Past Papers — Worked Answers & What to Expect

II. "The cost of an asset is depreciated over its useful life."

Partly true. Under LKAS 16, it's the depreciable amount (cost less residual value) that's spread over the useful life, on a systematic basis that reflects how the benefits are used. Land is usually not depreciated, because it has an unlimited life. Useful life and residual value are reviewed at least once a year.

III. "ROCE is more informative than the net profit ratio."

Agree. ROCE = profit before interest and tax / capital employed, so it shows how efficiently all the long-term funds are used, and you can compare it with the cost of borrowing or other investments. The net profit ratio only relates profit to sales. It ignores how much capital was needed to earn that profit, so two firms with the same margin can have very different ROCE.

(b) Batch basis:

• Pens: cost 8,400 vs NRV 8,040 → 8,040
• Cloth: cost 281,000 vs NRV 290,750 → 281,000
• Total 289,040

This is the same as practice Week 3 Q7.

• Stationery = 60 + 50 + 90 + 15 + 70 + 175 + 50 + 40 + 60
• Sundry = newspapers 70 + photocopier repair 130 + display 80 + wrapping 89

Balance 3,260; reimburse 1,740; carry down 5,000. Post each column total to its expense account (Dr), and Dr Naleen 200.

• Fundamental:
• Relevance (predictive value, confirmatory value, materiality)
• Faithful representation (complete, neutral, free from error)
• Enhancing: comparability, verifiability, timeliness, understandability
• Underlying assumption (asked in 2020): going concern

Opening entry (general journal):

• Debit: land 1,585,000 · building 800,000 · furniture 400,000 · bank 325,000 · Sagara 55,000
• Credit: Ravi 80,000 · Max 75,000 · bank loan 450,000 · capital 2,560,000

Recommendation: the projects are mutually exclusive, so choose Project X, which has the higher NPV (29.20 vs 18.55 Mn) and adds more wealth.

Y pays back faster (0.92 years vs 2.94 years), but NPV is the better decision rule, because it uses all the cash flows and the time value of money.

Timing:

• 20% of sales are cash. Credit sales are received 50% in the same month and 50% the next.
• 10% of purchases are cash; the rest is paid next month.
• Salaries are paid 50% in the same month and 50% the next.
• Other expenses are paid a month late.

Disagree. The master budget normally starts from the sales budget, because sales are usually the principal budget factor (the limiting factor). Production is then planned as sales + closing stock − opening stock. Only if production capacity (or materials or labour) is the limiting factor would the production budget come first.

(a) Primary apportionment. Basis: welfare and medical by employees · rent by floor area · machinery depreciation by machinery cost · building maintenance by building value · electricity by kW.

(b) Simultaneous equations:

• A = 127,090 + 0.10B
• B = 95,995 + 0.20A
• So A = 139,479.08 and B = 123,890.82

(c) Absorption rates on the expected (budgeted) hours:

• X = 401,949 / 3,500 machine hours = Rs. 114.84 per MH
• Y = 298,891 / 5,000 labour hours = Rs. 59.78 per DLH

The hours "used" (2,600 MH and 4,500 DLH) give the overhead absorbed: X 298,584 and Y 269,010.

• Software: QuickBooks, Sage, Xero, Tally, SAP Business One, Microsoft Dynamics.
• "AIS is broader than ERP": disagree. An ERP (e.g. SAP, Oracle) integrates all business processes (finance, HR, production, sales, supply chain) in one database. The AIS is the accounting part of it. So ERP is the broader system, and AIS is a subset (a module) of it.

ABC Enterprises (year to 31 March 2020) uses exactly the same figures as Mihinadee above. The one extra point:

7. A cash count at night showed Rs. 3,000 against a book balance of Rs. 5,000. Cash drawings weren't recorded.

So there's a further drawings of 2,000, and cash falls to 3,000:

• Net profit: unchanged at 550,300, because drawings aren't an expense
• Drawings = 4,000 (goods) + 2,000 (cash) = 6,000
• Capital = 2,686,400 + 550,300 − 6,000 = 3,230,700
• Total assets = 3,887,700

(c) AIS components (5 marks):

1. People who use the system
2. Procedures and instructions (manual and automated)
3. Data about the organisation and its business activities
4. Software used to process the data
5. IT infrastructure (computers, peripherals, networks)
6. Internal controls and security

(d) "Manual is more effective than computerised": disagree.

Computerised systems are faster, more accurate (automatic posting and totals), give real-time reports, store data more easily, and offer backup and audit trails. Manual systems are cheaper to start and don't depend on electricity or IT skills. Overall, computerised systems are more effective for most businesses, provided there are proper controls.

• Stores S = 2,750 + 0.20M
• Maintenance M = 1,650 + 0.25S
• So S = 3,242.11 and M = 2,460.53

• Blanket overhead absorption: one single rate for the whole factory, instead of a separate rate for each department.
• Repeated distribution vs simultaneous equations: they give the same totals, because both share out all the service costs, including the reciprocal services. One does it by iteration, the other by algebra.

i. ABC Ltd:

• NPV = −8,320,000 + 3,411,000 × 0.847 + 4,070,000 × 0.718 + 5,824,000 × 0.609 + (2,065,000 + 900,000) × 0.516 = +Rs. 2,568,130, so invest
• Payback: 3,411,000 + 4,070,000 = 7,481,000 after 2 years; 839,000 / 5,824,000 of year 3 more → 2.14 years

ii. ARR:

• Average annual profit = 62,500 / 5 = 12,500
• ARR on the initial investment = 12,500 / 45,000 = 27.8%
• ARR on the average investment = 12,500 / 22,500 = 55.6%

iii. "Non-discounting methods are better": disagree.

• Payback and ARR are simple and good for checking liquidity and risk.
• But they ignore the time value of money, and payback ignores the cash flows after the payback period.
• Discounting methods (NPV, IRR) use all the cash flows and their timing, so they're more appropriate for decisions. Non-discounting methods are useful as supporting measures.

Timing:

• Sales: 50% cash; 50% credit, collected next month
• Purchases: cash ones paid immediately; credit ones paid 2 months later
• Rent income: received in the same month
• Admin: paid with a 2-month lag
• Depreciation: ignore (it isn't cash)
• Furniture: 32,000 paid in June

Ratios: the paper says current ratio 1:1 and quick ratio 2:1. That's the wrong way round: the usual benchmarks are current ratio 2:1 and quick (acid-test) ratio 1:1.

Double entry: Dr Plant 5,265 · Dr VAT recoverable 200 · Dr Overheads 25 · Dr Training 20 · Dr Operating losses 1,200 / Cr Bank (or payables) 6,710.

Core modules of accounting software: general ledger, receivables, payables, cash/bank. Non-core: payroll, inventory, fixed assets, budgeting, reporting.

Adjustments:

• Closing stock at the lower of cost 910 and NRV 950 = 910
• Electricity +10 and telephone +12 accrued
• Bad debt 7
• Fixed deposit interest: 1,200 × 12% × 6/12 = 72 receivable
• Loan taken on 31 March, so no interest this year, and it's a current liability (repaid within 12 months)
• Van insurance 40 covers 1 Oct to 30 Sept, so 20 is prepaid
• Van depreciation: 1,000 × 20% × 6/12 = 100
• Owner introduced land worth 800 (capital)
• Sales commission: 0.5% × 14,000 = 70 payable

• NPV = −7,320,000 + 3,420,000 × 0.847 + 4,090,000 × 0.718 + 5,924,000 × 0.609 + 2,965,000 × 0.516 = +Rs. 3,651,020. It's positive, so accept.
• Payback = 1 + (7,320,000 − 3,420,000) / 4,090,000 = 1.95 years
• Reliability of AIS: decisions, tax and audits depend on accurate, complete, timely data. Reliability comes from internal controls (authorisation, segregation of duties, access controls, backups, audit trails). An unreliable AIS leads to fraud, errors and bad decisions.
• Pricing by buyer's location (adjusting the list price for shipping costs): geographical pricing, e.g. FOB-origin, uniform-delivered or zone pricing.

ii. Chemical (October 2018):

• FIFO: 15,000 litres left, all from the 25 Oct batch @ 68 = Rs. 1,020,000
• Weighted average: the average is 61.60 after the 10 Oct receipt and 63.81 after the 25 Oct receipt, so 15,000 × 63.807 = Rs. 957,103

iii. "Super" fertiliser (100,000 packets). Standard quantities: M1 2,000 kg · M2 1,500 kg · M3 1,000 kg. Standard prices per kg: 2,000 · 3,000 · 2,500.

Sales = 18,000 × 100 = 1,800,000, which is more than 1,000,000, so the special allowance applies. The price includes a 20% mark-up on cost, so cost of sales = 1,800,000 / 1.2 = 1,500,000, and the special allowance = 0.5% × 1,500,000 = 7,500 per permanent employee.

EPF and ETF are calculated on basic + COLA (the fixed salary for contract staff).

Time-rate system:

• Advantages: simple; earnings are steady; quality doesn't suffer from rushing.
• Disadvantages: no incentive for efficiency; needs supervision; slow and fast workers are paid the same.

Ratio analysis:

• Benefits: compare performance over time and with competitors; spot trends; support decisions.
• Limitations: based on historical data; different accounting policies distort comparisons; inflation; window dressing; ignores non-financial factors.

• Capitalise: invoice 3,500 + freight 70 + customs and non-claimable VAT (400 − 250) 150 + agent's fee 35 + installation 185 + engineer's salary for the installation month 45 = 3,985
• Expense: staff training 20
• Receivable: claimable VAT 250

Double entry: Dr Plant 3,985 · Dr VAT receivable 250 · Dr Training 20 / Cr Bank or payables 4,210 · Cr Salaries 45 (moving the engineer's salary into the cost).

ii. Payroll software 900,000, used for 5 years: it meets the definition of an asset, because it's a resource controlled from a past event and is expected to give future economic benefits. Recognise it as an intangible asset and amortise it at 180,000 a year.

iii. Definitions:

• Useful life: the period over which an asset is expected to be available for use (or the number of units it's expected to produce).
• Scrap (residual) value: the estimated amount the entity would get from disposing of the asset now, less disposal costs, if it were already at the age and condition expected at the end of its life.

iv. Stock terms:

• Re-order level: the stock level at which a new order is placed, e.g. max usage × max lead time.
• EOQ: the order size that minimises total ordering and holding costs: √(2DC₀/C_h).