ACCOUNTING

March 2020

Time allowed
Three hours

Instructions
• Write the question number next to each answer in your answer booklet.
• You are not required to rewrite the question in your answer booklet.
• Ensure that you pay particular attention to words in bold.

Information
• Different questions may carry a different number of marks.
• Marks for each question are shown in [ ].

Advice
• Read each question carefully before you start to answer it.
• Use the full time permitted and check all your answers.

Materials
• Notes or books are not permitted.
• Non-programmable calculators are permitted.

© INSTITUTE OF COMMERCIAL MANAGEMENT

 Answer question 1 and ANY THREE other questions
Q1 carries 40% of the marks – all other questions carry 20% of the marks

1. You have been asked to prepare the accounts for Phil's Sheds Limited for the
year ended 31st March 2020.
The trial balance has been extracted below.

Dr Cr
Sales (revenue) 2,840,000
Purchases 1,949,000
st
Stock (inventory) 1 April 2018 60,000
Payroll 245,000
Marketing 150,000
Insurance 30,000
Rent & Rates 35,000
Utilities 55,000
Bank Loan interest paid 1,000
Accounts payable 40,000
Accounts receivable 150,000
2% debentures 20,000
Buildings at cost 500,000
Equipment at cost 200,000
st
Depreciation of equipment (1 April 2018) 20,000
Ordinary share capital £1 100,000
st
Profit and loss a/c bal. (1 April 2018) 271,000
Bank loan 4% 90,000
Cash 1,000
Bank 5,000
3,381,000 3,381,000

Notes at 31st March 2020

 Equipment is depreciated at 10% on cost
 Insurance of £2,000 has been prepaid
 Closing inventory was valued at £10,000
 Payroll owing was £1,000
 Dividend declared of 70p per share
 Revenue of £100,000 due but not yet invoiced
 Taxation should be provided for of £27,000
 Bad debts of £500 should be written off
 £1,000 is owing on rent and rates
 Three months’ interest is due on the bank loan

(a) Prepare the Income Statement at 31st March 2020. [13 Marks]
(b) Prepare the Statement of Financial Position at 31st March 2020. [11 Marks]

Question 1 continues overleaf

 (c) Explain the following terms and whether they would be a debit or
credit in the income statement:
(i) Prepayments [3 Marks]
(ii) Bad debts [3 Marks]
(iii) Depreciation charge [3 Marks]
(iv) Accrued revenue [3 Marks]
(d) Explain the differences between ordinary and preference shares. [4 Marks]

2. The following fixed asset transactions took place during the period 1st April
2017 to 31st March 2020:
 1st April 2017 – A doughnut machine was purchased for £250,000
 1st September 2017 – A mixer machine was purchased for £100,000
 1st May 2019 – The doughnut machine was sold for £200,000
 30th November 2019 – A croissant machine was purchased for £300,000

Notes:
Machinery is depreciated at 25% per year using the reducing balance method.
In the year of purchase a full year of depreciation is charged to the income
statement. In the year of disposal no depreciation is to be provided.

(a) Write up the machinery at cost account for the period ended 31st March
2020. [4 marks]
(b) Write up the provision for depreciation account for the period ended 31st
March 2020. [7 marks]
(c) Write up the machine disposal account for the period ended 31st March
2020. [5 marks]
(d) Explain the difference between straight line and reducing balance
depreciation. [4 marks]

3. Holly plans to open a shop selling pet care products. She invests £200,000
in the business as capital and the business opens on 1st April 2019.The following
transactions are made:-
 On 1st April Holly purchases a shop for £80,000 with fixtures of £20,000.
 Three staff members are employed, each receiving a salary of £1,000 per month
paid on the 30th of each month.
 (Ignore PAYE/NI). Two are employed on 1st April 2019 and one on 1st May 2019.
 Stock purchases are paid in advance and are as follows:
(a) April-June: 100 items per month at an average price of £5 per item
(b) July-September: 120 items per month at an average price of £6 per item
(c) October-December: 150 items per month at an average price of £7 per item
(d) January-March: 200 items per month at an average price of £5 per item
 Sales are as follows:
(a) April-June: 80 items per month at an average price of £30 per item
(b) July-September: 110 items per month at an average price of £34 per item
(c) October-December: 160 items per month at an average price of £32 per item
(d) January-March: 195 items per month at an average price of £30 per item
 70% of sales will be for cash. 30% will be on credit for one month.
Question 3 continues overleaf
  The fixtures will be depreciated at 10% on cost. The building at 1% on cost.
 Holly plans to draw £1,000 per month from the business.
 There will be a special open day held on 1st April 2019 at a cost of £1,000
 An advertising contract has been signed for £5,000 per annum, paid quarterly
in arrears.
 The start date is 1st April 2019.
 Overheads are expected to be £1,000 paid in arrears.

(a) Prepare a cash-flow budget for the period 1st April 2019 to 31st March
2020. [11 marks]
(b) Comment on the budgeted cash flow position and advise whether or
not Holly should go ahead with the business plan. [3 marks]
(c) Explain three of the following five types of budget:
(i) Sales budget
(ii) Manpower budget
(iv) Capital expenditure budget
(v) Cash budget
(vi) Operating budget (profit and loss) [6 marks]

4. The following data relates to two businesses producing pet beds, for the
year ended 31st March 2020.

Poppy Ltd Amber Ltd

(£000) (£000)
Sales in year 6500 7000
Cost of sales for the year 3000 4000
Total expenses for the year 3000 1000
-------- --------
Average stock value 135 160
Closing stock value 150 120
Closing current assets 850 800
Closing current liabilities 700 400

All sales are on credit.

All cost of sales and expenses are on credit.
(a) For each company calculate the following to two decimal places:
(i) Gross profit percentage
(ii) Net profit percentage
(iii) Stock turnover rate
(vi) Current ratio
(vii) Acid test ratio [10 marks]
(b) Compare and contrast the financial performance of the two businesses. [7 marks]
(c) Explain how ratio analysis can help a business make decisions. [3 marks]

Continued overleaf
5. Explain the following sources of finance:
(a) Bank overdraft [4 marks]
(b) Factor finance [4 marks]
(c) Profits [4 marks]
(d) Creditors [4 marks]
(e) Leaseback [4 marks]

END OF QUESTIONS
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