Cambridge Assessment International Education

Cambridge International Advanced Subsidiary and Advanced Level

ACCOUNTING 9706/32
Paper 3 Structured Questions October/November 2017
MARK SCHEME
Maximum Mark: 150

Published

This mark scheme is published as an aid to teachers and candidates, to indicate the requirements of the
examination. It shows the basis on which Examiners were instructed to award marks. It does not indicate the
details of the discussions that took place at an Examiners’ meeting before marking began, which would have
considered the acceptability of alternative answers.

Mark schemes should be read in conjunction with the question paper and the Principal Examiner Report for
Teachers.

Cambridge International will not enter into discussions about these mark schemes.

Cambridge International is publishing the mark schemes for the October/November 2017 series for most
Cambridge IGCSE®, Cambridge International A and AS Level components and some Cambridge O Level
components.

® IGCSE is a registered trademark.

This document consists of 11 printed pages.

© UCLES 2017 [Turn over

9706/32 Cambridge International AS/A Level – Mark Scheme October/November
PUBLISHED 2017
Question Answer Marks

1(a) $ $ 10
Revenue 45 000
Cost of sales
Opening inventory 825 (1)
Purchases 28 700 (2)
29 525

Closing inventory (1 650) (1 OF) (27 875) (1OF)

Gross profit 17 125 (1 OF)
Deduct:
Insurance 3425 (2)
Electricity 775 (1) (4 200)
Restaurant profit 12925 (1 OF)

Purchases 28 350 – 1750 (1) + 2100 (1) = 28 700

Insurance (4800 + 950 +1100) (1) × 50% = 3425 (1OF)

1(b)(i) Gross margin = 17 125 / 45 000 = 38.06% (1OF) 2

Difference = 45.00 – 38.06 = 6.94% (1OF)

1(b)(ii) Consider market (1) – provide higher quality food (1) to appeal to target market. (1) 6
Seek cheaper suppliers / seek discounts from suppliers / buy in bulk (1) to reduce cost of sales. (1)
Increase the prices for items served in the restaurant. (1) Should earn higher revenue. (1)
Reduce food wastages. (1) This should increase the gross margin. (1)

2 marks × Max 3 points (1 mark for stating and 1 mark for developing)

1(c) The subscription received is debited to the bank/receipts and payments account and credited to the life membership 2
fund. (1)
An amount is transferred annually to the income and expenditure account. (1)
The remaining balance in the fund is shown in the statement of financial position. (1)
Max 2

© UCLES 2017 Page 2 of 11

9706/32 Cambridge International AS/A Level – Mark Scheme October/November
PUBLISHED 2017
Question Answer Marks

1(d) Beneficial if live longer than 10 years. (1) Otherwise not beneficial. (1) 5
Does he have funds available to pay $1000? (1)
Saves ‘trouble’ of renewing every year. (1)
Avoids any increases in subscriptions over the period. (1)
There may be other benefits for life membership. (1)
If he wishes to resign before the ten-year period, he may not get any refund. (1)
Decision. (1)
Max. 4 + Decision 1

Question Answer Marks

2(a) Ordinary Share premium General Retained earnings 12

share capital reserve
$000s $000s $000s $000s
At 1 Jan 2016 1000 300 100 220 (1) for four
Share issue 700 (1) 560 (1)
Bonus issue 510 (1) (510) (1)
Profit for the year 195 (3) *W1
Transfer to general reserve 40 (1) (40) (1)
Dividend paid (55) (1)
At 31 Dec 2016 2210 350 140 320 (1 OF) for four

*if 288, one mark only

W1: 288 – 52 (1) – 41 (1) = 195 (1) OF

2(b) It is not included in the statement of financial position/statement of changes in equity, (1) but as a note to the financial 2
statements. (1)

2(c) This is a non-adjusting event (1) as per IAS 10, (1) which is material / significant to the business. (1) Thus it is disclosed in 3
the notes to the financial statements for 2016. (1) It will be recorded in the 2017 financial statements. (1)

Max 3

© UCLES 2017 Page 3 of 11

9706/32 Cambridge International AS/A Level – Mark Scheme October/November
PUBLISHED 2017
Question Answer Marks

2(d) The ratio may indeed fall in the short term as non-current assets increase. (1) 5
Once the new factory is established, sales revenue or profit should rise too. (1)
The ratio may actually rise in due course. (1)
Shareholders are more interested in profits and dividends. (1)
The disclosure of the purchase enables users of the financial statements to make informed comparisons. (1)
Directors do not need to be greatly concerned. (1)

The directors should be concerned (1) as shareholders may sell their shares, (1) which may reduce the market price of their
shares. (1) Shareholder confidence may fall. (1) New shareholders may not be attracted to buy shares in the future. (1) The
shareholders may dismiss the directors. (1)
Decision (1)
Justification Max 2 for positive + Max 2 for negative

2(e) It increases the value of non-current assets in the statement of financial position. (1) 3
It increases/creates the revaluation reserve in the statement of financial position. (1)
It reduces the accumulated depreciation. (1)
It is recorded in the statement of changes in equity. (1)
Max 3

Question Answer Marks

3(a)(i) Stewardship is the responsibility which managers/directors have for the management of resources (1) within a business on 2
behalf of the owners/shareholders. (1)

3(a)(ii) The directors have responsibility as stewards of the company to report (1) at the AGM (1) to the shareholders on the 2
performance of the company. (1) To maintain proper accounting records. (1) Responsible for the preparation of financial
statements. (1) Manage the business on a day to day basis. (1) Safeguard the assets. (1)
Max 2

3(a)(iii) External auditors are appointed by the shareholders to carry out an audit, which is a systematic and independent 2
examination (1) of books, accounts, documents and vouchers of an organization, (1) to ascertain how far the financial
statements present a true and fair view of the business (1) and comply with IAS/Companies Acts. (1) To prepare an audit
report expressing an opinion. (1)
Max 2

© UCLES 2017 Page 4 of 11

9706/32 Cambridge International AS/A Level – Mark Scheme October/November
PUBLISHED 2017
Question Answer Marks

3(b)(i) $ $ 5
Sales 182 000
Less: returns (8 000) (1)
Less: sale or return (6 000) (1)
168 000
Purchases 154 000
Less: returns 12 000
142  000 (1 )
Closing inventory 74 800 (1 OF)
Cost of sales 67 200 (1 OF)
Gross profit 100 800

3(b)(ii) 168 000 × 60% (3/5) = $100 800 (1OF) 1

3(c) Percentage change is 100 800 – 50 000 (100 800 – *50 800) (1OF) = 50 800 (1OF) / 100 800 = 50.4% (1OF) 3

* 74 800 – 24 000

3(d) Reasons for closing inventory to be different than as per records: 6

Inventory has been stolen/damaged (1) due to little control. (1)
Inventory is obsolete, (1) so has no value in reality but might in the inventory records. (1) Sales have been omitted in the
records, (1) i.e. Inventory has been sent out on consignment or a sale or return basis, so not yet sold. (1)
Purchases of inventory have been recorded twice, (1) or not all inventory was counted. (1) Sales returns were amended in
the records (1) but the purchases returns were not. (1)
2 marks × Max 3 points (1 mark for stating and 1 mark for developing)

3(e) If book value is used, profit and current assets would be overstated (1OF) which is against the prudence concept (1) and 4
does not give a true and fair view. (1) Inventory should be recorded at the lower of cost and net realisable value, (1) in line
with IAS2 (1). Therefore the warehouse inventory valuation should be used. (1)
1 for decision + max 3 for comments

© UCLES 2017 Page 5 of 11

9706/32 Cambridge International AS/A Level – Mark Scheme October/November
PUBLISHED 2017
Question Answer Marks

4(a)(i)(ii) Income gearing 235 000 / 1 580 000 14.87% (1) 5

(iii)(iv) or 234 800 / 1 580 000 14.86%
Gearing ratio 2 935 000 / (2 935 000 + 4 540 000) 39.26% (1)
Dividend cover 1 345 000 / 325 000 4.14 times (1)
Price earnings ratio* 3.44(times) (2)

*EPS = 1345 / 3000 = 0.45 (1)

PE ratio = 1.55 / 0.45 = 3.44 (1OF)

4(b)(i) $000 2
Profit from operations 1600
Finance costs (200 000 + 235 000) (435) (1)
Profit for the year 1165 (1) OF

4(b)(ii) Equity and liabilities $000 2

Ordinary share capital 1500
Share premium 500
Retained earnings 3430
Total equity 5430 (1)

Non-current liabilities
8% debentures 2020 2935
} (1) both
10% debentures 2026 2000
4935

*Retained earnings = 2 540 000 + (1 600 000 – [435 000 + 275 000]) =

3 430 000 or (2 540 000 + 1 165 000 – 275 000) = 3 430 000

4(c)(i) Workings 4
Income gearing 27.19% (1 OF) 435 000 / 1 600 000
27.18% or 434 800 / 1 600 000
Gearing ratio 47.61% (1 OF) 4 935 000 / 10 365 000
Dividend cover 4.24 times (1 OF) 1 165 000 / 275 000
Price earnings ratio 3.33 times (1 OF) 1 165 000 / 3 000 000 = 0.39
1.30 / 0.39 = 3.33

© UCLES 2017 Page 6 of 11

9706/32 Cambridge International AS/A Level – Mark Scheme October/November
PUBLISHED 2017
Question Answer Marks

4(c)(ii) Income gearing has increased (1) significantly from 2016 because of extra interest payable on debentures. This is worse (1) 8
for a shareholder. This will reduce profit available to equity holders and therefore also impact other investment ratios. (1)
(Max 2)

The gearing ratio has also increased (1) because of the debenture issue being a greater increase than the increase in
retained earnings. (1) This increases the risk (1) of the company because of the need to pay interest and repay debt. (1)
(Max 2)

Dividend cover has stayed reasonably stable/increased (1) over the two years – as the profit available for distribution has
decreased (1), so have the dividends.
(Max 2)

The price earnings ratio has decreased (1). This is also a reflection of the market price of a share and the risk attached to it,
depending on the market confidence. (1) (Max 2)

4(d) The issue of the debentures had an adverse (1) effect on the income gearing and gearing ratios. The company is now seen 4
to be more risky. (1) The company may be perceived as being less attractive to investors. (1)

The company has had to pay additional finance costs. (1) This has reduced profits available to distribute to shareholders. (1)
This may have a negative effect on its liquidity. (1)

The company has a significant repayment commitment (1) and annual interest payment, (1) for which the directors need to
plan if profits fall. (1)

Debentures may be secured on the assets of the company (1) which may mean the asset is sold to repay it, if necessary.
(1)

1 for comment + 1 for development

2 marks × Max 2 points (1 mark for stating and 1 mark for developing)

© UCLES 2017 Page 7 of 11

9706/32 Cambridge International AS/A Level – Mark Scheme October/November
PUBLISHED 2017
Question Answer Marks

5(a) Payback does not consider the time value of money, (1) whereas net present value does. (1) 4
Payback calculates the time it takes to cover the initial cost of the investment and does not consider the net cash flow after
the payback period. (1)
Net present value considers the discounted cash flows for the whole life of the investment. (1)

5(b) Net present value is: 1

$
Cost (55 000.00)
Total present values 55 700.75
Net present value 700.75 (1)

5(c)(i) Annual net cash flows: 5

Year Present value $ Discount factor Net cash flows $

1 3 683.40 0.877 4 200 (1)
2 6 536.50 0.769 8 500 (1)
3 9 483.75 0.675 14 050 (1)
4 14 977.60 0.592 25 300 (1)
5 21 019.50 0.519 40 500 (1)

5(c)(ii) Payback period is therefore 4 years (1OF) and (2950 / 40 500 × 365) 27 days (1OF) 2

5(c)(iii) Units for each year are: 8

Year Net cash flow Contribution per Units

From (c)(i) unit
1 4 200 40 – 20 = 20 (1) (years 1 and 2) 210 (1 OF)
2 8 500 40 – 20 = 20 425 (1 OF)
3 14 050 50 – 25 = 25 (1) (years 3 and 4) 562 (1 OF)
4 25 300 50 – 25 = 25 1012 (1 OF)
5 40 500 55 – 25 = 30 (1) 1350 (1 OF)

© UCLES 2017 Page 8 of 11

9706/32 Cambridge International AS/A Level – Mark Scheme October/November
PUBLISHED 2017
Question Answer Marks

5(d) The machine has a positive net present value, but it is very small. (1) 5
The payback is within the life of the machine. However, it is very late by being in the fifth year. (1)

Wong Ho should purchase the machine as it has a positive net present value (1), it pays back within the life of the machine
(1) and it increases the production level. (1)

Wong Ho should not purchase the machine as the data is all estimated (1) and could be wrong. If the small positive net
present value becomes negative, (1) the payback does not happen in the lifetime and the production does not exceed the
current production levels. (1) There may be additional potential costs, (1) such as training. (1)

1 for decision and max 4 for explanation

© UCLES 2017 Page 9 of 11

9706/32 Cambridge International AS/A Level – Mark Scheme October/November
PUBLISHED 2017
Question Answer Marks

6(a) Jan Feb March 9

$ $ $
Balance b/f 4 500 (8 500) (5 500)

Receipts from trade receivables 150 000 180 000 200 000 (1) all

Payments to trade payables 148 000 (2) 162 000 (2) 171 000 (2)
Payment for expenses 15 000 15 000 15 000 (1) all

Balance c/f (8 500) (5 500) 8 500 (1 OF)

Workings:

Nov Dec Jan Feb Mar April

$ $ $ $ $ $
Revenue 150 000 180 000 200 000 210 000 225 000 240 000
Cost of sales
Mark-up 25% 120 000 144 000 (1) 160 000 (1) 168 000 (1) 180 000 192 000
Closing inventory 36 000 40 000 42 000 45 000 48 000

Cost of sales 120 000 144 000 160 000 168 000 180 000

Closing inventory 36 000 40 000 42 000 45 000 48 000
Opening inventory 36 000 40 000 42 000 45 000
Purchases 148 000 (1 OF) 162 000 (1 OF) 171 000 (1 OF) 183 000

6(b) Budgeted income statement 3

for the three-month period ending 31 March 2018

$ $
Sales 635 000 (1)
Opening inventory 40 000
Purchases 516 000 (1 OF)
Closing inventory 48 000 508 000
Gross profit 1275 000
Operating expenses 45 000
Depreciation 9 000
Profit for the period 73 000 (1 OF)
© UCLES 2017 Page 10 of 11
9706/32 Cambridge International AS/A Level – Mark Scheme October/November
PUBLISHED 2017
Question Answer Marks

6(c) $ 8
Profit from operations 73 000 (1 OF)
Depreciation 9 000 (1 OF)
Increase in inventory (8 000) (1 OF)
Increase in trade receivables (105 000) (1)
Increase in trade payables 35 000 (1)
Increase in cash 4 000 (2 CF or 1 OF)
Cash at 1 January 2018 4 500
Cash at 31 March 2018 8 500 (1 OF)

Workings:
Increase in trade receivables ($210  000 + 225 000) – ($150 000 + $180 000) = $105 000
Increase in inventory ($48 000 – $40 000) = $8000
Increase in trade payables ($183 000 – $148 000) = $35 000

6(d) Management decision will result in a cash deficit for March 2018 (1OF). Therefore possibly delay purchase. (1) 5
Review cash budget after March to see if payment can be delayed. (1) Arrange alternative finance, e.g. loan. (1) Will incur
interest charges (1) which will affect profit. (1)
Ask supplier for more favourable payment terms which don't impact cash flow as much. (1)
May have to delay payment to suppliers/expenses, (1) which may affect credit terms or confidence (1) of suppliers.

If these issues can be overcome then it may be worth purchasing the new system. (1)
Purchase of new system may allow better management of cash flow. (1)

Accept any reasonable analysis.

(1 mark) for decision
+
4 marks for valid discussion points

© UCLES 2017 Page 11 of 11