Past Paper Questions

Question 1

4 reasons why the proposal to ask for overdraft facilities (from the bank for up to $30,000) should NOT be accepted

Answer 1

1. Bank overdraft not suitable for long-term borrowing
2. Interest may be more than that of a loan
3. Bank may require overdraft to be repaid at short notice
4. Overdraft facility may be withdrawn at short notice

Question 2

Why is it not possible to have a credit balance in the cash column of the cash book?

Answer 2

It is not possible to take out more cash than is in the cash box

Question 3

3 forms (other than in cash or from the bank) in which a business owner might take drawings

Answer 3

1. Goods for own use
2. Private expenses paid by business
3. Business asset taken over by owner

Question 4

4 advantages of maintaining books of prime (original) entry

Answer 4

1. Reduces the number of entries in the ledger
2. Provides evidence of transactions since they are recorded from source documents
3. Groups together similar types of transactions in one book in date order
4. Allows work to be divided between several people

Question 5

2 reasons why a business owner prepares an income statement

Answer 5

1. To know if he has made a profit

2. To know if he has an adequate return on his investment

Question 6

State the type of asset for which the revaluation method of depreciation is suitable.

Answer 6

Small items of equipment eg. loose tools

Question 7

4 reasons why the directors might have taken out the loan

Answer 7

1. To reduce the overdraft
2. To fund an increase in inventory
3. To purchase new non-current assets
4. Growth/expansion

Question 8

2 ways in which the shop profit could be increased

Answer 8

1. Increase the selling price

2. Buy cheaper goods

Question 9

4 users of the financial statements (other than the owner) + reason why those users would be interested

Answer 9

1. Credit supplier
   - To check on likelihood of being paid
2. Manager
   - To see efficiency and progress of the business
3. Bank/lender
   - To check on suitability for loan
4. Government
   - To use in tax calculation

Question 10

2 reasons why a partner may make a loan to the business rather than investing additional capital

Answer 10

1. Greater security than capital

2. Repaid before capital in a winding-up

Question 11

Explain why inventory should be valued at the lower of cost and net realisable value.

Answer 11

• This is an application of the principle of prudence
• Over-valuing the inventory causes the profit for the year to be overstated
• Over-valuing the inventory causes the current assets to be overstated

Question 12

2 reasons why the straight line method would NOT be a suitable method of depreciation to apply to hand tools used in the factory

Answer 12

1. Too difficult to depreciate each item separately

2. Hand tools do not depreciate by an equal amount each year

Question 13

4 problems a business may face if the trade payables payment period is unsatisfactory

Answer 13

1. difficult to obtain future supplies on credit in the future
2. might get a poor credit rating
3. may be charged interest for late payment
4. cannot take advantage of cash discounts

Question 14

4 benefits of maintaining a full set of double entry records

Answer 14

1. easier to prepare financial statements
2. helps to identify errors
3. helps to prevent fraud
4. easy reference

Question 15

Explain how maintaining a provision for doubtful debts is an application of the principle of accruals (matching).

Answer 15

The sales for which a business is unlikely to be paid are regarded as an expense of the year in which those sales are made.

Question 16

5 disadvantages to the existing ordinary shareholders if the funds are raised by the issue of additional ordinary shares

Answer 16

1. Dilution of ownership of company
2. New shares rank equally with existing ordinary shares with regard to dividend
3. New shares rank equally with existing ordinary shares with regard to repayment in a winding up
4. The dividend per share may reduce
5. In the event of a winding-up each shareholder may receive less

Question 17

Partnership

Answer 17

A form of business ownership where two or more owners called partners share profits or losses

Question 18

Limited company

Answer 18

A legal entity which has a separate identity from its shareholders, whose liability for the company’s debt is limited

Question 19

Shareholders

Answer 19

Owners of the share capital of a limited liability company

Question 20

State why a statement of account is not recorded in the ledger.

Answer 20

The statement is a summary of the transactions which have already been recorded in the accounting records

Question 21

State why a contra entry may be necessary.

Answer 21

It is made when a sales ledger account is set off against a purchases ledger account of the same business

Question 22

2 reasons why a manufacturing business purchases finished goods

Answer 22

1. Cheaper to buy than produce
2. Cannot manufacture those particular items themselves
3. Production cannot keep up with demand

Question 23

Statement of financial position

Answer 23

A statement of the assets, liabilities and capital of a business on a certain date

Question 24

Book of prime (original) entry

Answer 24

A book in which transactions are recorded before being entered in the ledger

Question 25

Why should the proposal to use the general reserve to raise $80,000 NOT be accepted?

Answer 25

General reserve is not necessarily represented by actual money.

Question 26

Why was interest on capital included in the partnership agreement

Answer 26

To encourage partners to invest in the business