THEORY.

QUESTIONS ON DEPRECIATION

1. Discuss two accounting concepts that are applied when making provision for bad and doubtful debts

2. Distinguish between capital expenditure and revenue expenditure

3. Using an accepted accounting concept explain why the purchace of a non current asset such as computer
equipment will be recorded in theprofit and loss account for a single year only4

4. Explain how accounting concept of materiality assists in determining whether expenditure is classified as
capital or revenue

5. Evaluate whether it would be prudent to consider training costs for staff to use new equipment as capital or
revenue expenditure
6. Evaluate the benefits of using straight line dep for production machinery rather than using reducing balance

Benefits:

• Straight line is simpler to operate.

• Gives equal depreciation for equal benefit received in each year.
• Does not distort profit with higher levels of depreciation in early years.

Disadvantages:
• Machinery will lose more value in early years of ownership than later years.
• Balance sheet values may not be in line with market value of machinery.
• Total costs of ownership will increase using straight line as maintenance costs rise as the asset
becomes older

7. Explain two advantages of a manufacturing changing from straight line to reducing balance method
ii) Advantages of reducing balance:
• Greater depreciation written off in early years, which may reflect the fact that the fixed
asset loses more value in the early years.
• May provide a more realistic net book value if asset loses more value in early years.
• Total cost of operating the fixed asset would be even over the life of the asset. High
depreciation and low maintenance in early years. This will reverse in later years.

8. Explain the term depreciation and why it is an application for going concern concept
• Depreciation is the diminution in the value of a fixed
asset √√ due to use and/or the lapse of time√√.
b• Valid points may include:
• The going concern concept assumes that,
unless the opposite is known, the business will
operate for an indefinite period of time.
• Proportion of cost allocated to P/L each year.
• Fixed assets have a life of many years and
require the estimated diminution in value to
be charged to each year.
• The assumption of going concern therefore
allows depreciation to be charged over the life
of the asset irrespective of length.

9.The owner of a garage has stated that “by changing the annual depreciation the business will have sufficient
cash to replace the fixed asset at the end of a useful life” EVALUATE THIS STATEMENT
Supporting the statement
• Depreciation accrues a previous year’s capital expenditure over the life of the asset.
• Profit will be reduced by depreciation which should result in retention of profit.
• Profit will increase cash flow.

Against the statement

• No,it does not mean that they will have sufficient cash
• Although the accrual convention applies, this relates to the expenditure and cash flow in a previous year.
• The retention in profit may not be in cash.

10. Explain reason why a business should record depreciation in the annual accounts

Not to overstate profit • Follows prudence/ accruals / going concern concept

• Show a true estimate of the assets value in the balance sheet
• Book vales nearer to market value
• Apply the accruals concept and more accurately record the expenses of the business in the profit and loss

11.State one accounting concept which

I)supports change of depreciation

ii)does not support change of depreciation

(i) Prudence –√√ losses should be charged as soon as they are identified.
The depreciation on machinery will be high in the early years not
evenly spread over the life of the asset.
(ii) Consistency –√√ when a method of depreciation is chosen for a
non-current asset this should be consistently applied over the life of
the asset to ensure that the accounts are not distorted.

B) Evaluate arpans decision on changing his basis of dep from staraight line to reducing balace

Points for
• Greater depreciation will be charged in the early years which
reflects the situation with machinery
• Carry over value will be closer to market value resulting in
more accurate financial statement value.
• Evens out total cost of ownership when repair costs are
added to depreciation.
• Provides a more realistic book value
Points against:
• Distorts profit calculation
• Not consistent with previous practice.
• Not appropriate if machine used equally from year to year
QUESTIONS ON CONTROL ACCOUNTS, TRIAL BALANCE,DOUBLE ENTRY AND ERRORS

1. Name and explain four types of errors that would not be revealed by the trial balance

Commission Posted to wrong account of same class

Reversal Accounts correct but double entry reversed
Omission No double entry made in the books
Principle Posted to wrong account in a different class
Compensating Two different errors cancelling each other out
Original entry Incorrect original figure used

2. Evaluate the uses of suspense account

In favour
• Enables trial balance to balance
• Identifies the net value of errors to be found.
Against
• Errors remain in the accounts until found
• Financial statements prepared will be inaccurate
• Some errors will not be revealed by the suspense account
• Does not help to actually find the error.

3.Evaluate advantages of using double entry systeme

Easier to prepare financial statements / trial balance / establish pr
• Detailed record of each debtor / creditor accounts
• Checking of records is possible / less time consuming to check
• Can monitor business progress
• Can control costs more effectively
• Can manage business more effectively
• Can detect errors but NOT in correct errors
• Useful for authorities / tax authorities / bank
• Enables comparisons

4. Evaluate the usefulness to a business of preparing a trial balance

Positive
• Is ‘prima facie’ evidence of correct double entry/ a checking device
• Enables the existence of arithmetical errors to be identified
• Enables draft financial statements to be prepared
• Shows all accounts for information.

Negative
• Errors which do not affect the balancing of the trial balance will not be revealed
• The number of errors is not revealed just the balancing figure
• Draft financial statements will be prepared inaccurately.
• Difficult to locate error

5. Evaluate the role of a trial balance in ensuring the accuracy of ledger accounts

• The trial balance will reveal errors where there

has not been a debit and a credit of equal value
• The trial balance will not reveal errors where
the debit and credit in the ledger has not been
completed due to some fundamental error e.g the wrong account used as in an error in principle or of commission
6.Evaluate the contributions of control accounts in ensuring that debtors and creditors accounts are always
accurate

Benefits of control accounts:

• Control accounts act as a check against the total of debtors or creditors.
• Act as a protection against fraud.
• Reveal errors such as incorrect addition

Disadvantages
• The control account will not identify errors in individual accounts.
• Considerable additional work will be required to pinpoint errors.
• Errors not revealed by the trial balance will not be revealed by the control accounts.

7.Explain the limitations of trial balance


Does not reveal errors if one account has been debited and another account credited
with the same value.
• If transaction omitted from the accounts the trial balance will not record the error.
• Provides a summarised position for many creditors and debtors which may contain many
errors.
• Only records the position as at a point in time.

8. Evaluate the decision of not to keep full set of double entry records
Benefits:
• Detail of all transactions and individual accounts would be available.
• Final accounts easy to draft to establish financial position.
• Value of debtors and creditors would be readily available.

Disadvantages:
• Preparation requires specialist knowledge to maintain.
• Cost of purchasing specialist knowledge.
• Time consuming.
 QUESTIONS ON PATNERSHIP,NON PROFIT MAKING ORGANISATION AND MANUFACTRING A/C

1.Evaluate a trader trading in partnership compared with being a sole trader

Positive
• Greater capital/resources available
• Specialist skills available from the other partners
• Share losses/reduce risks

Negative
• Shared, not sole, decision making/conflicts
• Joint and several liability
• Share profits

2.Explain why subscriptions require adjustments for sums paid in advance and in arrears
The matching concept √√ must apply to ensure that the income for the period is matched against the expenditure of the
period.√√

3.Evaluate the decision for patners to not charge depreciation on land and building
Positive
• Land generally does not decrease in value through deterioration
• Historically land and buildings have appreciated in value
• Annual depreciation charge would be very small due to the long life of the asset

Negative
• Buildings will deteriorate with the passage of time
• Does not comply with concept of prudence, matching or going concern
• Unrealistic not to charge
• Non current assets not overstated
3.Evaluate why the club has high rate of membership fee for abt 10 yrs
Points for
• Cash flow up front
• Ties members to the club for a long period
• Reduce bad debts
• Attract more members
Points against
• Lower overall subscriptions over the years affecting surplus
• Services must be provided for ten years whatever the level of future
costs
√√ per valid point x Max two point in favour and two points against
4.Evaluate the need for a partnership agreement
Points for
• Formalises agreement
• Terms are clear to all partners which avoids argument
• States responsibilities
• Profits and losses can be divided in desired ratios.
Points against:
• Cost and time
• Changes more difficult to implement

5.Evaluate patners decision not to record good will in the books

Benefits to recording
• Accurate value of the business to the partners
• Does not undervalue the business
• Required when purchasing/selling a business
Against recording
• Goodwill is difficult to value/Money measurement
• Goodwill can change in value due to sudden events
• Accounting standards only recommend purchased
goodwill be recorded
• Prudent not to do so

6.Explain the term goodwill

7.Evaluate the decision of a patner joining a partnership as an alternative of opening a new business as a sole
trader

In favour of joining the partnership

• Established business
• The existence of goodwill indicates a successful business
• Partners to share the workload and facilitate time off and holidays
• Experienced partners to share decision making with

In favour of setting up a sole trader business

• All profit made would belong to Ionna
• Total control without having to seek approval of other partners
• No need to purchase goodwill

8.Evaluate the decision of a fan club not to write off bad debts

Benefits of writing off bad debts:

• Debtor level is high with 400 out of 2 000 still having not paid
• A significant time has passed increasing probability that not all debts will be collected
• Not all debts will be collectable and therefore a significant provision should be made
• Prudence concept applied
• Will lead to reduced profits in the future if bad debts occur
• Debtors will be accurate in the accounts.

Disadvantages of accounting for bad debts:

• Income from subscriptions may still be collected
• Need to chase debts to establish whether they are collectable
9.Define the terms fixed cost and semi fixed costs

Fixed costs are constant for a period of time and do not vary in the
short term with the level of output. √√
Semi-fixed costs contain both a fixed and a variable element. The
variable element varying with the level of output. Examples: Fixed: Rent, Production managers salary,
Depreciation on plant √
Semi-fixed: Sundry factory expenses √

10.Evaluate whether a manufacturing company should accept the offer made by the overseas suppliers

For acceptance of the answer

• Cheaper manufacturing cost greater profit
• Loss of manufacturing responsibility
• Can concentrate on marketing product
Against acceptance of the offer
• Loss of manufacturing independence
• Prices may rise later
• Supply placed in the hands of another manufacturer
• Social aspects on community with closure of plant
• discussion of exchange rate and/or import issues

11.Explain how provisions for unrealised profits would be treated by a manufacturer

• Transfers from Manufacturing Account to Trading Account are at a mark-up. √√

• At year end the manufacturing profit is removed from the inventory of finished goods √√
• A decrease in the provision will be added and a increase in the provision deducted from the gross profit in the
income statement √√
• The provision balance is deducted from the inventory valuation in the Statement of financial
QUESTIONS ON STOCK VALUATION,LABOUR COSTS,OVERHEAD COSTS AND JOB COSTING

1. Explain the following methods of remuneration

i)Day work

ii)Piece work

Day-work Workers are paid by the hour… Hours worked √ x Rate per hour √
Piecework Workers are paid by the number
of items produced… Number produced √ x Rate per item √

2.Evaluate remunerating a factory production line workers by piece work

In favour
• Greater production
• Cost reduced per unit
• Greater motivation for workers.

Against
• Quality can be reduced if work is rushed
• Greater supervision levels required
3.Explain the following terms i)Fixed cost ii)semi fixed cost iii)variable cost

Fixed costs – Costs which are constant over a period of time/ not varying with the level of output √√ e.g rent,
advertising. √
Semi-fixed cost – Costs which are fixed until a certain level of output is achieved, √ then those costs rise and
remain fixed until the next level of output is achieved when they rise again √ . (Stepped costs) e.g supervision costs
√
Variable costs rise in proportion to the level of output √√ e.g raw materials, direct labour. (accept
electricity/power, motor vehicle running expenses )

4. Evaluate the use of separate recovery rates for labour and overhead costs

Positive
• As labour is a variable cost and overheads mainly fixed cost, quotations can be more accurate and
competitive.

Negative
• As no multiple departments the recovery basis will be the same: hours worked.
 • Time consuming/complicated to calculate

5. Distinguish between allocation and apportionment as used in overhead recovery

Allocation occurs where a cost is wholly identifiable with one cost centre √√
Apportionment occurs where costs are shared and must be apportioned across the cost centres on some
equitable basis

6. Distinguish between inventory rotation and inventory valuation

Inventory rotation refers to the physical movement of inventory through the
stores. The oldest stock will normally be sold first to avoid deterioration. √√
Inventory valuation refers to the theoretical value of the inventory that is
sold or issued to production. √√ This may be influenced by the need to charge the customer
7. Evaluate the potential effect of the change to LIFO perpetual inventory
Points for
• Profit will be more prudently lower
• Issues to customers more accurately reflect replacement value
Points against
• Not approved by the tax authorities
• Inventory does not reflect market replacement value
• Does not reflect rotation

8.Evaluate the use of bonus scheme for remunerating the operators

Points for
• Greater production
• Lower unit costs than at present
Points against:
• Quality issues
• Potential accidents

9.Evaluate the use of FIFO as a method of valuing inventory

Points in favour
• Accepted by the tax authorities/accounting standards
• Is logical in that the oldest stock values are sold/issued first
• Gives a higher closing stock value and higher profits when prices are
rising.
Points against
• Stock is sold/issued at values that may be below current market prices
• Higher profits will mean higher taxes.

10.Distinguish between stock valuation and stock rotation

Stock valuation relates to the price attached to the issue of stock to the
production department or for resale/for the valuation of closing stock. A
method such as FIFO will be used resulting in the issue price probably being
different from the price paid. √√

Stock rotation relates to physical rotation of stock, the oldest stock will be
issued first to avoid deterioration.

11. Identify four business activities likely to be undertaken by a patner which would not be directly charged to a
client
• Promoting the business
• Undertaking own administration
• Interviewing staff
• Meeting potential clients
• Travelling time
• Illness

12. Identify the use of hourly rates for charging clients

Points for:
• Service industry best suited to charging by hour
• Charging method is seen as fair by clients
• Simple to calculate from job sheets
Points against:
• Work can be of varying complexity justifying a different
charge.
• Method does not take account of the ability of the client to
pay.

13.Evaluate apportionment as a means of recovering overhead costs

In favour:
• provides a basis for recovering overhead costs
• reasonable pre-estimate of how costs are actually incurred.
Against:
• complicated calculation
• only an estimate of the costs incurred by each department
• reasonable basis not always available

14.Evaluate the decision of changing the remuneration payment to her employees from DAY-work to PIECE -
work
In favour of the decision:
• less supervisory control will be needed
• more work may be completed by the employee in the same time
• opportunity to increase earnings for employee.
Against the decision:
• difficulty of measuring this type of work
• difficulty in setting the piecework rate
• quality of work may diminish
15. Explain six characteristics of job costing

• One off/ single order contract.

• Customers special requirements.
• Each job is of comparatively short duration.
• Continuously identifiable unit.
• Hourly charged, quotes prepared for each customer.
• Items not produced for stock.