Cambridge International AS & A Level Accounting workbook: answers to example questions Cambridge International AS & A Level Accounting workbook © David Horner/Hodder & Stoughton Ltd 2021 51 3 Any three from: Cost includes: purchase price of any materials; import taxes; transport costs; handling costs. Costs of conversion comprise: direct labour, other direct expenses and subcontracted work; production overheads; any other relevant overheads. 4 i Operating activities ii Investing activities iii Financing activities 5 An adjusting event happens after the end of the financial year that provides further evidence of conditions that existed at the end of the reporting period. If this event would materially affect the financial statements, the financial statements should be changed to reflect these conditions. A non-adjusting event happens after the end of the financial year indicative of a condition that arose after the end of the reporting period. No adjustment is made to the financial statements for such events. If material, they are disclosed by way of notes to the financial statements. 6 i Expected usage of the asset, its capacity or output. ii Expected physical wear and tear. iii Technical or economic obsolescence. iv Legal or other limits imposed on the use of the asset. 7 Any three from the following: • Fall in the market value of the asset. • Obsolescence caused by change in technology. • Economic downturn. • Damage, resulting in the asset’s fair value falling or future cash-generating ability falling. • Restructuring of the business. 8 Contingent liabilities are potential obligations of the business, i.e. where it may need to pay out an amount but the possibility is not certain. If the contingent liability is likely then a reference needs to be made in the notes to the accounts. If the contingent liability is unlikely to arise then it does not need to be mentioned. 9 Any research expenditure should be treated as revenue expenditure in the statement of profit or loss. Development expenditure can be treated as revenue expenditure but can also be treated as capital expenditure (i.e. as an intangible asset) if the business can demonstrate that the asset will generate future economic benefits. 10 i Integrity ii Objectivity iii Professional competence and due care iv Confidentiality v Professional behaviour 11 A qualified report is where auditors do not believe the financial statements give a true and fair view of the company’s financial position whereas an unqualified report is where auditors believe the accounts have been prepared correctly and present a true and fair view of the company’s financial position.
Cambridge International AS & A Level Accounting workbook: answers to example questions Cambridge International AS & A Level Accounting workbook © David Horner/Hodder & Stoughton Ltd 2021 52 12 For management purposes, the financial statements are used by owners or managers to highlight areas of good practice and to find areas within the business that could benefit from improvement. For stewardship purposes, the financial statements show any providers of finance how the funds that they provided are being used, for example, being used wisely or inappropriately. 3.3 Business acquisition and merger 1 A business merger is where two businesses combine to form a new business that consists of the two previous businesses. Acquisition is where one business takes over another business and the business being acquired is incorporated into the original business. 2 Goodwill arises when a business is acquired by another business for a price in excess of the fair value of the net assets being taken over. 3 Roach and Morton Statement of financial position at 1 January $ $ ASSETS Non-current assets 57 000 Current assets Inventory 11 800 Trade receivables 6 700 Cash and cash equivalents 26 234 44 734 Total assets 101 734 CAPITAL AND LIABILITIES Capital: Roach 45 000 Capital: Morton 45 000 90 000 Current liabilities Trade payables 11 734 Total capital and liabilities 101 734 4 $ Capital 325 000 Less: cash (820) Net assets acquired 324 180 Purchase consideration (400 000) Goodwill 75 820
Cambridge International AS & A Level Accounting workbook: answers to example questions Cambridge International AS & A Level Accounting workbook © David Horner/Hodder & Stoughton Ltd 2021 53 5 $ ASSETS Goodwill 40 000 Non-current assets 340 000 Current assets 20 200 Total assets 400 200 EQUITY AND LIABILITIES Capital and reserves Ordinary shares of $1 each 270 000 Share premium 25 000 Reserves 65 500 Total equity 360 500 Current liabilities 39 700 Total equity and liabilities 400 200 6 Bainbridge Ltd Statement of financial position at 1 July 2021 $ ASSETS Non-current assets Goodwill 131 205 Premises 450 000 Machinery 65 000 Vehicles 15 000 661 205 Current assets Inventory 20 000 Trade receivables 17 500 Cash and cash equivalents 22 250 59 750 Total assets 720 955 EQUITY AND LIABILITIES Equity Ordinary shares of $1 each 700 000 Current liabilities Trade payables 20 955 Total equity and liabilities 720 955
Cambridge International AS & A Level Accounting workbook: answers to example questions Cambridge International AS & A Level Accounting workbook © David Horner/Hodder & Stoughton Ltd 2021 54 7 a Realisation account $ $ Property 300 000 Lisbie Ltd 510 000 Equipment 90 000 Discounts received 3 000 Motor cars (less the two taken) 30 000 Inventory 45 000 Dissolution costs 15 000 Discounts allowed (24 000 – 21 500) 2 500 Capital: Arthur 20 333 Capital: Luscombe 10 167 513 000 513 000 (i.e., a profit on dissolution of $30 500 is divided in a 2:1 ratio to the partners) b Capital accounts Arthur Luscombe Arthur Luscombe $ $ $ $ Motor cars 18 000 12 000 Balance b/d 210 000 240 000 Lisbie Ltd 150 000 150 000 Current accounts 27 000 24 000 Bank 89 333 112 167 Realisation account 20 333 10 167 257 333 274 167 257 333 274 167 8 Any two advantages from: • larger market share • more control over pricing • economies of scale • benefits of specialization • larger profits. 9 Acquisition is a good idea: • Larger market share. • Save costs as no need for duplication of functions. • Economies of scale. • Less pressure to keep prices low. Acquisition is a bad idea: • Diseconomies of scale. • Clash of corporate culture. • Costs of acquisition. • Take over may be resisted. Overall: • Depends on how different the businesses are. • Would need to consider how big Arefin Ltd actually is. • Consider whether it would lead to economies or diseconomies of scale.
Cambridge International AS & A Level Accounting workbook: answers to example questions Cambridge International AS & A Level Accounting workbook © David Horner/Hodder & Stoughton Ltd 2021 55 3.4 Computerised accounting systems 1 Any three advantages from: • Speed: Data entry into the system can be carried out much more quickly than if done on paper. Calculations are performed automatically. • Accuracy: If the original entry is correct, there are fewer areas where an error can be made since the data entry made is replicated throughout the system, and human error in calculations is avoided. • Availability of information: Accounting records are automatically updated once information is keyed in. Reports are produced automatically. • Taxation returns: Information required by tax authorities is available at the touch of a button. 2 Any three disadvantages from: • Hardware costs: The initial costs of installing a computerised accounting system can be expensive, and the hardware will inevitably need to be updated and replaced on a regular basis, leading to further costs. • Software costs: Accounting software needs to be kept up to date, which can be a long-term financial commitment. • Staff training: Staff will need training to use the software and training updates each time the system is modified. • Opposition from staff: Some staff may feel demotivated using a computerised system. Other staff may fear that the introduction of computers will lead to staff redundancies, which could include them. Changing to a computerised system can cause disruption in the workplace and changes to existing working practices may make staff feel uneasy. • Inputting errors: Staff may become complacent as inputting into the system becomes more repetitive and therefore, they may lose concentration leading to input errors. 3 a i Debiting the customer’s account in the sales ledger. ii Crediting the sales account in the general ledger. iii Inventory records show a decrease. b i Bank account is debited. ii Customer’s account is credited. 4 This would occur where the business runs a paper-based manual system of accounting at the same time as running the newly installed computerised accounting system. This is to ensure that there are no discrepancies in the data, and that if there are problems with the introduction of the computerised system, there is a back-up so that data is not lost. 5 Any three methods from: • A system of protective devices. • Each member of staff should have a unique password allowing access to their area(s) of responsibility within the system. • A period of parallel operation could be implemented. • Regular reconciliation of the cash book. • Maintenance of control accounts. • A trial balance can be produced more regularly. • Having a back up system.
Cambridge International AS & A Level Accounting workbook: answers to example questions Cambridge International AS & A Level Accounting workbook © David Horner/Hodder & Stoughton Ltd 2021 56 6 He should computerise his system: • He will make fewer errors. • It will make sure no unauthorised people can access his records. • Real-time reports on financial progress may be produced. He should not computerise his system: • If his premises are secure, then he should not have any security issues. • It may be costly. • If he is a sole trader, it may not be necessary if he does not have that much to record. Overall: • It will depend on the size of the business and number of transactions that need to be recorded. • Perhaps a less expensive system may be worth trying initially. • Consider if the ability to produce financial reports be useful for Stobbs. 3.5 Analysis and communication of accounting information 1 a Mark-up: 95.2% in 2025; 63.2% in 2024 b Gross profit margin: 48.8% in 2025; 38.7% in 2024 2 a Trade receivables turnover: 33 (32.27) days b Trade payables turnover: 73 (72.53) days c Inventory turnover: 59 (58.56) days d Rate of inventory turnover: 6.23 times e Working capital cycle: 19 (18.30) days f Net working assets to revenue: 7.26% 3 a Current ratio: 2.52: 1 b Acid test ratio: 1.76: 1 4 a Trade receivables turnover: 73 (72.32) days b Trade payables turnover: 81 (80.02) days c Inventory turnover: 55 (54.56) days d Working capital cycle: 47 (46.8) days 5 2023 2022 a Earnings per share $0.43 $0.37 b Dividends per share $0.08 $0.06 c Price earnings ratio 5.93 5.32 d Dividend yield 3.14% 3.05% e Dividend cover 5.38 times 6.17 times 6 Gearing: 42.2% in 2024; 28.6% in 2023
Cambridge International AS & A Level Accounting workbook: answers to example questions Cambridge International AS & A Level Accounting workbook © David Horner/Hodder & Stoughton Ltd 2021 57 7 2025 2024 a Gearing 29.7% 24.6% b Interest cover 4.3 times 4.6 times 8 a ROCE 9.90% b Gross profit margin 41.07% c Mark-up 69.69% d Profit margin 20.20% e Expenses to revenue ratio 20.87% f Operating expenses to revenue 16.86% g Current ratio 2.33 : 1 h Acid test ratio 1.58 : 1 i Non-current asset turnover 0.43 times j Trade receivables turnover 43 days k Trade payables turnover 51 days l Inventory turnover 40 days m Rate of inventory turnover 9.17 times 9 a Working capital cycle 32 days b Net working assets to revenue (%) 9.52% c Interest cover 6.04 times d Gearing ratio 27.32% e Earnings per share $0.10 f Price earnings ratio 17.16 g Dividends per share $0.03 h Dividend yield 1.69% i Dividend cover 3.46 times 10 Reasons to be concerned about the rise in gearing: • Interest payments may rise significantly. • Normally interest payments cannot be deferred. • Profits will increasingly be used to service debt. • If profits fall, the business may not be able to service the debt. Reasons not to be concerned with the rise in gearing: • Interest rates are low and look to remain low in many countries (though not all). • If profits are rising, then it may not present much of a risk. • Businesses should borrow money to exploit business opportunities as they arise. • Internal growth is slow and borrowing allows quick growth. Overall: • Monitor interest cover ratio: if low, then the gearing may be a problem. • Consider whether profits are rising faster than the gearing ratio. • Consider if there are other ways of financing expansion – e.g. share issues.
Cambridge International AS & A Level Accounting workbook: answers to example questions Cambridge International AS & A Level Accounting workbook © David Horner/Hodder & Stoughton Ltd 2021 58 4 Cost and management accounting 4.1 Activity based costing 1 Cost drivers are the activities that a business undertakes as part of the production of output which generate overheads (e.g., machine set-ups). 2 Cost pools are the accounts that collect the costs incurred by each activity undertaken. 3 $29 800 ÷ 250 = $119.20 per set-up 4 ($12 800 + $23 400 + $19 250) ÷ 2 360 = $23.50 per unit 5 a Cost driver rates: Machinery set-up ($65 420 /(25+56)) $807.65 Checking costs ($32 950/(12+18)) $1 098.33 Selling costs ($42 440 / (24+18)) $1 010.48 b Overheads to be apportioned: Overheads per product A ($) B ($) Machinery set-up ($807.65 x 25) 20 191.36 ($807.65 x 56) 45 228.64 Checking costs ($1098.33 x 12) 13 180.00 ($1098.33 x 18) 19 770.00 Selling costs ($1010.48 x 24) 24 251.43 ($1010.48 x 18) 18 188.57 57 622.79 83 187.21 6 Product S Product T Apportionment of overheads: $ $ Machine maintenance 75 000 15 000 Ordering costs 20 000 25 000 Production run costs 13 500 22 500 Overhead cost 108 500 62 500 Direct costs 6 250 000 1 250 000 Full cost 6 358 500 1 312 500 Full cost per unit 254.34 131.25 Note – machine maintenance costs are in the ratio (25 000 x 4) : (10 000 x 2)
Cambridge International AS & A Level Accounting workbook: answers to example questions Cambridge International AS & A Level Accounting workbook © David Horner/Hodder & Stoughton Ltd 2021 59 7 a Activity Inspection costs ($) Machine maintenance costs ($) Machine set-up ($) Selling expenses ($) Cost ($) 50 000 24 000 33 000 24 000 Cost driver (20 + 5) 25 (28 + 12) 40 (5 + 10) 15 (6 + 4) 10 Cost driver rate (50 000/25) 2 000 (24000/40) 600 (33 000/15) 2 200 24 000/10) 2 400 XJ3 MIM $ $ Inspection and packing (20 000 x 20) 40 000 (2000 x 5) 10 000 Machine maintenance costs (600 x 28) 16 800 (10 x 12 x 4000) 7 200 Machine set-up (2200 x 5) 11 000 (2200 x 10) 22 000 Selling expenses (2400 x 6) 14 400 (2400 x 4) 9 600 Total overheads incurred 82 200 48 800 b XJ3 MIM $ $ Direct labour cost (4 x 8 x 6000) 192 000 (3 x 6 x 4000) 72 000 Direct materials cost (12 x 8 x 6000) 576 000 (10 x 12 x 4000) 480 000 Overheads apportioned 82 200 48 800 Full cost 850 200 600 800 Full cost per unit (850 200/6000) 141.70 (600 800/4000) 150.20 Selling price (30% mark-up) 184.21 195.26 8 a Overheads total $131 000 Machine hours total 36 000 OAR $3.64 per labour hour b XJ3 MIM $ $ Direct labour cost 192 000.00 72 000.00 Direct materials cost 576 000.00 480 000.00 Overheads 87 333.33 43 666.67 Full cost 855 333.33 595 666.67 Full cost per unit 142.56 148.92 c XJ3 MIM $ $ Selling price (30% mark-up) 185.33 193.60
Cambridge International AS & A Level Accounting workbook: answers to example questions Cambridge International AS & A Level Accounting workbook © David Horner/Hodder & Stoughton Ltd 2021 60 9 Arguments for switching: • ABC provides more realistic costing information. • Helps to identify where and understand how overheads arise. • Helps to improve performance by replicating good practice identified in one department across other departments. • It helps in the preparation of estimates and quotes for other work. Arguments against switching: • Some overhead costs cannot easily be assigned to a cost pool. • Implementing a system of ABC is also a costly process because of its complexity. Overall: • Deciding how to apportion overheads will always involve a degree of subjectivity. • Often the differences in the actual figures are quite small. • It will require time spent on learning the new system. 4.2 Standard costing 1 $89 080 – $90 101 = $1 021 (Adverse) 2 $6 300 – $7 260 = $960 (Favourable) 3 a Total materials variance: (550 x $12.5) – (610 x $11) = $165 (Favourable) b Materials price variance: ($12.50 – $11.00) x 610 = $915 (Favourable) c Material usage variance: (550 – 610) x $12.50 = $750 (Adverse) 4 $201 890 – $189 600 = $12 290 (Favourable) 5 a Total labour variance: (1 850 x $9.30) – (1 920 x $8.50) = $885 (Favourable) b Labour wage rate variance: ($9.30 – $8.50) x 1 920 = $1 536 (Favourable) c Labour efficiency variance: (1 850 – 1 920) x $9.30 = $651 (Adverse) 6 a Total materials variance: (1 880 x $6.30) – (1 910 x $6.50) = $571 (Adverse) b Materials price variance: ($6.30 - $6.50) x 1 910 = $382 (Adverse) c Material usage variance: (1 880 – 1 910) x $6.30 = $189 (Adverse) d Total labour variance: (250 x $8.75) – (262 x $8.25) = $26 (Favourable) e Labour wage rate variance: ($8.75 – $8.25) x 262 = $131 (Favourable) f Labour efficiency variance: (250 – 262) x $8.75 = $105 (Adverse) 7 a Total sales variance: (6 700 x $15) – (7 200 x $13.50) = $3 300 (Adverse) b Sales price variance: ($15 – $13.50) x 7200 = $10 800 (Adverse) c Sales volume variance: (6 700 – 7 200) x $15 = $7 500 (Favourable) 8 A flexible budget is a budget that has the amounts adjusted for differences between budgeted output and actual output level. For example, if actual output is higher than budgeted output it would be useful to know whether the increase in total expenses is the result of increased output or increases in the cost per unit of output.
Cambridge International AS & A Level Accounting workbook: answers to example questions Cambridge International AS & A Level Accounting workbook © David Horner/Hodder & Stoughton Ltd 2021 61 9 Quantities for labour hours and materials used need to be flexed: • Direct material quantity = 630 ÷ 500 x 150 metres = 189 metres • Direct labour hours = 630 ÷ 500 x 250 hours = 315 hours a Total materials variance: (189 x $3.50) – (190 x $3.20) = $53.50 (Favourable) b Materials price variance: ($3.50 - $3.20) x 190 = $57 (Favourable) c Materials usage variance: (189 – 190) x $3.50 = $3.50 (Adverse) d Total labour variance: (315 x $8.50) – (295 x $8.30) = $229 (Favourable) e Labour wage rate variance: ($8.50 – $8.30) x 295 = $59 (Favourable) f Labour efficiency variance: (315 – 295) x $8.50 = $170 (Favourable) 10 a Total fixed overhead variance: ($22 000 x 1050/1200) – $18 000 = $1 250 (Favourable) b Fixed overhead expenditure variance: $22 000 – $18 000 = $4 000 (Favourable) c Fixed overhead volume variance: $22 000 – ($22 000 x 1050/1200) = $2 750 (Adverse) 11 a Fixed overhead expenditure variance: $50 000 - $48 000 = $2 000 (Favourable) b Fixed overhead capacity variance: $50 000 – (8500 x $5) = $7 500 (Adverse) c Fixed overhead efficiency variance: (8 500 – 8 750) x $5 = $1 250 (Favourable) d Fixed overhead volume variance: $50 000 – ($50 000 x 1750/2000) = $6 250 (Adverse) e Total fixed overhead variance: ($50 000 x 1750/2000) – $48 000 = $4 250 (Adverse) 12 Any one advantage from: • It can identify areas of the business where expenditure is higher than was planned. • It allows a business to monitor the efficiency of its workers. • It allows a business to monitor how efficiently materials are being used. • It allows a business to judge whether the reason for any overspend is within the control of the business. • Reasons for sales revenue varying from budgeted levels can be analysed. • Corrective action can be made so as to improve business performance. Any one disadvantage from: • It takes time (and money) to set up in the first place. • Time will be spent calculating and interpreting the results. • The target result used to calculate the standards may not be realistic (e.g. might be based on unrealistically high assumptions about worker productivity). • Standards may be out of date. • Attempts to improve a ‘variance’ might lead to another variance worsening (see the section on the interrelated nature of some variances). • Some variances arise out of factors outside the control of the business (e.g. prices charged for materials). • If output levels differ from those budgeted, then the variances may be misleading (though preparation of flexible budgets can help solve this issue).
Cambridge International AS & A Level Accounting workbook: answers to example questions Cambridge International AS & A Level Accounting workbook © David Horner/Hodder & Stoughton Ltd 2021 62 13 A wage cut is a good idea: • Wage cut should improve the adverse variance. • Saving money on labour costs will improve profitability. A wage cut is a bad idea: • Worker motivation is likely to deteriorate and labour efficiency variance may worsen. • Conflict with workers and trade unions may be created if wages are cut. • Adverse wage rate variance may be the result of an attempt to motivate workers to be less wasteful with materials (hence the favourable variance in materials usage). Overall: • The size of the variance may be small compared with the overall costs and revenues of the business. • The adverse variance may be caused by external factors, such as an increase in the minimum age rate of that country. • Variances are interrelated and addressing this adverse variance may result in other variances worsening. 14 Flexed quantities: • Direct materials: 1500 kg • Direct labour: 1200 hours • Flexed overheads: $0.50 x 15 000 units = $7500 • Flexed profit = $11250 Statement reconciling budgeted profit with actual profit for September 2021 Favourable ($) Adverse ($) ($) Budgeted profit 11 250 Variances: Sales price 3000 Direct materials price 120 Direct materials usage 1050 Direct labour wage rate 300 Direct labour efficiency 1000 Fixed overhead expenditure 4000 Fixed overhead volume 2500 4670 7300 2630 Actual profit 8620 4.3 Budgeting and budgetary control 1 Any two advantages include: • It defines areas of responsibility and targets to be achieved by different personnel. • Budgets can act as a motivating influence at all levels – usually only true when all staff members are involved in the preparation of budgets. • Budgets are part of the business’s overall strategic plan so individual departmental and personal goals are more likely to be an integral part of the ‘bigger picture’. • Budgets usually lead to more efficient use of resources – leading to better control of costs.
Cambridge International AS & A Level Accounting workbook: answers to example questions Cambridge International AS & A Level Accounting workbook © David Horner/Hodder & Stoughton Ltd 2021 63 2 Any two disadvantages include: • Budgets are only as good as the data being used – if data are inaccurate, the budget will be of little use. • Should one departmental budget be too optimistic or too pessimistic this will have a knock-on effect on other associated budgets. • Budgets might demotivate if they are imposed rather than negotiated. • If too easy to reach, there is a possibility that this could lead to complacency and/or underperformance. • They might lead to departmental rivalry. • Budgets can be a lengthy, complicated procedure to implement. 3 Any three features from: • A clear definition of each manager’s role. • Once approved, individual managers are responsible for the implementation of their departmental budgets. • Departmental budgets are action plans for each area of responsibility. • Performance is constantly monitored and compared to the agreed budget. • Where budget targets are not met, corrective action is taken. • Unexplained variations from budgets must be investigated.
Cambridge International AS & A Level Accounting workbook: answers to example questions Cambridge International AS & A Level Accounting workbook © David Horner/Hodder & Stoughton Ltd 2021 64 4 a Zohaib Sales budget for the three months ending 30 June April May June Budgeted sales (units) 24 28 25 Budgeted sales revenue $372 $476 $456.25 b Total production is found using the following calculation: Budgeted sales (24 + 28 + 25) 77 Add Budgeted closing inventory 29 Total production needed 106 Less Opening inventory 13 Budgeted production for three months 93 This means that 93 ÷ 3 = 31 components must be produced each month (based on an even production flow). Zohaib Production budget for the three months ending 30 June April May June Budgeted sales 24 28 25 20 23 29 Total production needed 44 51 54 Less Budgeted opening inventory 13 20 23 Budgeted production 31 31 31
Cambridge International AS & A Level Accounting workbook: answers to example questions Cambridge International AS & A Level Accounting workbook © David Horner/Hodder & Stoughton Ltd 2021 65 5 Budgeted sales (pipes) (320 + 450 + 470) 1 240 Add Budgeted closing inventory 110 Total purchases needed 1 350 Less Budgeted opening inventory 60 Budgeted purchases needed 1 290 PCHH Ltd need to purchase 1 290 ÷ 3 = 430 for each month. PCHH Ltd Purchases budget for the three months ending 31 March Jan Feb Mar Budgeted sales 320 450 470 Add Budgeted closing inventory 170 150 110 Total purchases needed 490 600 580 Less Budgeted opening inventory 60 170 150 Budgeted purchases 430 430 430 6 Clayton Ltd Production budget for the three months ending 30 November Sep Oct Nov Budgeted sales (units) 1 120 1 240 1 560 Add Budgeted closing inventory 248 312 364 Total production needed 1 368 1 552 1 924 Less Budgeted opening inventory 200 248 312 Budgeted production 1 168 1 304 1 612
Cambridge International AS & A Level Accounting workbook: answers to example questions Cambridge International AS & A Level Accounting workbook © David Horner/Hodder & Stoughton Ltd 2021 66 7 Alex Davenport Cash budget for the three months ending 31 October 2022 Aug Sep Oct $ $ $ Receipts Cash sales 10 760 13 576 13 632 Credit sales 2 198 2 432 2 690 12 958 16 008 16 322 Expenditure Cash purchases 5 205 7 574 8 222 Credit purchases 5 645 5 205 7 574 Wages 900 900 900 Insurance 125 125 125 Heating and lighting 204 204 204 Rent 800 12 079 14 808 17 025 Net receipts 879 1 200 (703) Balance brought forward 340 1 219 2 419 Balance carried forward 1 219 2 419 1 716 8 Sabkha Ltd Trade receivables budget for the three months to 31 March Jan ($) Feb ($) Mar ($) Balance brought forward 35 000 45 000 55 000 Credit sales 45 000 55 000 58 000 80 000 100 000 113 000 Cash received from credit customers 34 300 44 100 53 900 Discount allowed 700 900 1 100 Balance carried forward 45 000 55 000 58 000
Cambridge International AS & A Level Accounting workbook: answers to example questions Cambridge International AS & A Level Accounting workbook © David Horner/Hodder & Stoughton Ltd 2021 67 9 Nettleship Ltd Trade payables budget for the four months to 30 September Jun ($) Jul ($) Aug ($) Sep ($) Balance brought forward 65 600 81 125 81 750 91 000 Credit purchases 58 300 52 600 64 700 57 850 123 900 133 725 146 450 148 850 Cash paid to credit suppliers (2 months earlier) 19 950 22 825 29 150 26 300 Cash paid to credit suppliers (1 month earlier) 22 825 29 150 26 300 32 350 Balance carried forward 81 125 81 750 91 000 90 200 Working. Balance at 1 June = ($39 900 x 0.5) + $45 650 = $65 600 10 Kevin and Michelle Cash budget for the three months ending 31 May Mar ($) Apr ($) May ($) Receipts Cash sales 4 050 4 525 4 100 Credit sales 11 550 12 150 13 575 15 600 16 675 17 675 Expenditure Credit purchases 11 500 13 200 17 400 Wages 1 100 1 100 1 100 Drawings 650 650 650 General expenses 425 425 425 Rent 1 200 13 675 16 575 19 575 Net receipts 1 925 100 (1 900) Balance brought forward (500) 1 425 1 525 Balance carried forward 1 425 1 525 (375)
Cambridge International AS & A Level Accounting workbook: answers to example questions Cambridge International AS & A Level Accounting workbook © David Horner/Hodder & Stoughton Ltd 2021 68 11 Reasons for producing a cash budget: • A lender may ask to see a budget before providing finance. • Shortage of cash is one of the most common reasons for business failure. • A budget can be used to identify periods where too much cash is being held. • Just because he has not needed one so far does not mean he won’t need one in the future. Reasons against producing a cash budget: • He may lack the experience/expertise to produce a useful cash budget. • If he is dealing with small amounts, then the time taken may mean it is not necessary. Overall: • Will depend on whether he trades on credit. If so, he may need one. If he deals with cash only transactions, then it may be less important. • Will depend on how ‘predictable’ his market is. If it is very steady and predictable then it becomes less pressing. 4.4 Investment appraisal 1 Machine 1: 2.5 years Machine 2: 3.0 years 2 Equipment 1C: Cumulative net cash flow after three years is $18 000 add back (3 x $500) = $19 500 Proportion of year 4 needed is ($22 000 - $19 500)/($5 000 + $500) Payback period = 3.45 years Equipment 2D: Cumulative net cash flow after three years is $15 000 add back (3 x $800) = $17 400 Proportion of year 4 needed is ($19 000 - $17 400)/($3 000 + $800) Payback period = 3.42 years Based on payback period alone, equipment 2D should be purchased. But as the periods are so similar further analysis would be recommended. 3 Any one advantage from: • It is relatively simple to calculate. • It is fairly easy to understand. • The use of cash is more objective than using profits that are dependent on the accounting policies decided by managers. • Since all future predictions carry an element of risk, it shows the project that involves the least risk because it recognizes that cash received earlier in the project life cycle is preferable to cash received later. • It shows the project that benefits a business’s liquidity. Any one disadvantage from: • It ignores the time-value of money. • It ignores the life expectancy of the project; it does not consider cash flows that take place after the payback period. • Projects may have different patterns of cash inflows.
Cambridge International AS & A Level Accounting workbook: answers to example questions Cambridge International AS & A Level Accounting workbook © David Horner/Hodder & Stoughton Ltd 2021 69 4 Machine AGL6 Machine AMJ Average investment $65 000 $82 500 Average profit $28 200 $29 800 ARR 43.38% 36.12% 5 Project AC-K Project H17 Average investment $128 000 $99 000 Average profit $29 720 $25 300 ARR 23.22% 25.56% 6 Any one advantage from: • ARR is fairly easy to calculate. • Results can be compared to present profitability. • It takes into account the aggregate earnings of the project(s). Any one disadvantage from: • ARR does not take into account the time value of money. • It does not recognise the timing of cash flows. 7 a $710 b $807 c $1 412 8 Net cash flow Discount factor Present values $ $ Year 0 (80000) 1.000 (80 000) Year 1 29 500 0.909 26 816 Year 2 42 342 0.826 34 974 Year 3 31 315 0.751 23 518 Year 4 16 790 0.683 11 468 Net present value 16 776 9 Net cash flow Discount factor Present values $ $ Year 0 (25 000) 1.000 (25 000) Year 1 6 757 0.917 6 196 Year 2 8 905 0.842 7 498 Year 3 13 440 0.772 10 376 Year 4 3 435 0.708 2 432 Net present value 1 502
Cambridge International AS & A Level Accounting workbook: answers to example questions Cambridge International AS & A Level Accounting workbook © David Horner/Hodder & Stoughton Ltd 2021 70 10 Any one advantage from: • The time value of money is taken into account as adjustments are made to take account of the present value of future cash flows. • It is relatively easily to understand. • Greater importance is given to earlier cash flows. Any one disadvantage from: • Because the figures are projections, all the figures are of a speculative nature. • Inflows are difficult to predict; outflows are equally difficult to predict. • The current cost of capital may change over the life of the project. • The life of the project is difficult to predict. 11 IRR = 9 + [(14 – 9) x 679/(679 + 446)] = 12%, which is greater than Hadfield’s cost of capital. Therefore, he should go ahead with the investment. 12 He should buy Machine A: • Shorter payback period. • Lower cost. • Less risky in terms of paying back any borrowing required to buy machines. He should buy Machine B: • More profitable (based on ARR). • Will last longer than machine A. Overall: • Depends on how unstable he thinks the market will be. • Depends on whether he will have to borrow the money. • Depends on whether profit maximisation is his main goal.