ACCOUNTING UNIT 2(THEORY)

1.(Jan/15)

Answer: IAS1 states additional line items in the Statement of comprehensive income, may be required when
necessary to explain elements of financial performance. Treatment is required by law (The Companies Act
validates IAS) When items are material, they should be disclosed separately either on the face of the accounts, or
in the notes. The items need to be disclosed by virtue of their size, or incidence.
Benefits
This will benefit users of accounts because they can see that the expense or revenue of the Exceptional Item will
not be expected to be repeated regularly in the future. Although in the normal line of business the Exceptional
Item should be disclosed because of its size. This allows the reader to predict more accurately future expected
performance. This may help future potential investors / shareholders trade payables banks with decision making.
Should be beneficial if required to be shown by IAS / FRS
Disadvantages
Adds more figures and details to the accounts so makes them more difficult to understand.
More time and money spent producing accounts.
Competitors may gain an advantage if they see this detail in the accounts.
Maximum for arguing only one side.
Evaluation :Should conclude that it is beneficial to disclose Exceptional Items.

2. Recommend changes to the allocation of overtime to each member of staff that would improve the
performance of the department.
Answer: Susmita is not efficient and needs overtime to fulfil quota so suggest reducing overtime. Zahir is inefficient
– does overtime and still cannot meet quota, suggest reducing overtime. Mohon is inefficient – does not meet
target, do not give overtime to him. Chadni is very efficient, surpasses quota in normal time, suggest give overtime
to her. Rubia meets deadline so is efficient – can be given overtime .
3. Evaluate the performance of a department for the first week of January, including recommendations for the
future of this department.
Answer:
Performed poorly.
Variances are adverse reasons are inefficient labor or expensive material.
Labor efficiency – could improve training, especially to Mohon, Susmita, and Zahir.
Labor rate – pay overtime at standard rate, especially if 120 targets not met.
Material usage – better training of staff or buy better quality material or new machinery.
Material price – look for alternative suppliers √ or negotiate better prices or pay quickly to ensure discounts.
Performed well.
Section may be efficient; it is just that the standards set are unrealistic. They are not reviewed regularly, in which
case review and change standards. Some workers are efficient and meet or surpass targets i.e., Rubia and Chadni.
Overall, the department has met its production target.
Conclusion: the department has performed poorly.
4.
a. Define the accounting term Goodwill.
b. State two reasons why goodwill may occur.
Answer:
(I) Goodwill is a sum paid in excess of the fair / agreed value of net assets acquired when purchasing a business.
(ii) Any two from Existing customer base, Supply channels set up, Suitable location, skilled workers, Reputation of
business, Brand awareness, Loyal staff, Profitable business.

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5. Evaluate the use of issuing shares to finance the purchase of another company.
Answer:
For financing using shares
Does not require any use of cash which would be a drain on liquid resources.
If the market thinks the deal is a good one the value of all shares in the buying company will rise, keeping
shareholders happy.
Improves gearing ratio.
No need to payback shareholders
No capital repayment required unlike loans.
Dividends only need to be paid when profits are healthy unlike interest payments on loans that must take place.
No need to offer collateral.
Against financing using shares
If the market thinks the deal is a bad one the value of all shares in buying company will fall, making shareholders
unhappy.
Memorandum of Association may mean it is not possible to issue more shares or may need to get approval from
Stock Exchange Council to alter Memorandum and issue more shares.
Number of shareholders in buyer rises so dilution of powers of existing shareholders.
More dividends will be paid to a greater number of shareholders √ which may result in lower dividends per share.
Issuing of shares results in extra costs etc.
Conclusion
Financing purchase of another company is good/ not good idea.
6.
How to evaluate a project using the net present value method?
Answer:
Case for Project
Net cash flow is positive from year 1/every year.
NPV will be positive very soon /Year 6
Users will continue to rise in future.
Case against Project
NPV method states do not invest as NPV is negative.
NPV is a good method to use as it includes falling value of money over time.
Other Relevant Points
Other investment appraisal methods should be used e.g. payback or average rate of return.
How accurate are the predictions for costs, cost of capital, and revenues?
Is the 5 year payback time period appropriate? for a project such as this where users build up over the years.
Other investment projects available at present? More or less profitable?
Objectives/strategy of company? Is this investment in line with objectives?
Asia telecoms may face competition which may limit expansion.
Conclusion -
Company should not invest because of negative NPV after 5 years.
OR company should invest because NPV is likely to be positive after more than 5 years.

7.( May/14)
Evaluate the financial performance of Wavelength Asia plc for the year ended 31 March 2014 and the financial
position on 31 March 2014.
OR

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How do you evaluate the financial performance of a Limited company out of its Income Statement and
Statement of Financial Position?
Answer:
Strengths
Gross Profit is good at 41% of sales. Or more is good.
Net Profit before tax is good √ at 16% of sales. Or more is good.
Profit for this year added to retained earnings is £1million, as much as all previous retained earnings.
Gearing is good at 31.4% .
ROCE = 25% which is very good
Weaknesses
Current ratio is poor at 0.87:1.
Acid ratio is poor √ at 0.62:1.
Working capital is negative/poor at £ (201 000)
Company has taken out a short term loan of £500 000 due to liquidity problems.
Company has tax bill of £399 000 to pay in 30 days, but only £125 000 in the bank.
Conclusion –the limited company has had a good trading year but has liquidity problems.
8.
Evaluate whether the directors of Grecian Glass Limited should accept the offer from Hellenic Glass Limited.
Or
What factors should be considered in accepting an offer in case of Marginal Costing.
Answer:
For Accepting Offer
Grecian could buy for £35 and sell for £41 so making a profit / positive contribution of £6 per item. This may realize
a total profit of £300 if all are sold.
May allow Grecian to meet ALL orders promptly which keeps customers happy.
Demand may increase still further, and Grecian can meet this increase.
Avoid production problems.
Against Accepting Offer.
Marginal costing theory would say do not accept buying for £35 when business can make for £30 as this would be
£5 more expensive.
Grecians are only 15 items short on meeting an order, so do not need 50 items, as this gives an extra 35 items.
There may not be any demand for the extra 35 items. There may not be any storage space for the extra 35 items.
The increase in demand for week 16 may be temporary√ so more than 35 items may be left unsold. quality issues
Hellenic is interested in a regular/long term contract which may be problematic.
Conclusion Grecian Glass should / should not accept contract.

9.
Explain
(I) Two advantages to a company of redeeming Ordinary Shares.
(ii) Two disadvantages to a company of redeeming Ordinary Shares.
Answer:
Advantages of redeeming shares:
Company may have excess/large amounts of cash, which they feel would be best used / no better use than
redeeming shares.
Less funds will have to be paid out in the future in terms of dividends.
Certain ratios will improve, e.g., return on Capital Employed, Earnings per share. This will make managers and
directors and company look better.
The share price will rise as fewer shares are on the market.
Disadvantages of redeeming shares:
Drain on company’s liquid resources. i.e., cash and cash equivalents.
Liquidity ratios will worsen. e.g., Current ratio, and Acid ratio

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Gearing ratio will worsen. As Debts is a larger percentage of capital employed.

The company’s Statement of Financial Position has a smaller equity base which gives the impression of a smaller
company.

10.
Explain the following terms, including how each is created:
(I) Reserves
(ii) Provisions
(iii) Liabilities
Answer:
Reserves
Revenue reserves are appropriation of retained profit i.e., created after net profit has been calculated. E.g.,
General reserve
Capital reserves may arise for a specific reason. E.g., issuing shares at a premium, or revaluing a non-current asset,
or redeeming own shares without an issue of new shares.
Provisions
Provisions are amounts set aside before arriving at net profit e.g., for depreciation. Provisions reduce the value of
assets. The reason for the provision will be specific e.g., for damages in a court case, but the amount of the
provision would be an estimate.
Provisions follow the concept of prudence.
Provisions enable a true and fair view to be shown/using matching concepts.
Liabilities
Liabilities are debts that have been incurred by the business and must be paid.
Short term (current) liabilities must be paid back within one year, e.g., trade payables to suppliers.
Long term liabilities are to be repaid in a term greater than one year. E.g., long term bank loan.
11.
Evaluate budgets as a management tool for control.
Answer:
FOR Budgets as a tool for management control
Some costs are under management control e.g., rate paid to direct labor.
Budgets allow business to see how a level of costs e.g., direct labor impacts on profit. This may result in
management deciding on an appropriate level of pay rise.
Variances can be analyzed, and remedial action taken.
Budgets are good motivators especially where staffs meet targets/bonus payments etc.
Budgets help coordination within the business.
AGAINST Budgets as a tool for management control
Some costs are out of management control e.g., commodity prices such as sugar.
Some figures/costs may change, so drawing up budgets is a waste of time and money.
Need to employ a specialist so wage rises.
Conclusion: Budgets are a useful tool for management control.
12.
Explain why an adjustment for depreciation charged is added in a Cash Flow statement.
Answer: Depreciation is a noncash item, which has been deducted from profit.
13.
Evaluate the performance of Chang Tao Stores plc concerning liquidity, over the financial year ended 31 March
2014.
Answer:
Liquidity handled well.
Positive cash and cash equivalent balances √ at start and end of year.

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Payments to purchase shares in other companies, seemed to have been entirely financed by issue of shares and
debentures (long term finance).
Operations are making a profit and generating funds.
Low level of dividends appears to have been paid, so cash not leaving the company.
Liquidity not handled well.
Cash and cash equivalents has decreased over the year. Fall in cash is worrying , especially as company has stores,
which should be taking in cash.
Issue of shares and debentures not enough to finance purchase shares in other companies.
All of Net cash from Operating activities may have been used buying non-current assets.
Conclusion Liquidity has been handled badly.

Question-14.(Jan/14)
Evaluate the raising of capital for a plc by issuing a debenture instead of taking out a bank loan.
Answer:
Advantages of debentures
Debenture may have a lower rate of interest which would have been fixed on issue. The bank loan may have a
higher rate if there is a period of high or rising interest rates.
Interest only has to be paid on a debenture every 6 months, whereas bank loans require monthly repayments. The
debenture therefore allows the company some breathing space which is useful if trading is seasonal or going
through a period of low sales.
Debenture may be for a longer period of time, which may benefit company, especially if to finance a long term
project.
Bank may wish to be involved in decision-making etc. if loan given e.g., ask for a seat on the board.
Interest on both is allowable for tax.
Both have the same effect on gearing i.e., worsens.
Both would require assets to be offered as security/collateral.
Bank loan could be renewed/refinanced to be the same length as a debenture.
Neither result in dilution of ownership so share price may not fall
Advantages of bank loans
Interest rate may be lower.
Bank loan is likely to be for shorter period so less interest may be paid.
Monthly repayments may be preferable to larger six-monthly repayments.
Bank may have good relationship with company and give advice etc.
Debenture holders may wish to be involved in decision-making/control e.g., ask for a seat on the board.
Conclusion
Debentures / bank loans are better debentures / bank loans are better.
Question-15.
Briefly explain.
(I) Two advantages to Kolatun Power plc of redeeming some of the 4% Redeemable Preference shares.

(ii) Two disadvantages to Kolatun Power plc of redeeming some of the 4% Redeemable Preference shares.
Answer:
Advantages
Redeemable shares can be bought back from shareholders, so will mean less funds leave the company in the form
of dividends each year leaving more funds in the business for operations or paying dividends to ordinary
shareholders.
Buying back debt means that the gearing ratio could improve/reduce, which reduces risk.
Statement of Financial Position looks stronger which could help attract investors.
Capital may not be needed.
Return on Capital employed will rise.
Disadvantages

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Buying back the shares means a large outflow of funds at this time.
Administration costs of buying back shares are high e.g., staff time, bank fees, postage etc.
Preference shareholders may be unhappy and may not invest in the future.
Question-16. Evaluation of creating and utilizing Capital Redemption Reserve (CRR).
Answer:
Case For Case Against
CRR acts as a creditors’ buffer. Creating a CRR takes time and money and accounting
Capital base is maintained. expertise.
CRR is a Capital Reserve, so it prevents Reduces flexibility, as company may not be able to do
directors/shareholders from taking cash/ capital what they want to do.
out of the business, leaving little/nothing for e.g., redeem shares, if e.g., insufficient funds in revenue
creditors in the event of the company experiencing reserves.
liquidity/ trading problems. Conclusion
Cannot be transferred back to the Statement of Capital Redemption Reserve is worthwhile/ useful/
Comprehensive Income and then used to pay out effective.
dividends.
Presence of CRR may help a company obtain credit
or investment/ buying of company shares as
Statement of Financial Position appears stronger.
In certain circumstances e.g., redemption of shares,
the CRR must be created by company law therefore
should be of benefit.
CRR can be used for a bonus issue of shares.

17. Jahangir, the uncle of Imran, is also interested in investing in shares and has given Imran the following
advice.
“Do not buy the shares in Bengal Life plc at a market price of £2.00. You should buy the shares in Oceanic
Assurance at £2.25. They have a higher share price, so they must be a better share.”- Advise Imran as to the
value of this statement.
Jahangir also states, “There is only one ratio that is important and worth knowing about, and that is the
dividend per share.” - Evaluate this statement on behalf of Imran.
Answer:
A higher share price does not mean a “better” share. The nominal or face value of the share needs to be
considered. Also, the total number of shares in the company. Also important is the movement in the value of the
share – is it moving up or down? Especially important is the demand and/or future/confidence of the market in
the share √ – if Imran buys now, will he make a profit or a loss on the share. √ Many factors both inside the
company and outside the company can affect the price of a share.
For the statement
Investors are usually interested only in the return on their investment, which is shown in the dividend per share,
which is used to calculate how much the investor receives. Investors are more concerned with what they actually
receive, √ than how easily the company can afford to pay the dividend, √ as shown by the dividend cover.
Against the statement
Investors also have a capital gain when the share price rises, which is partly shown in the Price/Earnings ratio.
Dividend yield shows the return for every pound invested, which is more important than dividend per share.
Earnings per share is an important ratio, as it shows how much profit is being generated for each share invested.
These profits are then used to pay dividends. Other ratios concerning profitability and liquidity etc. are important,
as they show how well the firm is doing.
Conclusion
Dividend per share is not the only important ratio worth knowing about.

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Question-18.
At the end of Month 1, actual sales of vending machines have only been half (50%) of budgeted sales.
Evaluate whether Venture Vending Limited should draw up a new set of budgets to replace the existing budgets
for Months 2 and 3.
Or what steps can be taken if a budget prepared is wrong or faulty.
Answer:
For Decision to draw up new budgets.
Existing budgets are not likely to be accurate so there is little point in sticking with them.
Good budgeting should be flexible, so changes should be made to this ongoing process with regular reviews taking
place.
A new business should not draw up a three month budget, as it is likely to be unsure of the predicted figures, not
having any past figures to rely on.
A new budget would help planning / changes e.g. reduce the purchases for each month.
New budgets may have targets staff can reach √ which will increase motivation.
Against Decision to draw up new budgets
Will take time and money to draw up new budgets.
Variance analysis could be carried out and actions taken to meet original budgeted figures.
The new budget will only be estimates anyway, so may not be accurate.
The only budget directly affected by a lower sales level is trade.
Receivables so there may be a need just to draw up trade receivables.
This is a new business, and sales may pick up to meet month 2 and 3 in the original budget, making it accurate.
19.
Suggest one reason for each of the following variances and explain the actions could take on the:
(I) Material usage variance
(ii) Material price variance.
Answer:
Material Usage variance
Could be caused by poor quality materials resulting in a lot of wastage.
Action to solve the problem could be to change supplier or insist on a certain level of quality. Perhaps insert
penalty clauses into supplier’s contracts for quality.
Or wastage caused by poor quality labor. So, train labor better, or hire better quality labor, or raise wage rates to
attract better quality labor or improve quality control.
Material Price variance
Could be caused by suppliers charging a high price.
Action could be Purchasing department must negotiate a lower price.
Or change to supplier with lower price. or buy lower quality materials.
Or achieve discount by bulk buying or prompt payment.
20.
Vandeloos Fencing Limited applied management by exception to the figures for April 2013.The cost accountant
decided to ignore the labour variance, but to investigate the material variance. Evaluate the decision of the cost
accountant to ignore the labour variance, but to investigate the material variance.
For the decision
Material variance is larger / labour variance is smaller .
Labour variance is £317.20 adverse, √ which is £380.32 less than the adverse material variance of £697.
The policy is to investigate variances over a particular limit e.g. £500.
The labour variance is only 3.56%, √ whereas the materials variance is 15.3% which is much bigger.

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Management by exception tries to make the management time cost effective, so no time is wasted investigating
small variances.

Against the decision

It is possible that all costs, including labour could be reduced so the adverse variance should be investigated.
If you ignore an adverse variance below a certain limit, the cost could “creep up” each year without any action
being taken.
It is possible that any reduction in costs after investigation is cost effective i.e., could be greater than management
time spent.
21.
At a board meeting at the end of the year, the Marketing Director stated, “I am concerned about the liquidity
position of the company.”
(b) Evaluate the statement of the Marketing Director, concerning the liquidity position of Channel Oil plc, on 31
December 2012.
FOR statement
Current ratio is 2 508 600: 293 250 which is 8.56: 1. This is way above / too high ideal ratio of 1.5/2: 1.
Too much working capital is tied up in stocks of oil. Acid ratio is (2 508 600 – 2 273 600): 293 250 which is
0.80:1.This is below/ too low the ideal ratio of 1:1. A tax bill of £198 000 must be paid in 30 days but there is only
£131000 Cash and cash equivalents.
AGAINST statement
A current ratio of above 2:1 is better than below 2:1.If the business can sell stocks quickly, and then liquidity
problem can be avoided.
The nature of the industry may mean that it is normal for large stocks of oil to be carried.
Working capital is £2 215 350 which is a healthy figure. Bank balance is positive at £114 000 which can be used to
pay debenture, loan interest, and settle trade and other payables.
Conclusion: Channel Oil plc has a liquidity problem.
22.
“I am unhappy about the low level of dividend paid. I can see a large figure in the Total Equity column – could
we use that to pay dividends?”
Another shareholder stated at the meeting. “I think that the company should have issued bonus shares in
September instead of a rights issue. This would have been better for Med Isle Travel plc.” Evaluate this
statement on behalf of Med Isle Travel plc.
Answer:
Share Capital, Share Premium, and CRR are capital reserves and cannot be used to pay dividends. Total of 1290
cannot be used for dividends. Retained earnings, General, and Asset Replacement are revenue reserves and can be
used to pay dividends. Total of 104 can be used for dividends. However, retained earnings have little left, and
General reserve has nothing. It is only the fact that the General reserve has been transferred back, that has
enabled the present dividend to be paid.
Asset Replacement could be transferred back to Retained earnings. However, as more has been transferred into
Asset Replacement ,it is an asset needs replacing soon.
23.
A shareholder stated at the meeting. “I think that the company should have issued bonus shares in September
instead of a rights issue. This would have been better for Med Isle Travel plc.”-Evaluate this statement on behalf of
Med Isle Travel plc.
Answer:
For statement
Company will not have pay cash dividends, which is beneficial if a liquidity problem. Bonus shares makes the
Statement of Financial Position look like that of a larger company which may help to raise finance etc. Original
shareholders would have been kept happy and therefore quiet as they would have received free shares, and
these shares are eligible for dividends. Quicker/cheaper to issue bonus shares.
Against statement

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Bonus shares bring in no cash for the company but a rights issue does bring in cash which is used to run the
business/ pay bills or expand the business or strengthen the company Statement of Financial Position Issue of
bonus shares sees share price fall more than the possible fall if a rights issue Bonus shares will result in more
shares eligible for dividends so dividend per share likely to fall.
Conclusion: Bonus issue would not be better for company
Question-23 (Jan/18,2e)
At a Board meeting, the Chief Executive stated, “Last year, the dividend per share was 2.5 pence per share. It is
important that the dividend per share increases every year.” Evaluate the statement made by the Chief Executive.
Agree with statement.
Ideally directors would like to reward the shareholders with an ever-increasing dividend per share each year.
This would keep shareholders happy. This would keep directors in their posts, including when they come up for re-
election by shareholders. This may also signify that the company is continually performing increasingly well.
Against the statement
Directors should only pay what they feel is the appropriate amount in dividends. This may be less than
they paid in the previous year. This may be because profits are down in a year, and directors wish to be.
cautious. It may be that if dividends are to increase in a year, they are greater than the amount in revenue
reserves. Or it may be that dividends are getting too large, and the shareholders returns are starting to be
unrealistically high, given the financial position of the company. Or it may be that the directors wish to keep some
funds in reserve in case of a future downturn, or for an investment opportunity, or to replace non-current assets.
etc.
Decision
The statement is unrealistic.
Question-24(june18/5e)
The financial statements were presented to the shareholders at the Annual General Meeting. One
shareholder stated at the meeting “I think the dividend policy of the company is not very generous to
the shareholders.”
Evaluate the statement made by the shareholder.
June 2021 (THOERY)
1(b)
(b) Evaluate the role of the auditor in the corporate governance of a limited company. You must include
in your answer how the auditors’ concerns above should be addressed.
An auditor is an independent person or business, appointed and authorized to examine accounts and
accounting records, and state the result of their audit. Auditors are expected to pass comment on the
corporate governance of a company.
Corporate governance is the framework of rules and practices by which a board of directors ensures
accountability, fairness, and transparency in a company's relationship with all its stakeholders
(financiers, customers, management, employees, government, and the community).
The auditor will report on the corporate governance of a company by feedback to the Board of Directors
and in the Audit Report.
Case for the role of the auditor in corporate governance.
The auditor is an external person or business and should view all accounts, practices, procedures, and
company ethics from an independent viewpoint. This may allow the board to have feedback from a
different, external viewpoint rather than from their own, internal position.
There is a UK Corporate Governance Code and auditors should examine if the company is complying
with the Code. Companies must “comply or explain.” They may be able to justify an alternative approach
in writing. The Code has 5 areas, and each area may require a comment by the auditors when auditing
Sofa So Good plc.
Section A: Leadership – the company should be led by an effective board, who are responsible for
success of company. There should be a clear division of responsibilities, with non-executive directors

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who should challenge. The Chairperson is responsible for the Board. No individual should be able to
make all the decisions. The auditor should advise Sofa So Good plc that the Chair is not also the CEO.
Section B: Effectiveness – the board should have an appropriate balance of skills, experience,
independence, and knowledge to carry out duties effectively. Appointments to the board should be
formal, rigorous, and transparent. There should be induction for new board members,
self-evaluation, and re-election. The auditor should advise Sofa So Good plc that the Code states that
“board members should be re-elected at regular intervals” and also be rotated.

Section C : Accountability The board should present a balanced and understandable assessment of the
company’s position and prospects. The board is responsible for risk and internal controls and should
have sound risk management. For Sofa So Good plc, this risk management should apply when taking
over another company. If the board were interested in taking over another company, thorough checks
need to be carried out on the other company, to verify financial statements etc. It would be the funds of
the shareholders that would be put at risk if these checks were not made.
Section D: Remuneration Levels of remuneration should attract, retain, and motivate directors of the
required quality. However, a company should avoid paying more than is necessary. Director’s
remuneration should be partly linked to individual and corporate performance. No director should be
involved in deciding their own remuneration which is not the case for Sofa So Good plc.
Section E: Relations with shareholders the board is responsible for ensuring a satisfactory dialogue with
shareholders takes place, based on mutual understanding of objectives. Investors should be encouraged
to participate at the Annual General Meeting. Appropriate notice needs to be given to shareholders of
Sofa So Good plc which will allow them to attend the AGM if they wish.
Case Against the role of the auditor in corporate governance.
Boards, including Sofa So Good plc, should maintain an appropriate relationship with the company’s
auditor. This may be difficult to put into practice. The auditor may be reluctant to criticize the company’s
corporate governance because the company is a lucrative source of income. The auditor may also be
carrying out other, consultancy work with the company which is charged at a high rate. The auditors will
be reluctant to lose fees for audit and management consultancy. This may result in poor corporate
governance continuing into the future.
Suggestions have been made that different auditors should be used for audit work (including corporate
governance) and management consultancy.
Other suggestions made have included the establishment of a separate, government funded body that
oversees the corporate governance of companies.
Conclusion
The role of the auditor in corporate governance is appropriate and beneficial.

QUESTION-2

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The Accounts Assistant stated, “This is strange, I thought the variable overheads would be likely to
change and the fixed overheads would stay the same.”
(d)
(I) Explain why the actual fixed overhead figure may be different from the budgeted fixed overhead
figure but the actual variable overhead figure is equal to the budgeted variable overhead figure.(4)
Fixed overheads do not change with output, but they do change over time.
Fixed overheads are often outside the control of the company / production manager.
Variable overheads will rise when output increases, but output was exactly as budgeted.
Variable overheads are costs that can be controlled by the company/production managers.
(ii) State two examples of fixed overheads that may decrease over time. Give a reason why each of
these may decrease.(4)
Rent may decrease when the lease is renewed if there is a decrease in demand for properties in the area Managers
salaries may decrease if there are fewer managers this year / some managers have been made redundant / left
the company.
Depreciation may decrease if there are less non-current assets after some have been sold.

e) Evaluate the performance of Galana Sawmill Limited in Week 43, considering any changes that may
be beneficial for the company in the future.
Good performance
Material price variance is favorable by £20. This may show that the purchasing department of Galana
Sawmill Limited may be doing a good job and negotiating a good deal with the tree supplier. However, it
could just be market forces that have reduced the price.
The fixed overhead variance was favorable. However, not enough information is given as to why this is
the case.
Planned output of 480 timber lengths for the week was achieved.
Poor performance
Output was only achieved with 11.5 hours of overtime which is paid at a higher rate.
Labour efficiency variance is adverse by £110. Labour rate variance is adverse by £55.
Adamu manages to reach his target within the 40 hours. Why is it that the other three workers cannot
meet their target? Are they inefficient? Or they are working slowly in order to receive the overtime
payment at the higher rate? Is Adamu a more skilled worker? Have the other three workers received
sufficient training?
It may be that a better method of payment in the future is to switch to piece rate i.e., pay the worker for
each timber length produced. This may make workers more efficient and work quicker, reducing the
need for overtime. However, it may also result in workers rushing and the quality of finished product
may suffer.
Material usage was adverse at £19.50. An extra tree had to be purchased. Each worker should use 10
trees per week. Has one worker used 11 trees, or has more than one worker had to use the “extra”
tree? Were all the trees of the required quality?
Other points
Variable overheads had no variance. This may suggest that budget setting was accurate. The total
material variance was only £1 favorable which supports this.

QUESTION-3
(b)(I) Explain one advantage of a decrease in inventories.(2)

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Advantage: Lower costs of storing inventory e.g. rent, insurance, security

(ii) Explain one disadvantage of a decrease in inventories.
Disadvantage Less/narrower range of inventory which means unexpected orders or large orders cannot be met.
(d) Explain one advantage of a decrease in trade payables.
An advantage of a decrease in trade payables is that the credit rating of the company may improve if they pay
suppliers promptly. (1)AO1 This will allow them to obtain credit more easily in the future.
(g) State two reasons, excluding receiving dividends, why Maldisun plc would buy shares in other companies.
Share price may rise in the future and profit may be made.Company may wish to take control or have a larger say
in another company.
At a Board Meeting of Maldisun plc, a director made the following statement. “The increase in cash and cash
equivalents in the year was quite small. This increase could have been much bigger if we had not paid £23 million
of dividends in the year.”
(k) Evaluate whether it is appropriate for Maldisun plc to pay £23 million in dividends in the year ended 31
March 2021.
For the payment
• Shareholders are kept happy and kept onside with the company. This may be important as the share issue may
have diluted the existing shareholders ownership.
• The dividend cover is over 2 times so the company can afford to pay the dividends.
• Preference dividends must be paid.
Against the payment
• £23 million of cash will leave the company. This cash could be put to better use within the company. E.g., fund
expansion
Other points
• It is not known how many shares the company has issued so it is not possible to know the dividend per share.
• The market price of the share is not given so it is not possible to calculate the dividend yield.
Conclusion
• It is appropriate to pay £23million in dividends for the year. Conclusion should follow argument given above.
QUESTION-4
(d) Evaluate the option of moving the magazine to an electronic only edition.

QUESTION-5
(b) Explain two reasons why a redemption of shares may take place.(4)
The company may not need this capital to operate. The company may be generating sufficient funds from trading.
Having fewer shares will mean remaining shareholders may receive greater dividends. (1) AO1 This will please
these shareholders.
Buying the shares will improve some ratios. These could be return on capital employed or earnings per share.
At a Board Meeting on 1 May 2021, the Board decided to raise more capital. The Board considered the
possibility of an issue of a debenture to raise capital.
(c) Evaluate the issue of a debenture as a method to raise capital by Tangail Logistics plc.
For the issue of debentures
Debentures may be issued at an interest rate lower than other sources of finance to Tangail Logistics plc such as
bank loans.
It may be that bank loans are not available to Tangail Logistics plc especially if they are making trading losses.
Against the issue of debentures
Debentures may be issued at an interest rate higher than other sources of finance to Tangail Logistics plc such as
bank loans.
Tangail Logistics plc may have to offer non- current assets as security to the debenture holders. These would be
forfeited if Tangail Logistics plc fails to pay the interest or fails to pay back the debenture. The security could be
property or vehicles which would seriously affect the running of the company.
The debenture would be repaid in one large instalment. It may be difficult for Tangail Logistics plc to raise this large
sum all at one time.

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Conclusion
Debenture is advantageous to use as source of finance when cost of capital is lower, and the company can make
considerable amount of profit to cover its interest.

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