ACCOUNTING

Units 3&4 – Written Examination

(TSSM’s 2011 trial exam updated for the current study design)
SOLUTIONS

Question 1 (7 marks)
General Journal
Date Details General Ledger

Debit Credit
01/01 Accounts Receivable 3 850
Inventory 32 890
Furniture and Fittings 17 800
Office Equipment 5 200
Cash at Bank 3 810
Accounts Payable 15 400
GST Clearing 5 300
Loan – EZY Bank 15 000
Capital 20 230

 1 mark – calculation of Accounts Receivable

 3 marks – Inventory/ Furniture and Fittings / Office Equipment
 1 mark – Cash at Bank / GST Clearing / Loan – EZY Bank
 1 mark – calculation of Accounts Payable
 1 mark – calculation of Capita

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ACCOUNTING EXAM

Question 2 (10 marks)

a.
Date Details In Out Balance
Qty Cost Total Qty Cost Total Qty Cost Total
Jan 1 Balance 4 70 280
04/01 Inv.410 2 70 140 2 70 140
09/01 Inv.3145 8 90 720 2 70
8 90 860
19/01 Memo 86 2 70 140
2 90 180 6 90 540
26/01 Memo 99 1 90 90 5 90 450
31/01 Memo 108 1 90 90 4 90 360
5 marks
 1 mark – line per entry

b.
Element Overstated / Understated / No Effect
Assets Overstated
Liabilities No Effect
Owner’s Equity Overstated
2 marks
 1 mark – Assets
 1 mark – Owner’s Equity
 Deduct 1 mark if ‘No effect’ not written for Liabilities

c.
Accounting Entity (1 mark)

The business is assumed to be separate from the owner. (1 mark)

Therefore, when the inventory was withdrawn by the owner, it is no longer recognised as an
asset of the business, but rather owned by the owner. (1 mark)

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ACCOUNTING EXAM

Question 3 (11 marks)

a.
IN OUT BALANCE
Date Details Qty Unit Value Qty Unit Value Qty Unit Value
2019 cost $ cost $ cost $
18/06 Inv.390 2 70 140 10 70 700
19/06 C/N 76 1 70 70 11 70 770
22/06 C/N 67 1 70 70 10 70 700
2 marks
1 mark –per completed entry

b.
General Journal
General Subsidiary
Ledger Ledger
Date Details Debit Credit Debit Credit
2019 $ $ $ $
18/06 Sales Returns 150
GST Clearing 15
Accounts Receivable 165
Inventory 70
Cost of Sales 70
22/06 Accounts Payable 77
Inventory 70
GST Clearing 7
4 + 3 = 7 marks
1 mark –Sales Returns
1 mark –GST Clearing
1 mark –Accounts Receivable
1 mark –Inventory and Cost of Sales entry
1 mark –Accounts Payable
1 mark –Inventory
1 mark –GST Clearing

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ACCOUNTING EXAM

c. State two changes George can make to his management of inventory to reduce sales
returns.
1 + 1 = 2 marks
Improve quality of products / improve packaging / improve delivery and ordering
efficiency / change supplier

Question 4 (21 marks)

a. State two reasons to explain how the Net Profit Margin improved yet the Gross Profit
Margin declined.
1 + 1 = 2 marks
 ↓ in Inventory Loss or Inventory Write-Down
 ↑ in Other Revenue
 improvement in expense control

b. Explain to Harriett how it is possible for a business to have an increase in profitability even
though there has been a decrease in profit.
2 marks

Profitability is the ability of a business to earn profit and is measured by comparing the
profit relative to another measure allows for comparisons between different businesses and
different periods.(1 mark)

Even though there is a decrease in the profit,

o if profit decreased by a lesser percentage than the decrease in sales

o if profit decreased by a lesser percentage than the decrease in average assets or
owner’s equity

profitability will increase. (1 mark)

c. Explain why the Return on Owner’s Investment is a more important indicator of business
performance than Return on Assets.
2 marks

Return on Owner’s Investment identifies the relationship between Net Profit and the actual
investment made by the owner. Return on Assets identifies the relationship between net
profit and value of assets. (1 mark)

The owner is more interested in the return from their investment (capital) as opposed to the
return on their assets amount to evaluate whether the owner should continue their investment
in the business as the asset value may be financed by external debt.
(1 mark)

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ACCOUNTING EXAM

d. Explain the difference between the concepts of ‘liquidity’ and ‘stability’.

2 marks

Liquidity is the ability of the business to meet its short-term debts as they fall due.
(1 mark)
Whereas stability refers to the ability of the business to meet its debts and continue its
operations in the long-term.(1 mark)

e. State two negative consequences of the trend in working capital.

2 marks

Too much money tied up in Cash at Bank, Inventory or Accounts Receivable. (1 mark)

o Increase in storage costs

o Greater chance of damage, shoplifting and obsolescence
o Increase chance in bad debts, debt collection fees and legal costs (1 mark for one of
these or a valid point)

f. State one limitation of using the Working Capital Ratio as an indicator of business liquidity.
1 mark

The Working Capital Ratio is a static measure that does not take into consideration the
speed in which accounts receivable and inventory are being turned into cash.

g. State one other key indicator that could be used when assessing business liquidity.
1 mark
Quick Asset Ratio or Cash Flow Cover

h. State one advantage and one disadvantage of being the owner of a business with a high Debt
Ratio.
1 + 1 = 2 marks

Advantage
 businesses can use borrowed funds to invest in more Assets to generate a higher
profit
Disadvantage
 more reliant on loans from banks so the business will have higher interest payments

 1 mark – per identification of advantage and then disadvantage

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ACCOUNTING EXAM

i. State two strategies Harriet might introduce to improve the trend in the Accounts
Receivable Turnover.
1 + 1 = 2 marks
 reduce credit terms
 better screening of accounts receivable
 follow up sales with reminder notices and phone calls
 prepare an accounts receivable Analysis
 endeavour to collect outstanding debts promptly

j. Discuss how the trend in Account Receivable Turnover could have a negative effect on both
the liquidity and profitability of the business.
4 marks
Liquidity
Accounts Receivable are being received at a slower rate,(1 mark) which means the business
may have difficulty purchasing inventory and paying accounts payable and expenses (1
mark)

 the business may have to go into overdraft or taking out a short-term loan to pay for these
items(1 mark)

Profitability
 negative effect on profitability because cash from accounts receivable is being received at a
slower rate and outside the credit terms, which means there might be a greater likelihood of
bad debts which would increase expense and decrease profit (1 mark)

 business may be generating high sales volumes, but it might be because the selling price is
too low / business might be holding too little inventory / costs such as delivery may be
higher (because deliveries are more frequent) (1 mark)

k. State one limitation of ratio analysis.

1 mark

 Based on historical data

 Changes in accounting methods
 Frequency of reporting
 Limited understanding of users

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ACCOUNTING EXAM

Question 5 (21 marks)

a.
General Journal
Date Details General Ledger

Debit Credit
28/02 Cash Sales 8 600
Credit Sales 13 200
Discount Revenue 120
Interest Revenue 20
Profit and Loss Summary 21 940
3 marks
 1 mark – Cash Sales and Credit Sales
 1 mark – Discount Revenue and Interest Revenue
 1 mark – Profit and Loss Summary

b.
 returning account balances to zero for the beginning of the next reporting period(1 mark)

 only transactions for the current reporting period are included in the reporting process and
calculation of profit(1 mark)

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ACCOUNTING EXAM

c.
Abby’s Appliances
Income Statement for month ended 28 February 2019
$ $
Revenue
Cash Sales 8 600
Credit Sales 13 200 21 800
Less: Cost of Goods Sold
Cost of Sales 10 900
Cartage Inwards 960
Buying Expenses 280 12 140
Gross Profit 9 660
Less: Inventory Loss 210
Adjusted Gross Profit 9 450
Plus: Other Revenue
Discount Revenue 120
Interest Revenue 20 140
9 590
Less: Other Expenses
Advertising 760
Bad Debts 440
Cartage Outwards 340
Depreciation – Furniture and Fittings 75
Depreciation – Office Equipment 65
Discount Expense 190
Insurance Expense 100
Interest Expense 260
Rent 2 500
Wages 6 100 10 830
Net Loss (1 240)
7 marks
1 mark – Revenues
1 mark – total Cost of Goods Sold items
1 mark – Inventory Loss
1 mark – Other Revenue items
2 marks – Other Expenses items per five items
1 mark – formatting of report

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 ACCOUNTING EXAM

d.
Wages
Date Cross-reference Amount Date Cross-reference Amount
28/02 Accrued Wages 1 800 28/02 Profit and Loss Summary 6 100
Bank 4 300
6 100 6 100

Profit and Loss Summary

Date Cross-reference Amount Date Cross-reference Amount
28/02 Expense Accounts 23 180 28/02 Revenue Accounts 21 940
Capital 1 240
23 180 23 180

Capital
Date Cross-reference Amount Date Cross-reference Amount
28/02 Drawings 500 01/02 Balance 49 160
Profit and Loss Summary 1 240
Balance 47 420
49 160 49 160
1/03 Balance 47 420
3 + 3 + 3 = 9 marks

 1 mark – per line entry

 1 mark deducted – no total in Wages OR no total in Profit and Loss Summary or no total in
Capital

Question 6 (2 marks)

Item Actual Budget Variance F/U

$ $ $
Sales $820 000 $775 000 $45 000 F
Gross Profit $425 000 $390 000 $35 000 F
Advertising $26 000 $21 000 $5 000 U
Wages $83 000 $96 000 $13 000 F
2 marks
1 mark – per two correct entries

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ACCOUNTING EXAM

Question 7
a.
General Journal
Date Details General Ledger

Debit Credit
09/07 Cartage Inwards 130
Inventory 5 100
GST Clearing 523
Accounts Payable – KR America 5 753

Product: ‘Fallon Flip’

Date Details In Out Balance
2019 Qty Cost Total Qty Cost Total Qty Cost Total
08/07 Balance 5 100 500
0907 Inv.476 30 110 3 300 5 100 500
30 110 3 300
6 marks

b. Explain the effect on profit if period costing is used instead of product costing.
2 marks

Profit will be reduced or understated by using period costing instead of product costing.
Period costing will recognise the expense as incurred regardless of the number of items sold,
thereby increasing/overstating Cost of Goods Sold and decreasing/understating Net Profit.
Product costing only recognises the expense as incurred when the actual item is sold.

1 mark –identifying that profit would be understated

1 mark –explanation of impact on Cost of Goods Sold

c. Discuss whether the accountant should apply product costing to the cost of the display cards.
4 marks

Under product costing, all costs incurred in getting the tables into a condition and location
ready for sale that can be directly traceable and allocated to each individual item are
included in calculating the cost each table. (1 mark)
Even though the display card can be directly traceable and allocated to each individual unit
of inventory on a logical basis, the display cards are only 16 cents each. (1 mark)

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ACCOUNTING EXAM

As they represent an insignificant amount, they are not useful for the decision making
process of determining an accurate cost price (1 mark) and should be written off as a Period
Cost and recognised entirely as an expense under the heading of Cost of Goods Sold.
(1 mark)

Question 8 (9 marks)
a.
Delivery Van
Date Cross-reference Amount Date Cross-reference Amount
2019 $ 2019 $
01/10 Balance 24 000 31/10 Disposal of Delivery Van (1) 24 000
31/10 Bank(1) 27 400

Accumulated Depreciation – Delivery Van

Date Cross-reference Amount Date Cross-reference Amount
2019 $ 2019 $
31/10 Disposal of Delivery Van (1) 22 000 01/10 Balance 21 600
31/10 Depreciation – Delivery Van (1) 400

Disposal of Delivery Van

Date Cross-reference Amount Date Cross-reference Amount
2019 $ 2019 $
31/10 Delivery Van 24 000 31/10 Accumulated Depreciation – 22 000
Delivery Van
(1 entire line)
Bank (1) 1 000
Loss on Disposal – 1 000
Delivery Van (1)
24000 24 000
2 + 2 + 3 = 7 marks
1 mark deducted – no totals in Disposal of Delivery Van ledger

b. Explain why a profit or a loss on the disposal of the Delivery Van occurred.
2 marks
Carrying value greater than disposal amount.
Under depreciated asset over its effective life (1 mark) due to over-estimating either the
estimated residual value or estimate effective life. (1 mark)
OR
The delivery van may have been in poor condition (1 mark) or this model may have been
in low demand or superseded by a new model. (1 mark)

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ACCOUNTING EXAM

Question 9 (7 marks)
a.

Calculation
Cost - $22
NRV - $18
$4 x 34
Inventory Write Down $136
2 marks
1 mark –calculation of $4 inventory write down
1 mark –multiplication of inventory write down by 34 units

b. With reference to an appropriate qualitative characteristic, explain why inventory is valued

at the lower of cost and net realisable value.
1 + 2 = 3 marks
Relevance/Faithful Representation

Using a more conservative inventory valuation allows the users of the reports to make
informed decisions. The reports are also prepared to more faithfully represent the real
world economic event that they represent, and are more likely to be free from material
error or bias.

c. State two reasons for the net realisable value of a product being lower than its cost price.
1 + 1 = 2 marks

Damaged / obsolete / out of season or fashion/ deliberate marketing strategy

100 marks

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