There is no change in the basic labour costs but half of the 500 hours will be paid at 50
per cent extra – this must be included.
4. There is no increase in supervisors’ overtime as a result of this order.
5. The special packaging is a relevant cost for this order.
6. No depreciation needs to be included. This is an irrelevant sunk cost, so there is no loss
of value through additional use.
7. The additional maintenance charge is relevant – it would not be paid if this order were
not accepted.
(b) Prepare a brief report to the sales manager… [For full question please
refer to the examination paper.]
(b) This analytical question should be answered by clearly identifying
three issues as required. These should relate the key strategic and
operational matters raised by the decision facing the company and
relate these appropriately to the answer given to part (a). Good
answers go beyond a simple restatement of the facts given in
part (a).
Information for short-run tactical decisions is covered in the subject
guide (pp.151–161) and Glautier and Underdown (Chapter 31).
12

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Specific comments on questions Zone B

SECTION A
Question 1
Distinction is often made between financial and management accounting.
Briefly explain the differences between these terms.
This question requires explanation of the differences between financial
accounting and management accounting. These differences are covered
on pages 16 and 17 of the subject guide. Good answers would link the
attributes of the two types of accounting, for example:
Financial accounting Management accounting

Is concerned with the preparation of Is concerned with the preparation of
accounting information for the needs of accounting information for the needs of
users who are external to the business. users who are internal to the business.
Question 2
The following information is available in respect of Bagehot Ltd… [For full
question please refer to the examination paper.]
Required:
Prepare for Bagehot Ltd a profit and loss account for the year ended 31st
December 2007 and a balance sheet as at that date, in as much detail as
possible, taking into account all the above information.
This question requires the use of accounting ratios in constructing a set
of financial statements from incomplete information. In this situation
the key is to adopt a logical approach starting from the actual amounts
given; in this case we know the figures for debtors, opening stock,
purchases, loans and share capital. If these amounts are placed into the
financial statements then the ratios can be used to find most of the
other items. There are some items which are deduced as balancing
figures, for example expenses and reserves bought forward.
Bagehot Ltd.
Profit and Loss Account for the year ended 31st December 2007
£
Sales (33,600 x 12) 403,200
Opening stock 28,000
Purchases 360,000
388,000
Closing stock (Bal fig) (85,600) 302,400
100,800
Expenses (Bal. Fig) 80,640
Net Profit (403,200 x 5%) 20,160

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Balance sheet as at 31st December 2007

£
Fixed assets (403,200 ÷ 4) 100,800
Current assets
Stock 85,600
Debtors 33,600
Cash at bank (Note 1) 26,400
145,600
Creditors (360,000 ÷ 12) (30,000) 115,600
216,400
Loan (29,520)
186,880
Share Capital 39,120
Reserves : Brought forward 127,600
Current year 20,160 147,760
186,880
Note 1
Creditors = 30,000
Acid Test = 2:1
∴ Debtors + Bank = 60,000
∴ Bank = 26,400
Accounting ratios are covered on pages 106–116 of the subject guide.
Question 3
In the books of Beveridge Ltd the creditors ledger control account… [For full
Required:
(a) Calculate the corrected creditors ledger control account balance, and,
(b) reconcile this with the total of the individual creditors’ balances in the
creditors ledger.
Control accounts play an important part in internal control within a
record keeping system based on double entry. This is a typical question
which involves the correction of the balances in the creditor’s ledger
control account (£321.100). The second part of the question requires
the reconciliation of this figure with the total of the individual
creditors’ balances in the creditor’s ledger; the final figure in this
reconciliation is an error which is the balancing figure (£3,570). The
key to this type of question is a clear distinction between the
adjustments to the control account on the one hand; and the list of
balances on the other.
An illustrative example of this type of question is found on page 44 of
the subject guide.

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Question 4
Hicks Plc’s outline balance sheet… [For full question please refer to the
examination paper.]
Required:
(a) Prepare a forecast outline balance sheet for Hicks Plc as at 31st March
2009, incorporating the above transactions.
(a) It is important to understand the practical implications of different
types of share issue on a company’s shareholders funds in the
balance sheet. This question involves a bonus issue and a
subsequent rights issue at a premium. The question also involves
an issue of loan stock. These transactions give rise to the following
forecast balance sheet:
£m
Forecast balance sheet as at 31st March 2009
Net assets 122

Loans (20)
102

Share premium 8
102
In this type of question clear workings are essential, in particular in the

calculation of the impact of each transaction on the company’s retained
earnings and net assets.
The relevant issues are dealt with on pages 88 and 89 of the subject
guide.
(b) Describe, without calculations, how each of the share issues in the year
ended 31st March 2009 will affect the earnings per share of Hicks Plc.
(b) This section requires descriptions of how each share issue will
affect the earnings per share (EPS) but did not ask for calculations
of EPS. The answers could be quite short as follows:
Bonus issue increase shares and thus will reduce the EPS.
Rights issue will increase shares but also generate profits from new
funds ∴ the impact will probably be to increase EPS.
Earnings per Share is explained on page 113 of the subject guide.
Question 5
Explain, with examples, the terms ‘monetary assets’ and ‘non-monetary’
assets and describe their treatment in historical cost accounting and one
alternative valuation convention.
There are essentially three elements to this question as follows:
1. explain the terms
2. give examples
3. describe the treatment under HCA and one alternative.

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Good answers would have clearly addressed all of these elements as

follows.
Monetary assets are those which by their nature, or by contract, are
expressed in pounds (money values) regardless of changes in price
levels. Examples are cash, debtors and bank balances.
Non-monetary assets are those which have a value which may be
regarded as changing in line with changing price levels of different
types of asset: examples are stocks and fixed assets.
Accounting treatment
Monetary Non-monetary
HCA Current money value HC
CPP Current money value HC x change in purchasing power of £
OR
CVA Current money value Replacement cost
or
Realisable value
or
Value in use.
The issues in this question are dealt with on pages 127–128 of the
subject guide, and on pages 321–336 of Glautier and Underdown.
Question 6
Clark Distributors Ltd began business… [For full question please refer to the
examination paper.]
Required:
Using only the data in the table above, calculate the cost of sales and closing
stock figures for inclusion in the accounts for the six months to 31st December
2007 under both the FIFO and LIFO assumptions.
The calculation of cost of sales and stock values by application of the
various accounting bases is a common and relatively straightforward
examination question. There were no particular problems posed by this
question, which gave FIFO values of £6,500 and £35,500; under LIFO
the amounts are £60,500 and £36,500. A worked example of this type
of question is given on page 53 of the subject guide. It is important to
provide your workings for this type of question.
Question 7
Smith Plc manufactures and sells a range of… [For full question please refer
to the examination paper.]
Required:
(a) Compute the following variances for product ‘Adam’ for July.
(i) Sales price variance.
(ii) Sales contribution volume variance.
(iii) Sales margin volume variance.
(a) This question involves the calculation of a number of sales
variances, as below:
i. Sales price variance £8,000 (U)
ii. Sales contribution variance £8,000 (F)

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iii. Sales margin volume variances £6,000 (F).

(b) The difference between (ii) and (iii) is the treatment of fixed
overheads.
ii. shows the additional contribution from increased sales and thus
ignores the fixed overheads.
iii. Shows the additional net margin from increased sales but this
includes an allocated fixed cost element. It would be necessary
to calculate a separate fixed overhead volume variance to reflect
the fact that the increase in volume will not result in any
additional fixed costs.
Thus
Sales margin volume variance 6,000 F
Fixed overhead volume variance*
(AQ – SQ) x FO per unit
(8,000 – 6,000) x £1 2,000 (F)
Sales contribution volume variance 8,000
Students are always advised to show clear workings. For example, in

this question a mistake in one element of the computations would only
be penalised for that mistake and the correct elements of the
computation would be rewarded as appropriate. For this to be done it
is important that workings are clear and legible with relevant
descriptions and labels. Pages 201 and 202 of the subject guide give
illustrative examples.
Question 8
A summary of Pareto Company’s profit… [For full question please refer to
the examination paper.]
Required:
(a) What is the break-even point in units?
(b) What is the margin of safety in units?
(c) If an extension to the factory… [For full question please refer to the
examination paper.]
This question tests the application of break-even analysis and the use
of a contribution approach to decision making. The techniques are
relatively straightforward but students need to read the question
carefully in order to use the data correctly. The solutions are as
follows:
(a) 500,000 units
(b) 500,000 units
(c) Extension to factory
Contribution per unit
= 0.50 − (30 × 110)
100
= £0.17
Required contribution

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= FC + Profit
= 150,000 + 110,000
= £260,000
∴ Required volume
= 260,000
0.17
= 1,529.411 units
The required volume is less than the new capacity of 1,600,000 units
and so there will be sufficient capacity.
Good answers would clearly identify the required levels of contribution
and volume in order to give full data for decision making.
Short term decision making involving these techniques is covered on
pages 152 and 156 of the subject guide and in Chapter 28 of Glautier
and Underdown.
Question 9
Rickwood Ltd… [For full question please refer to the examination paper.]
Answers should briefly explain the stages in the process of cost
determination.
1. Collect and classify overhead costs as between indirect
material, indirect labour and other identifiable cost headings
(e.g. power, insurance, depreciation).
2. Allocate these costs to the four production and three service
departments (cost centres) using appropriate methods (e.g.
floor area, capital value)
3. Apportion the costs of the service departments to the
production departments using appropriate methods.
4. Absorb the total indirect cost for each production cost centre
into the total cost of each of the three different product lines.
This question could easily be misinterpreted by students who do not
read the question carefully but see the word ‘cost’ and write about
issues which are not relevant to the specific issue being examined.
Traditional costing methods are explained on pages 142–144 of the
subject guide and a comprehensive coverage is given in Chapter 16 of
Glautier and Underdown.
Question 10
In the context of cost-volume-profit analysis… [For full question please refer
to the examination paper.]
This question requires brief explanations and give examples of three
management accounting terms. To gain good marks both of the
requirements must be met.
(a) Non-linear variable costs vary with volume of activity but with
a cost per unit which is different for different levels of activity.
Example: Direct material where there are discounts available for
larger orders.

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(b) Stepped fixed costs are those which do not vary with volume of
activity between two levels of activity but which will require an
extra resource at the higher level. Example: Rental of storage
facility which has a maximum capacity after which a new facility
will have to be rented.
(c) The relevant range is the range of outputs over which the
assumption that a cost-volume relationship is a linear relationship
is realistic. Example: A firm may determine variable and fixed
costs which will be realistic between 10,000 and 15,000 units;
outside of this range these costs will no longer behave in the
assumed linear fashion.
These terms are explained within Chapter 11 of the subject guide.
Question 11
Hayek Plc is considering investing in either project P or project Q: [For full
Required:
(a) Calculate the payback period for each project and on this basis advise
Hayek Plc which project to invest in.
(b) Briefly explain two disadvantages of payback period as a method of
investment appraisal.
Payback is a straightforward investment appraisal method. The only
complication here was remembering to adjust profits to cash flows (by
adding back depreciation) to give payback periods of 21/3 years for
project P and four years for project Q. Part (b) required standard text
book appraisal of the disadvantages of payback, which is discussed on
pages 166–169 of the subject guide.
Question 12
Glautier and Underdown state that… [For full question please refer to the
examination paper.]
The five stages of planning identified by Glautier and Underdown
(page 353) are summarised as follows:
1. Setting organisational objectives.
2. Assessing the environment in which the organisation will be
operating by reference to the external factors which are likely to
affect its operations. For this purpose forecasts have to be made
which attempt to predict what will happen in the future, with and
without policy changing on the part of the planning organisation.
3. Assessing existing resources; management is concerned with
making the most efficient use of scarce resources, often called the
four Ms: men, machines, materials and money. This aspect of the
planning function involves making an estimate both of external
resources which are accessible, and resources already held which
are either idle or which might be more efficiently utilised.
4. Determining the strategy for achieving stated objectives by means
of an overall plan which specifies strategic goals. Strategic
decisions are concerned with establishing the relationship between
the firm and its environment.

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5. Designing a programme of action to achieve selected strategic goals

by means of both long-range programmes and short-range
programmes; the latter covering a period of a year or less and
containing sets of instructions of the type found in annual budgets.
Once more it is necessary to read the question carefully. The question
is quite specific and answers which dealt with, for example, only the
advantages of budgets as part of planning would be insufficient.
SECTION B
Question 13
Keynes Plc is a company incorporated… [For full question please refer to the
examination paper.]
Required:
(a) Show any necessary adjustments to the bank balance according to the
cash book as at 30th April 2008. (3 marks)
(a) The reconciliation of the bank balance per the cash book and the
balance on the bank statement often reveals errors and omissions.
The adjustment of these and of the other accounting records is a
recurring question in this examination. In this case the adjustments
are as follows:
£
Bank balance per trial balance (6,600)
Administration standing order (12,000)
Bank interest paid (900)
Compensation received 20,000

Refund received 5,000
Bad debt recovered 12,000
Bank balance per cash book 17,500
Students are strongly advised to use the eight-column accounting
paper in answering this type of question. Often only brief workings are
required and therefore a complete set of ‘T’ accounts or journals is a
waste of time. Such workings can be effectively shown on the face of
the profit and loss account and balance sheet. However, the
adjustments necessary to arrive at amounts for cost of sales,
administration cost, loss of equipment, and fixed assets were quite
involved and therefore separate clear workings are necessary to enable
candidates to be awarded with all the appropriate marks.
(b) Prepare a profit and loss account for Keynes Plc for the year ended 30th
April 2008 and a balance sheet at that date in a form suitable for the
directors. (22 marks)
The final accounts of Keynes plc should be as follows:

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Keynes plc
Profit and loss account for the year ended 30th April 2008
£ £
Sales 3,960,000
Cost of goods sold 2,444,000
Gross profit 1,516,000
Bad debt recovered 12,000
1,528,000
Auditors remuneration 5,000
Depreciation/Amortization 306,000
Loss on equipment 50,000
Bad debts 18,000 1,457,000
Profit before interest and tax 71,000
Interest 18,900
Profit before tax 52,100
Taxation 3,000
Net profit after tax 49,100
Dividends paid 12,000
Retained profit for the year 37,100

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Keynes plc
Balance sheet as at 30th April 2008
£ £ £
Fixed assets Cost Accumulated Net
Depn/Amort
Leasehold property 440,000 132,000 308,000

Plant and equipment 2,840,000 1,572,000 1,268,000
1,576,000
Current assets
Stock 459,000
Debtors 206,000
Prepayments 3,000
Bank 17,500
685,500
Creditors: due within one year

Creditors (389,400)
Accruals (24,000)
Taxation ( 3,000) (416,400)
Net current assets (working capital) 269,100

Total assets less current 1,845,100
liabilities
Creditors: due after one year (180,000)
1,665,100
Issued ordinary share capital 660,000
Reserves: Share premium 428,000
Retained earnings 577,100 1,005,100
1,665,100
The profit and loss account and balance sheet for Keynes plc should be
properly headed and an acceptable layout with appropriate sub-
headings is given in the subject guide (see Chapter 6 examples 6.1 and
6.2).
(c) Draft a note in response to the director’s statement. (5 marks)
The section requires a draft note in response to the director’s
statement. The main points to be included in a comprehensive answer
were:
• accounts prepared on the basis of historical cost
• asset values of non-monetary assets do not reflect current value
• freeholds are not included at the moment at valuation but could be
with change of accounting policy
• plant and equipment stated at depreciated historical cost and only
reduced to realisable value if have a lower value in use
10

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• thus the balance sheet should not be used as a statement of

corporate value.
SECTION C
Question 14
The following are the summarised accounts of Toynbee Plc… [For full
Required:
(a) Prepare a cash flow statement for Toynbee Plc for the year ended 31st
December 2007. (16 marks)
This question requires preparation of a cash flow statement. Using the
eight-column accounting paper is recommended. The direction of cash
flows (outflows or inflows) is clearly a key issue and care should be
taken to ensure that this is correct. The layout and preparation of a
cash flow statement is given on pages 92–94 of the subject guide.
(a) The cash flow statement of Toynbee plc should be as follows:
Toynbee plc
Cash flow statement for the year ended 31 December 2007
£m £m
Operating profit 666
Depreciation 150
Profit on disposal of fixed assets (20)
Increase in stock (242)
Increase in debtors (18)
Increase in prepayments (60)
Decrease in trade creditors (20)
Net cash flow from operating activities 456
Returns on investment and servicing of finance

Investment income
Interest paid 30
(34) (4)
Taxation (280)
Capital expenditure
Purchase of tangible fixed assets (324)
Disposal of tangible fixed assets 160
Purchase of fixed asset investments (36) (200)
Equity dividends paid (160)
Net cash flow before financing (188)
Financing
Issue of ordinary shares 76
Repayment of loans (64) 12
Decrease in cash balances (176)
Reconciliation of cash balances
Decrease in cash at bank 88
Increase in bank overdraft 88
176
11

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(b) It has been argued that cash flow statements are more reliable than
financial statements prepared under the accruals convention. Briefly
examine this argument. (4 marks)
(b) This question specifically deals with arguments in respect of the
reliability of cash versus accruals accounting. Answers which
covered the general advantages/disadvantages of cash flow
statements would not address the issue. Students are again
strongly advised to read even short questions very carefully and to
focus on the specific issue raised.
Answers should discuss the following:
• subjective nature of accruals convention giving examples of
estimates and judgments such as stock values, depreciation, debt
provisions, etc.
• comparative objectivity of cash flow statements
• trade off between reliability and relevance thus while cash flows
are more reliable on their own they are less relevant for assessing
financial performance and position.
Question 15
Coase Ltd is a single-product manufacturing company… [For full question
please refer to the examination paper.]
Required:
(a) Prepare internal management profit statements for the year ended 30th
June 2008 using marginal costing. (7 marks)
(b) Prepare a draft profit and loss account for the year ended 30th June 2008
using full absorption costing. (8 marks)
(c) Give calculations showing why the profits for 2008 are not the same in
your answers to (a) and (b) above. Explain your answer. (5 marks)
Chapter 10 of the subject guide covers cost accounting and the
differences between marginal and traditional absorption costing. This
question requires an application of the techniques explained in Chapter
10. Students should think carefully about the layout to be used in
presenting their answer. A key issue is the measurement of the value of
stocks under each method. Students should carefully structure their
layouts to bring out the important features of their answer and give all
relevant workings. The question asks for statements for the year ended
30th June 2008 only and anyone producing 2007 figures would be
wasting valuable time and effort.
A suggested presentation of the answer is as follows:
12

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Coase Ltd
(a) Profit statement using marginal costing for year ended 30 June 2008
£ £
Sales (25,000 x 90) 2,250,000
Opening stock (2,000 x 48) 96,000
Production cost (24,500 x 55) 1,347,500
1,443,500
Closing stock (1,500 x 55) (82,500) 1,361,000
Cost of sales 889,000
Selling of admin expenses
(25,000 x 3) 75,000
Contribution 814,000
Fixed overhead 180,000
Profit 634,000
(b) Profit statement using absorption costing for the year ended 30 June 2008
£ £
Sales revenue 2,250,000
Opening stock (2,000 x 54.07) 108,143
Production cost (24,500 x £61.43) 1,505,000
1,613,143
Closing stock (1,500 x £61.43) 92,143
Cost of sales 1,521,000
729,000
Under-absorption (3,500 x £6.43) 22,500
706,500
Selling and admin costs 75,000
Profit 631,500
(c)
Marginal profit 634,000
Fixed overhead B/F in absorption O Stock
2,000 x £6.07 12,143
Fixed overhead C/F in absorption C Stock
1,500 x £6.43 9,643
Reduction in absorption profit 2,500
Absorption profit 631,500
The difference in profit figures is caused by the different treatments of

fixed production overheads. Fixed overheads are all written off as
period costs in marginal costing systems, while a proportion is carried
forward in stock valuation in absorption costing systems. The above
reconciliation shows exactly how the profit figures differ.
13

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Question 16
Wilkies Ltd… [For full question please refer to the examination paper.]
Required:
(a) Use the net present value method of project appraisal to advice the
management of Wilkes Ltd whether to go ahead with the proposed
project. (12 marks)
(b) List and briefly explain the key points you would make to a management
team unfamiliar with discounted cash flow appraisal techniques. (8 marks)
(a) Investment appraisal using discounting methods is a key part of the
syllabus. This question continues application of the Net Present
Value method of investment appraisal with an understanding of
opportunity costs.
It is important to adopt a well organised approach to the layout of an
answer. In answering this type of question it is strongly advised that
the eight-column accounting paper be used to produce a table of cash
flows and present values for each of the relevant years.
The most appropriate way of presenting the answer to this question is
as follows:
£000s 2009 2009 2010 2011 2012 2013 2014
start end
Sales 0 +400 +400 +400 +320 200
Equipment (-240) +40
Stock (-30) +30
Working capital (-20) +20
Overheads (-8) (-8) (-9.6) (9.6) (-9.6)
Material (-240) (-240) (-240) (-192) (-120)
Variable costs (-40) (-40) (-40) (-32) (-20)
Cash flow (-290) (-288) +112 +110.4 +166.4 +260.4 +200
Discount factor 0 0.893 0.797 0.712 0.636 0.567 0.507
Discounted cash flow (290) (257.2) 89.3 78.6 105.8 147.6 101.4
NPV = -£24,500
A negative NPV indicates that the project is expected to earn less than
the opportunity cost of capital of the finance providers. This firm
would serve its shareholders best by not proceeding with this project.
Good answers would also explain the omission of sunk costs (research
£20,000) and non cash-flow items (depreciation).
(a) The key points to be included in this explanation are:
• the time value of money
• discounting cash flows to a common point in time
• opportunity cost of investors’ funds
• minimum rate of return required on a project
• NPV = shareholder wealth increase
• NPV decision rule
• the significance of being cash flow-based rather than profit-based
• only incremental cash flows are considered.
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The relevant examples and discussion of discounted cash flow

appraisal techniques is covered in Chapter 13 of the subject guide and
pages 490–500 of Glautier and Underdown.
Question 17
The production manager… [For full question please refer to the examination
paper.]
(a) Cost the project for the production manager, clearly stating how you have
arrived at your figures and giving reasons for the exclusion of other
figures. (10 marks)
(b) State whether the company should tender for the project, giving the
reasons why and the price, bearing in mind that the competitor is
prepared to undertake the project for £30,000. (6 marks)
(c) Identify four non-monetary factors that should be taken into account
before tendering for this project. (4 marks)
This question involves analysis of a complex set of information in order
to determine the relevant costs for a decision on acceptance of a
special job. This involves recognition of relevant, incremental and
opportunity costs and setting aside of any sunk costs or costs not
relevant to the decision. Students should note that the requirement
asks for an explanation of each of the figures used. Good answers
should explain why the individual costs were or were not included in
the calculations. Question 11.2 on page 162 of the subject guide gives
a good example of this type of problem.
The following provides a summary of the calculations and explanations
required.
(a) Relevant costs of the project
£
Material A (1,750)
Material B 8,000
Direct labour 7,000
Net cost of machinery 4,750
Relevant cost 18,000
Contract price 30,000
Contribution 12,000
Notes:
There is a saving in material costs of £1,750 if material A is not used.
The actual cost of material B represents the incremental cost.
The hiring of the labour on the other contract represents the additional cash flows of
undertaking this contract.
The net cost of purchasing the machinery represents the additional cash flows associated with
the contract.
Supervision and overheads will still continue even if the contract is not accepted and are
therefore irrelevant.
(b) The report should indicate that the costs given in the question do
not represent incremental cash flows arising from undertaking the
contract. Incremental costs will provide an additional contribution
which will result in an increase in profits. Assuming that the
15

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company has spare capacity and that a competitor is prepared to

accept the order at £30,000 then a tender price slightly below
£30,000 would be appropriate. The price given by the production
manager includes non-relevant costs.
c) Before accepting the contract the following non-monetary factors
might be considered.
i. Is there sufficient spare capacity to undertake the project?
ii. Is the overseas customer credit worthy?
iii. Has the workforce the necessary skills to undertake the project?
iv. Is the contract likely to result in repeat business with the
customer?
Students may have identified other relevant issues and appropriate
marks would be awarded. However answers which simply repeated the
figures and explanations in (a) would not be sufficient.
16

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AC1025 2008-Principles of Accounting Main EQP and

StuDocu is not sponsored or endorsed by any college or university

This paper is not to be removed from the Examination Halls

UNIVERSITY OF LONDON 279 0025 ZA

Friday, 16th May 2008 : 2.30pm to 5.45pm

© University of London 2008

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Answer six questions from this section (5 marks each).

1. Distinction is often made between financial and management accounting. Briefly

(2) Motor vehicles

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Distribution costs vary according to whether delivery is made to a central warehouse or

Silk Musk Opia

Xebec’s fixed costs are £150,000 per year.

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The £150,000 of initial expenditure is treated as a fixed asset, to be depreciated on a

(b) Calculate the payback period for the project.

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(questions continues on next page)

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(2) Depreciation is to be provided on fixed assets at the following rates:

Plant and equipment 10% on cost

Draft a brief email, without any figures, in response to the director.

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Answer two questions from this section (20 marks each).

(question continues on next page)

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The following further information is available:

Cost Accumulated Net

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Standard cost for cleaning a boat

Actual results for May 2008

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16. Yawl Ltd is considering the launch of a new product.

Market research has been undertaken at a cost of £40,000, paid in 2008.

An investment of £480,000 in capital equipment on 1st January 2009 would be required

The company’s cost of capital is 12% per year.

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Downloaded by Mingun Jeon ([email protected])

Downloaded by Mingun Jeon ([email protected])

This paper is not to be removed from the Examination Halls

UNIVERSITY OF LONDON 279 0025 ZB

Friday, 16th May 2008 : 2.30pm to 5.45pm

© University of London 2008

Downloaded by Mingun Jeon ([email protected])

Answer six questions from this section (5 marks each).

1. Distinction is often made between financial and management accounting. Briefly

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Budgeted volume 6,000 units

During July 8000 ‘Adams’ were actually sold for £40,000.

i. Sales price variance.

(a) What is the break-even point in units?

(b) What is the margin of safety in units?

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(a) Non-linear variable costs.