Theory

Question 1

Explain the term Capital Expenditure and give an example

Answer 1

Explanation:
Money spent on acquiring, improving and installing non-current assets

Example:
Purchase of premises

Question 2

Explain Revenue Expenditure and give an example

Answer 2

Explanation:
Money spent on running the business on a day-to-day basis

Example:
Payment of wages

Question 3

Explain Revenue receipts and give an example

Answer 3

Explanation:
Amounts received in the day-to-day trading activities from revenue and other items of income

Example:
Rent received

Question 4

Suggest 2 reasons why it is possible to have a debit balance on a purchases ledger control account

Answer 4

• payment made in advance

- overpayment of the amount owing

Question 5

Formula of the rate of inventory turnover

Answer 5

Cost of sales / average inventory

Question 6

Suggest 2 problems when working capital inadequate

Answer 6

• unable to pay debts when they fall due

- unable to take advantage of cash discount (prompt payment)

Question 7

Explain why the outstanding loan interest should not be credited to the loan account

Answer 7

• loan interest is an expense account / accrued interest is a current liability
• loan is a non current liability

Question 8

Suggest 2 reason why the rate of inventory turnover decreased

Answer 8

• higher inventory levels

- lower sales activity

Question 9

State the meaning of a contra entry in connection with control accounts and the reason such an entry is made

Answer 9

Meaning:
A contra entry is one which appears on the debit side of the purchases ledger control account and the credit side of the sales ledger control account

Reason: the entry is made when a sales ledger account is set off against a purchases ledger account of the same person/ business

Question 10

Give 2 reasons why the sales ledger control account has a credit balance

Answer 10

• overpayment by customer
• payment made by customer without deducting cash discount
• goods returned by customer after payment of balance due
• payment made in advance by customer

Question 11

States 1 disadvantage to the supplier when the trade payable payment period exceeds the payment period

Answer 11

• adversely affects liquidity position

- increase risk of bad debt

Question 12

State 1 advantage to the supplier when the trade receivables collection period exceeds the payment period

Answer 12

• may charge interest on overdue account

- do not have to allow the customer cash discount

Question 13

Formula for mark up

Answer 13

Gross profit / cost of sales X 100

Question 14

Explain 2 factors to consider before comparing financial statements with other business’

Answer 14

(1 mark for point and 1 mark for development)

• business in the same trade
• business of approximately the same size
• business of the same type(eg: sole trader)
• businesses may operate different accounting policies
• statements do not show non-monetary factors

Question 15

Explain why a business should consider historical cost before comparing financial statements with others

Answer 15

• the financial transactions are recorded at the actual cost
• because of this it is difficult to compare transactions taking place at different times

Question 16

Name 4 objectives a business should consider when selecting accounting policies

Answer 16

• relevance
• comparability
• reliability
• understandability

Question 17

Explain why the partners calculated the quick ratio as well as the current ratio

Answer 17

• inventory is not included in the calculation of quick ratio
• quick ratio shows the ability of the business to current liabilities from liquid assets

Question 18

Suggest 2 ways in which the profit for the year could be increased

Answer 18

• control expenses
• increase other income
• reduce cost of manufacturing
• increase sales activity

Question 19

Explain what is meant by income statement

Answer 19

A statement in which the profit or loss for the year is calculated

Question 20

Explain the term statement of financial position

Answer 20

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

Question 21

Explain the term non-current assets

Answer 21

• assets which are purchased not for resale

- assets which will be kept by the business for more than 12 months

Question 22

Explain the term non-current liabilities

Answer 22

Liabilities which are not due for repayment within 12 months

Question 23

Explain the term capital

Answer 23

• the amount the business owes the owner of the business

OR

• any resources provided for a business by the owner of that business

Question 24

Give one example of an intangible asset

Answer 24

• goodwill
• patents
• trademarks

Question 25

Comment on the current ratio 3.62 : 1 (CA more than CL)

Answer 25

- it is much higher than the “benchmark” of 2:1 - current liabilities can easily be paid from current assets - funds are not being used very effectively

Question 26

Explain why quick ratio is a better measurement of liquidity than the current ratio (2)

Answer 26

- inventory is excluded from the calculation of quick ratio | - inventory is not regarded as a liquid asset

Question 27

Suggest 2 ways in which the rate of inventory turn over can be improved Cost of sales / average inventory

Answer 27

- reduce inventory levels | - increase sales activity

Question 28

Suggest 2 ways to increase gross profit margin (gross profit / revenue x 100)

Answer 28

- increasing selling price - reduce trade discount allowed to customers - find cheaper supplier - obtain better trade discount

Question 29

State why it is not possible to have a credit balance in the cash column of the cash book

Answer 29

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

Question 30

State 2 reasons for maintaining a petty cash book

Answer 30

- reduce the number of entries in the main cash book - reduces the number of entries in the ledger - allows the chief cashier to delegate some of the work

Question 31

Explain the importance of return on capital employed

Answer 31

- shows the profit earned for each $100 used in the business - the higher the percentage, the more efficiently the capital is being employed

Question 32

Define cost (inventory)

Answer 32

Cost is the purchase of the goods plus any additional costs incurred in bringing the inventory to its present condition and position

Question 33

Define net realisable value (inventory)

Answer 33

It is the estimated receipts from the sale of the inventory less any costs of completing or selling the goods