Jan 2009

1. As part of their business plan, the directors of Standard Bicycles plc

intend to reorganise and restructure its workforce in the next financial
year, ending 31 December 2009. The reorganising and restructuring of
the workforce will be treated in the accounts for the year ending 31
December 2009 as an Exceptional Item.
(b) Evaluate the usefulness of this treatment to the users of the
published accounts of Standard Bicycles plc.
Benefits

This will benefit users of accounts because they can see that the
expense 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 reader to predict more accurately future expected
performance.
This may help future potential investors / shareholders /
creditors etc with decision making.
Should be beneficial if required to be shown by FRS3. Could be
said to give a True and Fair View

Disadvantages

Adds more figures and details to the accounts so makes them

more difficult to understand.
Extra cost in spending extra time preparing accounts.

2. When the Cash Flow Statement is presented to the Board Meeting,

the Marketing Director comments We should not be worried. Liquidity,
not profitability, is important for the short term survival of the
business.
(d) Evaluate this comment, with reference to Sunset plc.
Not worried - Liquidity most important for short term survival

Liquidity problems result in unable to pay daily bills eg wages,

electricity (need two)
Unable to pay some bills may result in closure of business eg tax
bill
Unable to pay some bills may mean business unable to operate eg
electricity cut off

Can survive short term losses if previous profits have been built
up
If depreciation (a non-cash expense) is not included, Sunset plc
makes a profit
The Net Cash figure shows an inflow/increase ( But this has been
due to a loan and new share issue )

Worried - Profitability important.

If not profitable, business would close down in the long run

If short term liquidity problem, many sources are available as
source of finance eg banks, shareholders, debt factoring etc
(need two sources)
No/low profitability may result in firm unable to attract finance or
investors/shareholders
No/low profitability may see share price fall, as investors lose
confidence
Sunset only has no liquidity problem at present because it has
increased the bank loan and asked shareholders for more funds
The extra loan now means interest payments of 127 500 to be
made a year which will reduce profit

3. (f) Evaluate whether it would be useful for Mrs Yeungs Cakes Ltd also
to prepare a cash budget for the first four weeks of trading.

For a Cash Budget

o Allows firm to see inflows and outflows of cash in the period,
and to see whether overall there is an inflow or outflow of
cash for the period.
o This will help the firm with planning and decision making
e.g. arrange an overdraft or arrange a loan, or chase up
debtors, or negotiate with suppliers, or adjust prices
prevent overtrading
o Can compare Budget to Actual and variance analysis can
take place.
Against a Cash Budget
o Takes staff time to draw up budget and this means money.

o Budget is only an estimate so could be inaccurate and

this could lead to inaccurate decision-making
Conclusion (does not have to be at end)
o Should conclude that drawing up a cash budget is worthwhile
for the firm.

4. The Production Manager of CoolShades Ltd has said, If you decide to

pay a low wage rate, the business does not always benefit.
(c) Evaluate this statement.
o

For statement ie. Against Paying Low Wage Rate:

o Labour Rate variance is favourable, so probably less skilled
workers than expected employed. This could result in the
adverse Labour Efficiency variance, as they will take more time
to complete the job than higher skilled workers.
o This also explains the adverse Total Labour Cost Variance. Also,
the lower skilled workers (favourable Labour Rate variance)

would waste more material, explaining the Material Usage

variance, and the Total Material Cost Variance.
o Workers are less motivated so productivity may suffer
Against Statement ie. For Paying Low Wage Rate :
o Labour Rate variance is favourable which may reduce labour
costs
Conclusion must relate to points made above.

5. (c) Evaluate on behalf of the management of Himalaya Ltd which

method of stock valuation, marginal costing or absorption costing,
should be used.
o

Case for Marginal Costing

o Could be said to help decision making when deciding
whether to accept an offer price or make or buy or
discontinue a product/profit centre.
o Sees costs allocated to a time period, so it may be argued
that profit for that time period is more accurate. External
accounts are drawn up on the basis of a time period.
o May be argued it is prudent to write off costs in time period
incurred.
Case for Absorption Costing
o Sees costs allocated to products.
o Could be useful for management when fixing prices or
reviewing if a product/project has been profitable
o Recommended by SSAP 9.
o Could be said to give a True and Fair view .
Other Points
o If figures in the future are similar, choice of stock valuation
will not have very much effect on the profit.
Conclusion Max 2 marks available. Should relate to points made
above.

6. KC Jones bought three hundred (300) 2 shares in Whistle Stopz plc

in the stock market for 2.50 each, one year ago. The shares are now
trading on the stock market at 2.03.
(d) Evaluate the merger on behalf of KC Jones.
o

Case for takeover:

o KC has received some goodwill, as purchase price is greater
than net value of assets sold. Goodwill is actually 589 000 / 5
000 000 = 11.78p per share. #
o Whistle Stopz plc appear to having problems.
o Liquidity / working capital is very low. Profit and loss reserve
balance is very low. May be good to sell shares at decent price
before it gets worse.
o Selling share for 2.10 which is above market value of 2.03
by 0.07 per share
Case Against takeover:

KC bought the shares for 2.50 but is only receiving 2.10 per
share now. He is making a loss of 0.40 per share.
o Goodwill paid is low only about 5% above asset values.
o Whistle Stopz plc may improve in the future and the share
price could rise above 2.10.
Conclusion 2 marks available Should relate to points made above.
o

7. (c) Evaluate the financial success of the route to the new destination
by comparing the actual and budget figures.

Better than budget

o Passenger figures of 130 000 are better than budget figures by 10
000
o Sales price per passenger of 55 is better than the budget figure
of 50
o Actual sales of 7 150 000 is better than the budget sales of 6
000 000
Worse than budget
o Profit of 550 000 is worse than the budget profit of 600 000
(by 50 000).
o Variable costs of 40 per passenger are higher than budget
figures of 35
o Fixed costs of 1 400 000 are higher than budget figure of 1 200
000
o Actual Total Costs of 6 600 000 is worse than Budget Total Costs
of 5 400 000 although this is partly due to more passengers.
o Break even figure for passengers of 93 334 is higher than budget
figure of 80 000.
Conclusion (Should relate to above points. Profit is higher so actual figures
are better than budget.

June 2009
1. (b) A companys balance sheet is more important than its profit and
loss account. Evaluate this statement.
o

FOR Importance of Balance Sheet:

o shows items of value firm possesses and may use for running
firm over long term (fixed assets), ie shows financial strength
of firm.
o shows liquidity position of firm by Net Current Assets (Current
Assets Current Liabilities)
o shows financial weaknesses of firm (long term liabilities debt
that must be serviced)
o shows a book value of the firm, ie Capital and Reserves
o Shareholders can see the book value of their investment

some figures in the Profit & Loss account may be estimates

for example depreciation and stock values.
FOR importance of Profit & Loss Account:
o shows how well the firm has performed over the last trading
period. This is very important as for example balance sheet
may look healthy, but trading at a loss
o enables firm to see the relationship between sales and
purchasing/production ie Gross Profit
o enables the firm to see the relationship between Gross Profit
and Expenses ie Net profit
o some figures in the Balance Sheet may be estimates for
example depreciation and stock values.
CONCLUSION For example balance Sheet is more important. 2 s
for conclusion
o

2. (d) Study the budget and actual figures, and the information given
for April 2009. Evaluate the most appropriate actions to achieve the
40 000 net profit target required by the directors
Answers may include:
o
o
o
o
o
o
o
o
o
o

selling price below budget competitive market? Difficult to raise price

promotions?
Investigate why 0.52 kg of material used per loaf. Wastage? Could
reduce this figure.
World price of wheat rising. Difficult to reduce purchase price.
However, firm could try to find cheaper suppliers or
receive
discounts for buying in greater bulk.
Labour just had a pay rise. Difficult to now reduce pay rate.
Hours used less than budget. Any scope possible for further reduction?
Variable overheads difficult to reduce rate, but could reduce usage.
Fixed overheads unlikely to reduce rent, or managers salaries. Lay off
staff?
Conclusion
Probably best to try to control quantity of material used in production.

3. Angelina was a shareholder in Highway Connections Limited. (d)

Evaluate the merger from the point of view of Angelina.
o

For Merger
o Shareholders in Highway Connections receive a profit on
realisation of 341 000 o/f also Goodwill valuation of 274 000.

o New company should enjoy benefits of vertical integration as in

same line of business.
o New company could enjoy economies of scale for example bulk
buying of machinery
o Or enjoy managerial economies of scale or marketing economies
of scale

Larger company could enjoy financial benefits for example easier to

get bank loans at a lower interest rate.
Against Merger
o Dilution of ownership and voting power.
o Wessex Quarries do not appear to be in a healthy financial state
for example negative profit & loss reserve.
o Original Wessex balance sheet appears to have many assets
overvalued for example machinery overvalued by 100 000.
o Also liquidity position of Wessex is worrying as they appear to
have low working capital ratio/negative working capital .
o Wessex may be a drain on the liquid resources of the new company,
especially with the large amount of creditors to pay.
o We do not know the market price of the Highway Connections
shares.
o We do not know what the market price of Roadworks shares are
likely to be.
Conclusion
o Should conclude and relate to points made above.
o

4. Production is determined by the maximum production capacity of the

factory, NOT by the number of beds ordered by customers.
(b) Evaluate the decision to produce a quantity determined by the
maximum capacity of the factory instead of producing a quantity
determined by customers orders.
o

For Decision
o Makes full use of factory ie capacity utilisation is 100%, no
wastage
o Sales may be more than 55 a week. Able to meet this demand
from production or stock.
o In the event of production breakdown customers orders can be
met this will maintain customer loyalty.
o Beds kept in stock do not deteriorate / perish so money is not
lost.
Against Decision
o Stock is building up continually, and this involves a number of
costs for example rent insurance and ties up working capital.

o Eventually will run out of storage space, so must find

alternative premises or reduce production.
o It is possible that beds could deteriorate in stock for example
due to dampness.
o Possible that tastes change and firm left with stock that they
cannot sell.
Evaluation 2 marks available for overall conclusion, should relate to
points made above.

6. (b) Evaluate the project for the company, considering both financial
and non-financial factors

o
o

FOR INVESTMENT
o Payback method invest as project profitable overall and within
5 year payback period.
AGAINST INVESTMENT
o ARR states do not invest as fails to meet % return figure of 10%
Other Relevant Points:
o Accuracy of predictions?
o What happens after 5 years?
o Other possible investment projects available?
o Objectives/strategy of company?
o If incomes fall consumers are likely to reduce expenditure on
leisure activities (income elastics).

Jan 2010
1. (b) Evaluate the usefulness of limited companies preparing their
final accounts in accordance with the Companies Act 1985.
a. FOR Usefulness
i. Accounts are prepared in standard format which allows
stakeholders to compare the accounts of one company with
another. Eg for investment potential.
ii. Having a standard format makes it harder for companies to
window dress or manipulate accounts.
iii. The Companies Act must state a good way to prepare the
accounts as it was prepared by highly qualified
professionals eg accountants, lawyers.
iv. Readers of accounts eg auditors only have to familiarise
themselves with the one format.
v. A standard format allows accounting aids to be developed
and used eg software programmes.
vi. A standard format makes it easier for Regulatory authorities
to enforce procedures.
b. AGAINST Usefulness
i. Preparing the accounts in this format could be time
consuming, and time means money.
ii. Staff have to train to learn the format.
iii. The format still has scope for different interpretation eg
stock value, depreciation.
iv. Original Act is now 25 years old, and we live in constantly
changing times.
c. CONCLUSION
i. Should relate to points made above. Eg In accordance with
Companies Act is important and of value.
2. (c) Evaluate the usefulness to West Anglian Farms of preparing a
cash budget for the year.
a. FOR usefulness of Cash Budgets
i. The Farm has a very seasonal cash flow , especially from
sales.

ii. The Cash Budget will show if the sales will be sufficient to
cover all outgoings , and when shortages may occur.
iii. The budget may allow the Farm to see when alternative
arrangements eg overdraft may be required. Also for how
long, and how much.
iv. The budget may show where a cash surplus may be present,
so allows the firm time to plan what to do with the surplus
eg invest in shares, currencies etc.
b. AGAINST the usefulness of Cash Budgets
i. The budget takes time and money and expertise to
draw up.
ii. The figures are only predictions and may be inaccurate or
misleading.
iii. Inaccurate production figures may be caused by weather
or volatile market prices.
c. CONCLUSION
i. Should relate to points made above ie Cash Budgets are
useful.
3. (d) Evaluate the decisions of the directors in 2009 from the point
of view of an ordinary shareholder.
a. Answers may include :
i. Positives :
1. Ordinary dividend received of 5.2p per share which is
quite good.
2. Gearing ratio of 28% which is healthy and lower
than start of year
3. Redemption of Preference shares will improve the
future figure for ROCE also reduce future
preference dividends.
4. Capital and Reserves have risen, which means book
value of firm has risen, which probably means share
price has risen.
ii. Negatives :
1. Funds are leaving the company to pay preference
share dividends and redeem preference shares.
2. Possible that liquidity adversely affected to pay
preference shareholders.
b. Conclusion
i. Should relate to above 2009 been good for Ordinary
shareholders
4. (b) As Yasmin Farazs accountant, evaluate the likely effects of a
standard costing system on the production workers.
a. POSITIVE EFFECTS
i. Helps to establish production targets () that may be
comfortable for workers to achieve()
ii. Eg numerical example ()
iii. May be basis of possible bonus for production targets met etc
() which may see workers taking home more pay ()

iv. Anything that benefits the firm will benefit the workers () eg
for job security, pay, bonuses, competitive pricing of products
etc ()
v. Meeting production targets will motivate workers.
b. NEGATIVE EFFECTS
i. Helps to establish production targets () that may be difficult
for workers to achieve ()
ii. Eg numerical example ()
iii. May be basis of possible bonus for production targets met etc
() which may see workers missing targets () and taking
home less ()
iv. Missing production targets will demotivate workers.
c. CONCLUSION
i. should relate to points made above
5. (e) Evaluate the suggestions of the Managing Director.
a. NOT a good suggestion
i. Increase in prices not recommended due to recession, and
competition, and will probably reduce sales.
ii. Rent decrease difficult if signed a long term lease or
agreement. Managers salary reduction will demotivate
managers and performance may suffer.
iii. Director labours pay cut will demotivate and could result in
industrial action.
iv. May not be able to reduce other fixed costs eg Business
Rates to council, interest on loan etc
b. GOOD suggestion
i. May be possible to negotiate a rent decrease due to
recession It is possible to impose a cut in the managers
salary
ii. It is possible to impose a cut in pay to direct labour force It
may be possible to reduce some fixed costs eg heating,
insurance
c. Conclusion
i. Should relate to above 2 marks
6. Maria Manakopolous, the Marketing Director, has studied the
figures and said I am concerned about the liquidity of the
business. (c) Evaluate this statement.
a. AGREE with Statement
i. Current Ratio is very weak at 0.67 : 1
ii. Current Ratio worsened over the last year from 1:1 which
was weak
iii. Creditors are rising is this due to lack of liquidity? Positive
bank balance at start year now an overdraft.
b. DISAGREE with Statement
i. Debtors are falling so are probably being chased up.
ii. Bills such as tax and debenture interest appear to have been
paid over the year.
iii. Positive Net Cash Flow from Operating Activities of 163 755

c. CONCLUSION

i. Should relate to above points Liquidity of business gives

cause for concern
7. b) Evaluate the project for MetroTransit plc, using the
calculations made and considering any other relevant factors.
a. FOR investing in project
i. Project has a NPV greater than 0 ie 356 m
ii. Figures may not be accurate and NPV may be even greater.
iii. Other possible investment projects may be made available in
the future
b. AGAINST investing in the project
i. Figures may not be accurate and NPV may be smaller.
c. CONCLUSION Should relate to above ie Worth Investing in the
project = 1 mark

June 2010
1. b) A director has made the following comment at a Board
meeting: In order to reduce expenditure, we should not have an
Auditors Report with the final accounts this year, as the Auditors
Report is not important. Evaluate this statement.
a. FOR Importance
i. Auditors are independent scrutineers of the accounts.
who report that the accounts have been prepared correctly
in accordance with company law

or Accounting
Standards or Stock Exchange regulations (only needs one)
rather, give a True and Fair view. or do not .
ii. Auditors are reporting on how Directors have used the funds
invested by shareholders. . The auditors duty is to the
shareholders.
iii. Auditors may give tax authorities more confidence that the
tax computation is correct.
iv. Professional supervisory bodies exist to give guidelines to
auditors , eg Auditing Practices Board.
v. Auditors should be professionally qualified eg Chartered
Accountants.
vi. Companies Act could require report
b. AGAINST Importance
i. Auditors may not be very independent, going along with
the wishes of clients, in order to keep their custom.
which may include non-audit work.
ii. Auditors could be misled by the directors and provide an
inaccurate report.
iii. Auditors do not guarantee that material fraud has not
occurred. Report maybe costly to produce
c. Conclusion
i. Should relate to points made above. Eg Auditors Report is
important and of value.

2. (c) Evaluate the importance to Lee Ping of drawing up a Cash

Budget before starting his business
a. FOR usefulness of Cash Budgets
i. Lee will need to show potential investors eg family and
friends, banks business will be successful and is able to
give a return/pay back
ii. The Cash Budget will show if the sales receipts will be
sufficient to cover all outgoings , and when shortages may
occur. The budget may allow Lee to see when alternative
arrangements eg overdraft may be required. Also for
how long, and how much.
iii. The budget may show where a cash surplus may be present,
so allows the firm time to plan what to do with the surplus
eg invest in shares, currencies etc.
iv. Budget can act as a method of control
v. Budget can give variances which can be analysed and action
taken
vi. Answers could involve analysis of Lee Pings cash budgets
b. AGAINST the usefulness of Cash Budgets
i. The budget takes time and money and expertise to
draw up.
ii. The figures are only predictions and may be inaccurate or
misleading
iii. Eg Inaccurate sales figures may be caused by change in
demand from supermarkets
iv. Budget maybe inaccurate and may demotivate workers not
meeting targets
c. CONCLUSION Should relate to points made above ie Cash Budgets
are useful.
3. Sandra was a shareholder in Highland Bank plc. (d) As Sandras
accountant, evaluate the merger on her behalf.
a. For Merger
i. New company should enjoy benefits of horizontal integration
as in same line of business. which leads to larger market
share which results in increased profits and dividends
ii. New company could enjoy economies of scale eg bulk
buying
iii. New company should be able to reduce costs eg reduce
staff or close some branches
iv. Highland Bank appears to be in poor financial position eg
profit and loss reserve negative and debtors contained
many bad debts. They probably need a stronger company to
take them over to improve position or guarantee survival.

v. She gets no dividends at present because Profit & Loss

account balance is negative and she may get dividends
now
vi. Reduces risk and reduces competition
b. Against Merger

i. Shareholders in Highland Bank plc do not benefit from any

Goodwill
ii. The book value of the company before the merger was 47m
but the value at the time of the merger was only 28 m, a
decrease of 19m. (loss on realisation )
iii. Increased number of shareholders /Dilution of ownership
(need one) and voting power
iv. We do not know what the market price of St Andrews Bank
plc shares is likely to be. It is quite possible it will not settle
at 1.25
v. St Andrews Bank could be purchasing the assets of the
Highland Bank at a value under the market price
c. Own figure rules apply to calculations
d. Conclusion Should conclude and relate to points made above.
4. (d) Evaluate the effectiveness of management by exception to
Marco
a. FOR the use of Management By Exception
i. Management by exception sees management only
investigating differences against preset tolerances
ii. Saves management time as no need to take any action if
no variance / unless adverse variance. Here, Marcos does
not need to spend any time worrying about material cost
and usage etc
iii. Costs may well be reduced if variances are adverse
b. AGAINST the use of Management by Exception
i. It is possible that costs could be reduced eg find a cheaper
supplier, but Marcos will not spend this time looking for
another supplier as there is no adverse variance.
ii. Standards set could be poor
c. CONCLUSION Should conclude and relate to points made above
8730; 8730;
5. (b) Evaluate how Red Arrow plc has performed as a business
compared to the industry average, for the financial year ended 31
March 2010.
a. BETTER than industry average
i. Price/Earnings ratio is better by 3 times reflecting the
generous dividends?
ii. Dividend per share is better from the shareholders point of
view by 0.5p per share
iii. Dividend yield is better from the shareholders point of view
by 3.14%
iv. Dividend cover could be said to be better from the
shareholders point of view as a higher percentage of profit is
paid as a dividend. - by 1.34 times
b. WORSE than industry average
i. ROCE worse by 1.83 % points
ii. EPS is worse by 1p per share
iii. Dividend cover is less so funds not retained in the business
by 1.34 times
iv. Own figure rule applies for all figures

c. Conclusion -Red Arrow plc as a business has performed worse than

the industry average.

6. (b) Evaluate the project for the company, using the calculations
made and considering any other relevant factors.
a. FOR INVESTMENT
i. Payback method says invest as within a 4 year payback
period profits will be earned for 1 year and 3 months
(could be argued against investment)
ii. ARR states invest as to meets % return figure of 8%
b. AGAINST INVESTMENT
i. Payback is 3 years plus 9 months which maybe considered
too long but reason must be given as to why it is too long
ii. Accuracy of predictions?
iii. What happens after 5 years?
iv. Net Present Value calculations? no account taken of falling
value of money over time
v. Other possible investment projects available?
vi. Objectives/strategy of company?
vii. How can the company finance this investment ?
viii. Opportunity cost ? Are there any alternative investment
possibilities ?
c. CONCLUSION: Must relate to points made above Eg Make a bid for
the project
7. (c) Evaluate the effectiveness of break-even analysis as an aid to
business decision-making.
a. FOR effectiveness
i. A tool that allows a business to forecast profit/loss at
different output levels.
ii. Helps a business break down costs into fixed or variable
iii. Helps identify margin of safety and the angle of incidence

b. AGAINST effectiveness
i. Cost and revenue figures are only predictions and cannot
be assumed as 100% accurate.
ii. Eg in practice, straight lines on graphs are likely to be curves
as discounts are given or received for bulk sales or
overtime worked at a higher rate.
iii. Theory assumes that all output is sold.
iv. Costs and sales figures are affected by outside influences
eg inflation, boom or recession, seasonal factors,
fashions, life styles etc (max of two reasons)
c. CONCLUSION Break-even analysis is / is not an effective aid to
business decision-making

Jan 2011

1. (b) Evaluate the importance of the Directors Report that

accompanies the financial statements of a company.
a. Case For Importance of Directors Report
i. Report gives information to eg shareholders which they
could use to make a decision eg invest more funds in the
company.
ii. Shareholders may be assured the company is acting in an
ethical manner
iii. Other stakeholders eg pressure group may use information
in the Report to bring about change in company policy eg
treatment of disabled
iv. Disclosures may be required under Stock Exchange
regulations, which may be appropriate in the Directors
Report eg legislation pending
v. Information is given to shareholders which allows them to see
in some detail how the company is performing
1. Eg principal activities, review of position of business

2. Post balance sheet events, future developments

3. Names of directors, interests of directors
4. Employee involvement, disabled employees policy

5. Political and charitable donations

6. Creditor payment policy, creditor payment days
(Maximum of 4 marks for listing of items contained in
Report)
b. Case Against Importance of Directors Report
i. Report costs personnel time to prepare and money to print
etc
ii. Directors may use Report to window dress accounts, give
an unrealistic positive view of the company, as it is in their
interest to do so.
iii. Readers with no knowledge of accounts may not understand
the report.
c. Conclusion: Should relate to above points. Eg Directors Report is
important.
2. (b) Evaluate the project for the company, using the calculations
made and considering any other relevant factors.
a. Answers may include
i. Payback method says invest as project does pay back .
However, is the payback period of 4 years 3.89 months (o/f)
acceptable for the company? Is it too long?
ii. Project is profitable (each year) NPV method states do not
invest as NPV is negative (o/f)
iii. NPV may be a better method to use as it includes falling
value of money over time
b. Other Relevant Points
i. 2m has to be raised which may worsen the gearing ratio
ii. How accurate are the predictions for costs, cost of capital,
and revenues? (need 2 of these 3)

iii. Chance of renewal of contract after 5 years ? Would this be

profitable
iv. Other possible investment projects available at present?
More or less profitable?
v. Objectives/strategy of company? Is this investment in line
with objectives?
c. Overall Conclusion - 2 marks Company should/ should not invest.

3. (d) Evaluate how well the directors of Thames Technical Services

Limited have managed the liquidity of the business during the
year ended 31 December 2010
a. Handled poorly
i. Working capital has decreased from 22 610 to (940)
ie by 23 550
ii. Working capital ratio has worsened from 1.84:1
to
0.98 : 1
iii. Liquid (acid test) ratio has decreased from 0.85 : 1 to
0.36 : 1
iv. Bank/Cash has decreased by 21 290
v. Directors paid themselves an enormous interim dividend
b. Handled well
i. Tax due at the start year has been paid.
ii. Funding via issue of debenture and/or ordinary shares that
covers redemption of preference shares
c. Conclusion: Liquidity has been handled poorly by the directors
through the year.
4. (c) Evaluate the two options for the telephone charge, and
recommend which option should be chosen.
a. Case for keeping Fixed charge (Option 1)
i. Profit is higher by 3 000 o/f (if 2400 units are sold,
option 2 telephone charge is 6000)
ii. Profit is the most important aim of a business more
important than reducing break-even point especially when
break-even point is easily met.
b. Case for changing to Measured charge (Option 2)
i. Measured charge sees break even point reduced by 30
units o/f which is beneficial to firm especially if trading is
tough.
ii. Margin and safety is greater from 1650 (option 1) to 1680
(option 2) by 30 o/f
c. Conclusion: Keep with fixed charge method / measured charging
method must be rejected.
5. (c) Evaluate whether South East Asia Brick Company should use
Chinclay plc or Earthworks Limited as a future supplier of clay
a. Case for Chinclay
i. Probably better quality clay as no material usage variance.

ii. Earthworks has adverse usage variance so probably poorer

quality clay. 0.3 kilos o/f of clay less used per brick
iii. Overall cost of using Chinclay is cheaper by 672

iv. Cost of 1 brick for Chinclay is 5.6p, which is 0.56p cheaper

than
v. Earthworks which is 6.16p.
b. Case for Earthworks Limited
i. Cost per kilo of clay is cheaper by 0.04 pence per kilo.
c. Conclusion: Best to stay with Chinclay
6. (c) Evaluate whether Bharti should sell her shares in Krishnanor
Industrials plc
a. Case for selling shares
i. Dividend yield is low. She could possibly earn a better
return in another company, or maybe even in a bank
deposit account.
ii. Price/Earnings ratio is high, so a seller would get a good
price.
iii. Profit of 836 has been made
b. Case for holding shares
i. Dividend policy looks reasonably generous with about 75%
large amount of this years profit paid as a dividend.
ii. Price/Earnings ratio is high, which means the market has
confidence in the share, so price may continue to rise.
iii. Capital return of 9.59% per year is reasonably good and
may continue.
c. Conclusion: Appears to be a share worth holding
7. The company is considering a rights issue to ordinary
shareholders, to finance the construction of a second marina.
a. The Sales Director asks you the following question. Can
you explain the difference between a rights issue of shares
and a bonus issue of shares? (b) Explain the difference
between a rights issue of shares and a bonus issue of
shares.
i. A rights issue sees existing ordinary shareholders being
offered the first right to purchase newly issued shares. The
shares would be issued at a discount to the market value,
to benefit the shareholders subscribing. The shareholder
may be able to sell this right, if they do not wish to take up
the issue themselves. Shareholders who do not take up the
rights issue lose out by owning a smaller share of the
company. A rights issue will involve the company receiving
cash for the shares.
The double entry would be
Dr
Cash Cr Ordinary shares.
ii. A bonus issue would involve the company issuing new shares
to existing ordinary shareholders. The shareholders do
not have to pay any money to the company for the shares.
They may be issued to make the market price of the share
lower, and therefore easier to trade. Or, the issue could
be to make the balance sheet appear more like that of a
large company . The shareholders do not really benefit,
as they still hold the same percentage ownership of the
company. If company has no cash for dividends they may

give a bonus issue instead The double entry would be Dr

Any Reserve Cr Ordinary shares.
b. As an alternative to issuing shares, the company is
considering issuing debentures to finance the second
marina. (c) Evaluate on behalf of the company, the issue of
debentures to finance the second marina.
i. Case for debentures
1. Company raises cash required for new investment.
2. Fees are likely to be low compared to an issue of
shares e.g. prospectus, advertising, etc
3. No capital repayments over the life of the debenture
Interest is fixed which allows budgeting to take
place
4. Debenture interest is allowed against tax so less
corporation tax is paid on profits
5. Issuing debentures instead of shares reduces the
chance of a takeover
ii. Case Against debentures
1. There will be some expenses involved in debenture
issue e.g. administration, underwriting etc
2. When debenture matures, a large capital sum has to
be repaid
3. Interest must be paid on debenture even when the
company makes a loss and interest will reduce the
profits
4. Issue of debenture means gearing ratio will increase

5. Debenture holders are likely to insist on a charge

over company assets
6. Debenture holders may insist on some form of control
e.g. a seat on the board
iii. Conclusion: As a source of finance for the new marina, a
debenture is probably (not) a good idea.

June 2011
1. (b) Evaluate the importance of sending a copy of the financial
statements of a public limited company to shareholders at the
end of the financial year.
a. FOR Usefulness/ Importance
i. Legally the shareholders must receive a copy/or have
copy made available of the accounts and they can see
how the funds they have invested are being used/ how
company is performing
ii. Shareholders may be happy (or unhappy) with the
performance of the company and may decide to buy
more (sell) shares.

iii. Accounts are prepared in standard format which allows

shareholders to compare the accounts of one company
with another. E.g for investment potential.
b. AGAINST Usefulness/Importance
i. Preparing the accounts is time consuming, and time
means money.
ii. Expenses associated with preparation and sending eg
printing costs and postage.
iii. However shareholders could be sent an abridged (smaller)
version of the accounts which are much cheaper.
iv. Some figures are estimates e.g. Depreciation
v. Some shareholders will not understand the accounts as
they have little accounting knowledge
vi. The accounts may not be totally reliable e.g. due to
window dressing, fraud etc
c. CONCLUSION: Should relate to points made above. Eg
It is
important they receive a copy of the accounts.
2. (c) Explain to a potential investor the difference between
ordinary shares and preference shares.
a. Ordinary shares
i. Usually one vote per ordinary share held. at AGM
/shareholders meetings.
ii. Dividend per year is not fixed, but varies according to
performance.
iii. Last in the queue when dividends paid out of profits.
iv. Last in the queue for payments if a company is wound
up.
b. Preference shares
i. Usually no votes to preference shareholders.
ii. Dividend per year is usually fixed, despite performance

iii. Before Ordinary shareholders in the queue when dividends

paid out of profits.
iv. Before Ordinary shareholders in the queue for payments
if a company is wound up.
3. d) Evaluate how well the directors of Arkotari Limited have
managed the liquidity of the business during the year ended 31
March 2011.
a. Handled poorly
i. Working capital has decreased from 12 210 to 2
460 ie by 9 750
ii. Working capital ratio has worsened from 1.29:1 to
1.05 : 1
iii. Acid ratio has decreased from 0.26 : 1 to 0.24 : 1
Bank + Cash has decreased by 6 385 OR overdraft
increased by 5 900
iv. Creditors have increased. by 4 620
v. A number of vehicles have been sold off and generated
funds. Are these vehicles required for the business or

are they surplus to requirements? (could be in handled

well)
vi. Some Ordinary shares have been redeemed which must
be a drain on liquid resources. However, this may
mean a reduction in future dividends.
b. Handled well
i. Bank loan has been repaid in full and this should avoid
future interest payments which helps future liquidity but
this may be a problem now
ii. Dividends paid have been very modest. Ordinary
shareholders based on year end figure have only received
2% dividend.
c. Conclusion: Liquidity has been handled poorly/well by the
directors through the year
4. (c) Evaluate the performance of Goldstar Refrigerators plc
during the year ended 31 March 2011 by comparing the
performance to the year ended 31 March 2010.
a. Better than last year
i. Sales units figure is better 6 500, than last years figures
by 500
ii. Sales price per unit is better 240, than last year by
20
iii. Sales Revenue is better 1.56 m than last years 1.32 m
by 240 000
b. Worse than last year
i. Profit of 40 000 o/f is worse than last year of 88 000
(by 48 000 o/f).
ii. Variable costs of 160 per unit are higher than last year
of 132 by 28 o/f
iii. Fixed costs of 480 000 are higher than last year by 40
000
iv. Break even figure for units is higher 6000 o/f, compared
to last years 5 000
v. Angle of Incidence worse
vi. Margin of Safety is worse (last year 1000, this year 500)
so 500 worse
vii. Total costs have risen from 1 240 000 to 1 520 000
c. Conclusion (does not have to be at end): Should relate to above
points. Profit is lower so this year is worse than last year.
5. (d) Evaluate non-financial factors that may be considered by SE
Asia Rubber plc in making the decisions in (b) and (c).
a. Non-Financial Factors to Consider
i. Contract with FitFast could lead to further business in the
future and this could be at a higher price with a
greater profit margin
ii. Enables their tyres to be sold in a different market which
should raise profile of company
iii. Contract with supplier may lead to further business in
future perhaps with a keener price or in times of high
demand

iv. Selling at the lower price may upset the Byby plc who
may demand a lower price or find a different supplier
v. Quality of the products supplied may be better/worse
than products produced themselves
vi. Workers earn a higher rate if overtime is paid and this
increases motivation
b. Case Against considering Non-Financial Factors
i. Directors duty is to the shareholders who want a return
on their investment.
ii. Loss making firms will go out of business in the long
term.
c. Conclusion: SE Asia Rubber plc should/should not consider nonfinancial factors.
6. (c) Evaluate the companys policy of producing ovens for
expected sales, rather than producing ovens to match actual
orders.
i. For Policy
1. Customers do not have to wait for their orders.
Waiting for orders could mean customers go
elsewhere.
2. Production may fluctuate if only for actual orders,
especially if demand is seasonal
3. If sudden increase in demand stock is available
4. If delays in production this is not a problem as
order can be met promptly
ii. Against Policy
1. Producing for expected orders means some stock
may be unsold which is risky
2. Unsold stock may build up and this involves a
number of costs eg rent, insurance, and ties up
working capital
iii. Conclusion marks available for overall conclusion, should
relate to points made above. i.e. policy is good/bad.
7. (d) Evaluate the position of the original shareholders, after the
conversion of the bank loans into ordinary shares.
a. Better Position
i. As less interest to pay of 80 million (and less capital
repayments to make ) so annual profits will be higher
so more available for dividends
ii. Gearing ratio has improved falling from 200% to 12.5%
(from 66.6% to 11.1%) o/f, so less risk
iii. Net Book Value of business rises so share price in theory
may rise
b. Worse Position
i. Ownership diluted so smaller share of votes
ii. More shareholders now to receive dividends so dividends
per share may be less
iii. Share price will fall as more shares/on the open market

iv. Interest on loan meant a lower profit so tax bill may now
be higher on higher profit
c. Conclusion: Ie Better or worse off

June 2012
1. The information given includes revenues and expenses for
unused shop premises that Columbo Fireworks plc rents out.
Next year, Columbo Fireworks plc intends to sell these
premises and record this in the accounts as a Discontinued
Activity. (b) Evaluate the usefulness of recording the shop
premises as a Discontinued Activity in next years accounts
a. The fireworks activities should be shown as Continued
Operations in the accounts next year. All revenues and
expenses relating to these should be shown separately.
b. For usefulness
i. This will benefit users of accounts because they can
see that profits or losses from the Discontinued
Operations will not be expected to be realised in the
future
ii. This allows reader to predict more accurately future
expected performance. This may help future
potential investors / shareholders / creditors etc
with decision making.
iii. Eg buy more shares/allow credit Should be beneficial
if required to be shown by FRS3 / IFRS 5
c. Against usefulness
i. Adds more figures and details to the accounts so
makes them more difficult to understand. especially
for those with little accounting knowledge.
ii. Takes time to add extra detail and therefore this
means extra expense
d. Conclusion Should conclude that it is beneficial to show
Discontinued Activities.
2. Bernard Miles, the Chief Executive of Miles of Tiles Limited,
has stated If there is an adverse variance, this must be bad
for the business. (d) Evaluate this statement.
a. For statement
i. If this is a cost variance then expenditure has been
more than expected
ii. If budget is realistic, this is bad and may be caused
by :
1. Workers not working as hard as they could
2. Workers being paid more than a market rate
wage
iii. Inefficient machinery
iv. Materials being wasted
v. Paying more than the market rate for materials

vi. If this is a sales variance, then revenue is less than

expected
vii. This could be caused by:
1. Sales volume being less than expected
2. Sales price being less than expected
b. Against statement
i. Budget set may be unrealistic and actually the
business has performed well.
ii. There may be a positive aspect to the adverse
variance eg:
1. Material prices have risen on the world market,
but our buyers are still getting a comparatively
good price
iii. Adverse variances may be due to production being
greater than expected which is good for the business

c. Conclusion: Statement is (correct)/not correct

3. (d) Evaluate the decision to raise further finance by issuing
ordinary shares, rejecting the possibility of raising funds by
the issue of debentures.
a. Case for Ordinary shares / Case Against Debentures
i. Shareholders do not have to be paid dividends,
useful when short of funds / making a loss. Dividends
could be variable interest on debentures must be
paid
ii. No outside parties having any influence on running of
company eg place on Board
iii. No interest has to be paid, so profits of company
higher.
iv. No assets offered as security, so no claims on assets
by debenture holders, if debenture not repaid, or
company fails.
v. Reduces gearing ratio and therefore risk
vi. Debenture results in higher gearing which increases
risk to company
vii. Very important here as if debenture used, gearing goes
above 50% at 51.5%
b. Case for Debentures / Case Against Ordinary Shares
i. Interest is allowable for tax, so company may be able
to retain more funds than if paying dividends.
ii. Debenture issuer may bring expertise and experience
to company, and maybe Board.
iii. No possible dilution of ownership for existing
shareholders which means earnings per a share will
fall
iv. May be quicker to issue than ordinary shares
v. Costs of arranging debenture may be lower eg no
prospectus to issue
c. Conclusion: Should relate to above points made. E.g.
Ordinary shares are a preferable source of finance.

4. (c) Evaluate the Internal Rate of Return as a project

appraisal method.
a. Case For IRR
i. An accurate return can be calculated.
ii. Takes account of falling value of money over time.
iii. Can be compared to target value of business to
decide whether to invest in project.
iv. Can be calculated fairly easily by computer.
b. Case against IRR
i. Calculation of IRR involves use of complicated formula
requiring numerical skill Or calculation may involve
much trial and error to arrive at the IRR.
ii. May need a computer and computing skills to
calculate IRR.
c. Conclusion IRR is a good / not a good method of project
appraisal.
5. (d) Evaluate the treatment of the goodwill created in the
accounts of Panoramic Cinemas Limited following the
purchase of Luxury Cinemas Limited
a. Correct treatment of goodwill would be to amortize over its
useful economic life. Shown as an intangible non-current
asset
b. Case For this treatment
i. Likely to derive benefits from the expenditure over a
number of years, so spread the cost of this
expenditure over a number of years ie matching
concept gives a True and Fair view of the accounts.
ii. To write off immediately may make profit unrealistically
low, and tax charge would be unfairly low.
iii. In line with recommended practice ie FRS 10 / IAS
38
c. Case Against this Treatment
i. If written off immediately against reserves, the
prudence concept is followed.
d. Conclusion
i. Writing off over a number of years is recommended
and beneficial as it gives a true and fair view in the
accounts.
6. (c) Evaluate the figures calculated in (b) to make a decision
as to the future of each of the four mines
a. Just calculate
7. Henna Mahmood, a director of Chittagong Stores plc, has
stated at a board meeting liquidity is more important than
profitability. Required: (c) Evaluate this statement.
a. Profit most important
i. Without profit, business would close down in the long
run.
ii. If short term liquidity problem, many sources are
available as source of finance eg banks,
shareholders, debt factoring etc (need two sources).

iii. No/low profits may result in firm unable to attract

finance or investors/shareholders.
iv. No/low profits may see share price fall, as investors
lose confidence.
b. Liquidity most important (or both equally important)
i. Liquidity problems result in unable to pay daily bills
eg wages, electricity (need two)
ii. Unable to pay some bills may result in closure of
business eg tax bill
iii. Unable to pay some bills may mean business unable to
operate eg electricity cut off
iv. Can survive short term losses if previous profits have
been built up
c. 2 for Conclusion eg Profit more important

January 2013
1. (b) Evaluate the statement of the Marketing Director, concerning
the liquidity position of Channel Oil plc, at 31 December 2012.
a. FOR statement
i. Current ratio is 2 508 600 : 293 250 which is 8.56 : 1 O/F
ii. This is way above / too high ideal ratio of 1.5/2 : 1.
iii. Too much working capital is tied up in stocks of oil
iv. Acid ratio is (2 508 600 2 273 600) : 293 250 which is
0.80 : 1 O/F
v. This is below/ too low the ideal ratio of 1:1
vi. A tax bill of 198 000 must be paid in 30 days but there is
only 131 000
vii. Cash and cash equivalents
b. AGAINST statement
i. A current ratio of above 2:1 is better than below 2:1. If the
business can sell stocks quickly, then liquidity problem can
be avoided.
ii. The nature of the industry may mean that it is normal for
large stocks of oil to be carried.
iii. Working capital is 2 215 350 which is a healthy figure.
iv. Bank balance is positive at 114 000 which can be used to
pay debenture and loan interest and settle trade and other
payables
c. Conclusion (two s) Channel Oil plc has a liquidity problem
2. The directors of Khulnar Carpets Limited expect higher costs to
apply in January 2013, but have decided not to charge these extra
costs to customers, i.e. they will not increase the price of each
carpet sold. (d) Evaluate the decision not to charge the extra
production costs to the customer.
a. AGAINST Passing on the increase in production cost
i. Could absorb rising costs by increasing efficiency.
ii. Customer could be unhappy and not buy and go to a rival
supplier.

iii. New price could make firms price higher than rivals.
iv. Present price of 299 is psychological and an increase will
take them through the 300 barrier.
b. FOR Passing on the increase in production cost
i. Need to maintain profit margin, this (or mark up) could be
fixed otherwise business makes losses / goes bankrupt
ii. Cannot keep same selling price for ever will have to
increase price some day
iii. Customers may be quite willing to pay the higher price if
they still think they get good value
iv. New price may still be below that of rival firms.
c. CONCLUSION () Should relate to above eg passing on increased
costs is wrong/right
3. 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. (c) Evaluate this statement on behalf of Med Isle Travel plc.
a. For statement
i. Company will not have pay cash dividends, which is
beneficial if a liquidity problem
ii. Bonus shares makes the Statement of Financial Position look
like that of a larger company which may help to raise
finance etc
iii. Original shareholders would have been kept happy and
therefore quiet as they would have received free shares
and these shares are eligible for dividends.
iv. Quicker/cheaper to issue bonus shares
b. Against statement
i. 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
ii. Issue of bonus shares sees share price fall more than the
possible fall if a rights issue
iii. Bonus shares will result in more shares eligible for dividends
so dividend per share likely to fall.
c. Conclusion Bonus issue would not be better for company
4. (b) Evaluate the level of drawings that Kim Seng is taking out of
the business each month.
a. FOR correct drawings
i. April balance is 1 218 but needs to have monthly rent of
1199 deducted, leaving a balance of 19, so Kim
cannot draw out any more.
ii. May will be the first month of normal sales revenue of 6
160 which leaves a balance of 481.
iii. This will be needed for irregular payments eg truck service,
as a precaution, and to pay back the loan eventually.
b. AGAINST correct drawings

i. 481 per month is not enough to meet irregular

payments/bills as a precaution, and pay back the loan.
The drawings should be smaller.
ii. With these drawings, March has a negative balance.
c. CONCLUSION
i. Should relate to points made above ie Drawings are at
correct/incorrect level.
5. (b) Evaluate the project for Metro Clean plc, using the calculations
made and considering any other relevant factors.
a. Against Investment
i. Payback method says do not invest as project not within 3
year payback period
ii. May be better investment projects available?
b. For Investment
i. ARR states invest as meets % return figure of 10%
ii. Project is profitable overall having total cash inflow 986
000 o/f
iii. It is possible to dispute 3 year payback period , perhaps
longer is better.
iv. What happens after 5 years? renewal of contract? Any
other/further business?
v. Customer is in the public sector so little chance of bad
debts.
c. Other Relevant Points :
i. Accuracy of predictions?
ii. Objectives/strategy of company?
iii. Both methods ignore time value of money unlike NPV
iv. Could use other methods of appraisal
d. Conclusion : Must relate to points made above
6. (c) Evaluate the information and figures calculated in (b) to
decide which store should stay open, and which store should
close.
a. Case for Higher End staying open
i. Lower break even point by 10 550 units.
ii. Lower level of fixed costs by 15 900 if stays open, no
need to pay rent on other store.
iii. Higher contribution per unit by 5 per unit
b. Case for Lower End staying open
i. Higher profit by 1 716
ii. Greater margin of safety by 892 units.
iii. Higher level of sales by 11 442 units
iv. If other store closes, building could be sold, and maybe this
stores building purchased.
c. Conclusion Should CLOSE Higher end store as lower profit made .

7. (d) Evaluate the appropriateness of revaluing assets and

liabilities before a takeover.
a. AGAINST Revaluations
i. The larger party may be in a position of strength and abuse
this position to revalue assets to their own advantage ie
lower value than true market value

ii. Revaluing assets and liabilities a pointless waste of time and

money because the buyer can agree to pay whatever
goodwill they feel is appropriate.
iii. Professional valuers may be required and these may charge
considerable fees
b. FOR Revaluations
i. Even if one party is in a position of strength, the other party
does not have to agree to a sale if they do not like the
value put on assets.
ii. It is only fair that assets and liabilities are sold for their
correct market value, not some historical book value that
may not reflect market value.
c. Conclusion 2 marks available It is appropriate for revaluations.

June 2013
1. (b) Evaluate the usefulness of the Auditors Report to the users of
the published accounts of Hong Kong Cameras plc.
a. FOR Importance
i. Auditors are independent scrutineers of the accounts who
report that the accounts have been prepared correctly in
accordance with International Accounting Standards or
rather, give a True and Fair view or do not
ii. Auditors are reporting on how Directors have used the funds
invested by shareholders. The auditors duty is to the
shareholders.
iii. Auditors may give tax authorities more confidence that the
tax computation is correct.
iv. Professional supervisory bodies exist to give guidelines to
auditors eg Audit and Assurances Council. Auditors should
be professionally qualified eg Chartered Accountants.
v. Report is required by the Companies Act/legislation
vi. If Auditors are unhappy with the accounts the Auditors
Report will be qualified
vii. The report may help users make a decision eg buy or sell
shares in the company
b. AGAINST Importance
i. Auditors may not be very independent, going along with the
wishes of clients, i.e. conflict of interest in order to keep their
custom/earn feewhich may include non-audit work.
ii. Auditors could be misled by the directors and provide an
inaccurate report.
iii. Auditors do not guarantee that material fraud has not
occurred.
c. CONCLUSION - 2 marks Should relate to points made above. Eg
Auditors Report is important and of value.
2. (d) Evaluate whether Chandpur Sounds Limited should use
marginal costing or absorption costing to value inventory

a. Case for Marginal Costing

i. Could be said to help decision making in the short term when
deciding whether to accept an offer price or make or buy or
discontinue a product/profit centre or a limiting factor
problem
ii. Sees costs allocated to a time period, so it may be argued
that profit for that time period is more accurate. External
accounts are drawn up on the basis of a time period.
iii. Follows prudence concept as closing stock and profit figures
are lower.
b. Case for Absorption Costing
i. Sees costs allocated to products. Could be useful for
management when fixing prices or reviewing if a
product/project has been profitable in the long term.
Recommended by SSAP 9.
ii. Gives a realistic figure for profit
iii. Follows matching concept as revenues for the product are
matched against costs.
c. Other Points
i. If figures in the future are similar, choice of stock valuation
will not have very much effect on the profit.
d. Conclusion Max 2 marks available. Should use absorption costing
as per accounting standards.
3. (b) Evaluate the current liquidity position of Larnaca Distributors
plc.
a. Liquidity position good
i. Firm has healthy level of cash and cash equivalents
ii. Current Ratio now stands at 2.31: 1 which is good.
iii. Acid ratio now stands at 1.04 :1 which is ideal
iv. Liquidity has been improved by issue of ordinary shares
v. Working capital is 629 000 - 272 000 = 357 000 which is
healthy/ means current liabilities can be paid.
b. Liquidity position worsening/problems
i. Net cash outflow of 6 000
ii. Inventories are a large figure and rising is there a problem
with unsold inventories/ is it perishable?
iii. Trade Receivables rose by 15 000. Credit control/ chasing up
debtors needs to be carried out immediately as figure is very
high.
iv. Big increase in Trade Payables to very large sum Is firm
paying on time and obtaining cash discounts etc
v. Cash and Cash Equivalents of 71 000 are unable to pay
Current Liabilities of 272 000
vi. Dividend policy needs to be reviewed. Ordinary shareholders
have been paid an interim dividend for 2013 of 22 000 on a
profit before tax of 8000 which is very high.
vii. Debenture has been redeemed which uses liquid funds but
helps future liquidity as no more interest has to be paid.
c. Conclusion on current liquidity position max 2 marks ie Liquidity
position is good

4. (d) Evaluate whether it would be advisable to pay direct labour a

lower rate per tray, for Sunny Kipwat to achieve a profit of 2 000
per month.
a. Case for lower labour rate.
i. Business has profit target and has to take action to achieve
these targets.
ii. May not possible to decrease other costs, especially if fixed
eg loan repayment, rent etc
iii. May not be possible to increase selling price to increase
profit, as will result in reduced sales
b. Case against lower labour rate.
i. Workers will be demotivated and workforce morale will be
low.
ii. It may not be possible for workers to pick extra fruit, to
maintain overall wage level.
iii. Could try to reduce other costs instead eg shop around for
lower insurance.
c. Conclusion - It is a good/bad idea to lower labour rate.
5. Jahingar, the uncle of Imran, is also interested in investing in
shares and has given Imran the following advice.
a. 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. (b) Advise Imran as to the value of this
statement.
i. A higher share price does not mean a better share. The
nominal or face value of the share needs to be considered.
ii. Also the total number of shares in the company.
iii. Also important is the movement in the value of the share is
it moving up
or down?
iv. Very 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.
v. Many factors both inside the company and outside the
company can affect the price of a share.
b. Jahingar also states There is only one ratio that is
important and worth knowing about, and that is the
dividend per share. (c) Evaluate this statement on behalf
of Imran.
i. For the statement
1. 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.
2. 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.
ii. Against the statement

1. Investors also have a capital gain when the share price

rises, which is partly shown in the Price/Earnings ratio.
2. Dividend yield shows the return for every pound
invested, which is more important than dividend per
share.
3. 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.
4. Other ratios concerning profitability and liquidity etc
are important, as they show how well the firm is doing.
iii. Conclusion 2 marks
1. Dividend per share is not the only important ratio
worth knowing about.
6. (b) Evaluate whether Venture Vending Limited should draw up a
new set of budgets to replace the existing budgets for Months 2
and 3.
a. For Decision to draw up new budgets.
i. Existing budgets are not likely to be accurate so there is little
point in sticking with them.
ii. Good budgeting should be flexible, so changes should be
made to this ongoing process with regular reviews taking
place.
iii. 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
iv. A new budget would help planning / changes eg reduce the
purchases for each month
v. New budgets may have targets staff can reach which will
increase motivation
b. Against Decision to draw up new budgets
i. Will take time and money to draw up new budgets.
ii. Variance analysis could be carried out and actions taken to
meet original budgeted figures.
iii. The new budget will only be estimates anyway, so may not
be accurate
iv. The only budget directly affected by a lower sales level is
trade receivables so there maybe a need just to draw up
trade receivables
v. This is a new business, and sales may pick up to meet month
2 an3 figures in the original budget, making it accurate.
c. 2 marks available for overall conclusion, should relate to points
made above.
7. 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. (d)
Evaluate the decision of the cost accountant to ignore the labour
variance, but to investigate the material variance.
a. For the decision
i. Material variance is larger / labour variance is smaller

ii. Labour variance is 317.20 adverse, which is 380.32 less

than the adverse material variance of 697.
iii. Maybe the policy is to investigate variances over a particular
limit eg 500.
iv. The labour variance is only 3.56%, whereas the materials
variance is 15.3% which is much bigger.
v. Management by exception tries to make the management
time cost effective, so no time is wasted investigating small
variances.
b. Against the decision
i. It is possible that all costs, including labour could be reduced
so the adverse variance should be investigated.
ii. If you ignore an adverse variance below a certain limit, the
cost could creep up each year without any action being
taken.
iii. It is possible that any reduction in costs after investigation is
cost effective
iv. ie could be greater than management time spent
investigating.
c. Conclusion Should relate to above points eg decision was
correct/incorrect

Jan 2014
1. (c) Evaluate the project for the company, using the calculations
made in (a) and (b) above and considering any other relevant
factors.
a. For investment
i. NPV method states invest as NPV is positive
ii. Payback method says invest as project does pay back .
iii. Payback period of 2.94 years should be acceptable for the
company
iv. Positive cash flows received each year Other Relevant
Points could be
b. For or Against investment.
i. How accurate are the predictions for costs, cost of capital,
and revenues?
ii. Chance of renewal of contract after 4 years? Would this be
profitable?
iii. Other possible investment projects available at present?
More or less profitable?
iv. Objectives/strategy of company? Is this investment in line
with objectives? Is supermarket ethical?
v. Other methods could be considered e.g. Accounting rate of
return
vi. Future prospects of investment
vii. Sandwich market is very competitive
viii. Sandwiches/food is a basic essential product
c. Overall Conclusion Company should invest.

2. (b) Evaluate the raising of capital for a plc by issuing a debenture

instead of taking out a bank loan
a. Advantages of debentures
i. 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.
ii. 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.
iii. Debenture may be for a longer period of time, which may
benefit company, especially if to finance a long term project.

iv. Bank may wish to be involved in decision-making etc if loan

given e.g. ask for a seat on the board
b. Could argue either/both sides (as one each)
i. Interest on both is allowable for tax Both have the same
effect on gearing ie worsens
ii. Both would require assets to be offered as
security/collateral.
iii. Bank loan could be renewed/refinanced to be the same
length as a debenture
iv. Neither result in dilution of ownership so share price may
not fall
c. Advantages of bank loans
i. Interest rate may be lower
ii. Bank loan is likely to be for shorter period so less interest
may be paid.
iii. Monthly repayments may be preferable to larger sixmonthly repayments.
iv. Bank may have good relationship with company and give
advice etc
v. Debenture holders may wish to be involved in decisionmaking/control e.g. ask for a seat on the board
d. Conclusion Debentures / bank loans are better 2 marks
3. (d) Evaluate the creation and utilisation of a Capital Redemption
Reserve
a. Case For;
i. CRR acts as a creditors buffer
ii. Capital base is maintained
iii. CRR is a Capital Reserve so it prevents
directors/shareholders from taking cash/ capital out of the
business, leaving little/nothing for creditors in the event of
the company experiencing liquidity/ trading problems.
iv. Cannot be transferred back to the Statement of
Comprehensive Income and then used to pay out dividends

v. Presence of CRR may help a company obtain credit or

investment/ buying of company shares as Statement of
Financial Position appears stronger
vi. In certain circumstances e.g. redemption of shares, the CRR
must be created by company law therefore should be of
benefit.
vii. CRR can be used for a bonus issue of shares
b. Case Against ;
i. Creating a CRR takes time and money and accounting
expertise.
ii. Reduces flexibility, as company may not be able to do what
they want to do e.g. redeem shares, if e.g. insufficient
funds in revenue reserves.
c. Conclusion Capital Redemption Reserve is worthwhile/ useful/
effective.
4. (d) Evaluate the three payment options from the point of view of
Auto Albion Motors plc.

5. (c) Evaluate the two possible future policies for Saidpur

Household Appliances Limited to follow for the next 6 months.
a. Maintaining Output and decreasing Selling Price
i. Advantages
1. Reducing price may lead to higher sales, when
trading conditions are tough.
2. This may allow SHA Ltd to survive until trading
conditions improve , and competitors to fail.
3. No need to lay off any staff if output is not reduced,
which may involve redundancy costs etc.
ii. Disadvantages
1. Reduction in price of 0.26 is very little and may
have no effect on sales.
2. SHA Ltd may find they have unsold stock in these
difficult conditions.

3. Kettles are not a necessity in a downturn as

substitutes exist
4. Break-even point will be higher because contribution
per unit is lower
5. Total sales revenue decreases
b. Maintaining Selling Price and decreasing Output
i. Advantages
1. Keeping the same selling price may mean SHA Ltd
maintains market position i.e. does not appear to go
down market.
2. Avoids build up of unsold stock when trading is difficult

3. Could make a loss assembling kettles that cannot be

sold, so avoids unnecessary expense.
4. Break-even point does not decrease because
contribution per unit does not change.
ii. Disadvantages
1. Total sales revenue decreases
2. Reducing output may see resources wasted/unused
e.g. materials, staff etc.
3. Fixed costs are spread over a smaller output, so fixed
costs per unit will rise. 2 marks Should maintain
output (or selling price) and decrease selling price (or
output).
6. (c) Evaluate the performance and position of Southern Gas plc as
a business compared to Northern Gas plc for the financial year
ended 31 December 2013.
a. BETTER than Northern Gas plc
i. Gearing in Southern Gas is better as Northern Gas has a
ratio higher than 50% benchmark.
ii. This makes Northern Gas a risky investment, they have
probably taken out loans, debt capital etc
iii. ROCE is better in Southern Gas by 0.5 percentage points.
Perhaps the large debt capital of Northern means the returns
are lower e.g. due to interest payments
b. WORSE than Northern Gas plc
i. Earnings per ordinary share in Northern Gas are about 1
pence per share higher which is better
ii. Perhaps Northern have a smaller equity share base which
means EPS will be higher.
c. Conclusion Southern Gas plc as a business has performed
better/worse than Northern Gas plc.
7. Shares in Sheung Wan Construction plc were trading on the
market at 0.72 per share. Shares in Ngau Builders plc were
trading at 2.30 a share on the market. (e) From the point of view
of a shareholder in Ngau Builders plc, evaluate the purchase of
the company by Sheung Wan Construction plc.
a. FOR purchase

i. Goodwill received Profit on realisation 745 600 o/f 3.00

received per share which is 0.70 more than the share in
Ngau Builders plc trading at 2.30
ii. Larger firm may achieve benefits eg economies of scale
and share price in
iii. Sheung Wan plc may rise in future.
iv. Horizontal integration
v. Large liabilities on Ngau builders Statement of Financial
Position which another company can settle
vi. Sheung Wan has a healthier Statement of Financial position
and is therefore a safer investment.
vii. Reduces competition
b. AGAINST purchase
i. Larger firm may lead to problems eg diseconomies of scale
and share price in Sheung Wan may fall in future.
ii. Reduced power of shareholder from Ngau Builders plc, as
large numbers of other shareholders in Sheung Wan Limited.

iii. No control in new company .

c. Conclusion Purchase is beneficial/ not beneficial. 2 marks

June 2014
1. (b) Evaluate the financial performance of Wavelength Asia plc for
the year ended 31 March 2014 and the financial position at 31
March 2014.
a. Strengths
i. Gross Profit is good at 41% of sales. (own figure applies)
ii. Net Profit before tax is good at 16% of sales. (own figure
applies)
iii. Profit for this year added to retained earnings is 1million,
nearly as much as all previous retained earnings. . (own
figure applies)
iv. Gearing is good . at 31.4% . (own figure applies) ROCE =
25% which is very good (own figure applies)
b. Weaknesses
i. Current ratio is poor at 0.87:1 (own figure applies)
ii. Acid ratio is poor at 0.62:1 (own figure applies)
iii. Working capital is negative/poor at (201 000) (own
figure applies)
iv. Company has taken out a short term loan of 500 000
perhaps due to liquidity problems.
v. Company has tax bill of 399 000 to pay in 30 days, but
only 125 000 in the bank
c. Conclusion 2 marks Should relate to points made above. Eg
Wavelength Asia plc has had a good trading year but has liquidity
problems
2. At the start of Week 16 another business, Hellenic Design Limited,
asks Grecian Glass Limited if it is interested in a regular contract.
Hellenic Design Limited will supply 50 ornaments a week to

Grecian Glass Limited, at a price of 35 per item, for one year. (f)
Evaluate whether the directors of Grecian Glass Limited should
accept the offer from Hellenic Glass Limited.
a. For Accepting Offer
i. Grecian could buy for 35 and sell for 41 so making a profit /
positive contribution of 6 per item. This may realise a
total profit of 300 if all are sold.
ii. May allow Grecian to meet ALL orders promptly which
keeps customers happy.
iii. Demand may increase still further, and Grecian can meet
this increase.
iv. Avoid possible production problems
b. Against Accepting Offer.
i. Marginal costing theory would say do not accept buying for
35 when business can make for 30 as this would be 5
more expensive.
ii. Grecian are only 15 items short on meeting an order, so do
not need 50 items, as this gives an extra 35 items.
iii. There may not be any demand for the extra 35 items.
iv. There may not be any storage space for the extra 35 items.
v. The increase in demand for week 16 may be temporary so
more than 35 items may be left unsold. Possible quality
issues
vi. Hellenic are interested in a regular/long term contract which
may be problematic
c. Conclusion Grecian Glass should / should not accept contrac
3. Barisal Industrials plc redeemed some shares during the year.
a. (b) Explain:
i. (i) two advantages to a company of redeeming
Ordinary Shares.
1. Company may have excess/large amounts of cash,
which they feel would be best used / no better use
than redeeming shares.
2. Less funds will have to be paid out in the future in
terms of dividends. Certain ratios will improve, eg
Return on Capital Employed, Earnings per share.
(need one)
3. This will make managers and directors and company
look better.
4. The share price will rise as less shares are on the
market.
ii. (ii) two disadvantages to a company of redeeming
Ordinary Shares
1. Drain on companys liquid resources. ie cash and
cash equivalents.
2. Liquidity ratios will worsen. eg Current ratio, and Acid
ratio
3. Gearing ratio will worsen. as Debts is a larger
percentage of capital employed.

4. The companys Statement of Financial Position has a

smaller equity base which gives the impression of a
smaller company
b. Over lunch, a new member of the Finance Department asks
What are the differences between reserves, provisions,
and liabilities? (c) Explain the following terms, including
how each is created:
i. (i) reserves
1. Revenue reserves are appropriation of retained profit
ie created after net profit has been calculated. Eg
General reserve
2. Capital reserves may arise for a specific reason. Eg
issuing shares at a premium, or revaluing a noncurrent asset, or redeeming own shares without an
issue of new shares. (max 2 examples).
ii. (ii) provisions
1. Provisions are amounts set aside before arriving at net
profit eg for depreciation. Provisions reduce the
value of assets. The reason for the provision will be
specific eg for damages in a court case, but the
amount of the provision would be an estimate.
2. Provisions follow the concept of prudence
3. Provisions enable a true and fair view to be
shown/using matching concepts
iii. (iii) liabilities
1. Liabilities are debts that have been incurred by the
business and must be paid.
2. Short term (current) liabilities must be paid back within
one year. Eg trade payables to suppliers.
3. Long term liabilities are to be repaid in a term greater
than one year. Eg long term bank loan.
c. On behalf of the company, evaluate whether the total
dividend of 3.5 pence per share paid in the last financial
year was generous.
i. Dividend payment is generous
1. 3.5% return on nominal value of share 1 may be
higher than interest rate in a bank.
2. May be higher than other companies.
3. May be a good return for this industry.
ii. Dividend payment is not generous
1. 3.5p may be a lower return than what could have been
gained on a debenture or bond.
iii. Other factors (could appear on either side or argument)
1. Need to know the price paid/market price for the share,
which will tell us the yield ie true return on
investment.
2. Need to know the state of the world/national economy.
If a boom year, then 3.5p is low. If a recession,
3.5p could be regarded as high.

3. How does 3.5p compare to previous years dividends?

May be seen as higher or lower.
4. A member of staff states I do not know why we bother drawing
up budgets, because most of the figures in the Statement of
Comprehensive Income are out of our businesss control. (d)
Evaluate budgets as a management tool for control
a. FOR Budgets as a tool for management control
i. Some costs are under management control eg rate paid to
direct labour.
ii. Budgets allow business to see how a level of costs eg direct
labour impacts on profit. This may result in management
deciding on an appropriate level of pay rise.
iii. Variances can be analysed and remedial action taken.
iv. Budgets are good motivators especially where staff meet
targets/bonus payments etc
v. Budgets help coordination within the business
b. AGAINST Budgets as a tool for management control
i. Some costs are out of management control eg commodity
prices such as sugar.
ii. Some figures/costs may change, so drawing up budgets is a
waste of time and money.
iii. Need to employ a specialist so wage rises
c. Conclusion Budgets are a useful tool for management control
5. (b) Evaluate the performance of Chang Tao Stores plc concerning
liquidity, over the financial year ended 31 March 2014.
a. Liquidity handled well
i. Positive cash and cash equivalent balances at start and end
of year.
ii. Payments to purchase shares in other companies, seemed
to have been almost entirely financed by issue of shares and
debentures (long term finance).
iii. Operations are making a profit and generating funds.
iv. Low level of dividends appear to have been paid, so cash
not leaving the company.
b. Liquidity not handled well
i. 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.
ii. Issue of shares and debentures not quite enough to finance
purchase shares in other companies.
iii. All of Net cash from Operating activities may have been used
buying non-current assets
c. Conclusion Liquidity has been handled well/badly
6. (d) Evaluate the decision of Wilson Onyango to close one of the
stores for the year ended 31 March 2015.
a. FOR Closing store
i. Loss turns into a profit, an improvement of 23 198 on
the bottom line.
ii. Break even point is lower by 351 units.
iii. Business may be leaner/lower fixed cost base which helps
when trading is difficult.

iv. Margin of safety is now 276 units whereas before breakeven

point was not reached
b. AGAINST Closing Store
i. Sales in units have fallen by 50 units.
ii. Business has less store outlets to take advantage of upturn
in trading conditions.
iii. Possible redundancy costs
iv. Figures are only predictions
c. Conclusion Store should close