Mark Scheme (Results) Summer 2008

GCE

GCE Accounting (6002) Paper 01

Edexcel Limited. Registered in England and Wales No. 4496750 Registered Office: One90 High Holborn, London WC1V 7BH

6002/01 GCE Accounting Summer 2008

6002/01 Mark Scheme Summer 2008

Question Number 1(a)(i)

Answer

Mark (24)
W1 Cost of Sales Direct Labour Direct materials Factory Depreciation Stock Adjust 225000 312000 32000 9000 578000

Q1 Mark Scheme (a) (i) Profit and Loss Account for Rainbow plc for Year Ended 31st March 2008

Turnover Cost of sales Gross profit Distribution costs Administrative expenses Interest payable Profit on ordinary activities before tax Corporation tax Profit on ordinary activities after tax

1678000 578000 1100000 311000 49000 35000 705000 72000 633000

o/f o/f o/f o/f o/f C o/f o/f C 11

W2 Distribution Costs Advertising Warehouse Rent Lorry Drivers Wages Warehouse Staff

53000 60000 86000 112000 311000

W3 Administrative Expenses Bad Debts Written Off Office Expenses

1000 48000 49000

1 6002/01 GCE Accounting Summer 2008

Question Number 1(a)(ii)

Answer

Mark (16)

Balance sheet of Rainbow plc as at 31 March 2008 B Fixed assets I Intangible assets Goodwill * II Tangible Assets Buildings (1600000 - 32000 o/f) Motor Lorries

120000

1568000 250000

1818000 1938000

C Current Assets I Stocks Stocks of Finished Goods II Debtors Trade debtors Prepayments ** IV Cash at bank and in hand Bank D Prepayments and Accrued Income E Creditors: Amounts falling due within one year Trade Creditors Bank interest F Net current assets (liabilities) G Total assets less current liabilities H Creditors: amounts falling due after more than one year Bank loan I : Provisions for liabilities and charges Taxation Provision ***

65000

41000 5000

96000

207000

75000 3000

78000 129000 2067000

400000 72000 1595000

K :Capital and reserves I Ordinary share capital called up V Profit and loss account (462000 + 633000 o/f )

500000 1095000

1595000

*Goodwill gets 1 tick only if not separate from fixed assets/not shown under intangible assets ** Prepayments can be shown in CII Debtors or D Prepayments *** Taxation provision can be shown under I Provisions or E Creditors

6002/01 GCE Accounting Summer 2008

Question Number 1(b)

Answer

Mark (12)

Max 8 for arguing one side Case For Importance of Directors Report Report gives information to e.g. shareholders which they could use to make a decision e.g. invest more funds in the company. Directors may use the report to try to inform shareholders that the company is acting in an ethical manner e.g. renewable fuel sources Other stakeholders e.g. pressure group may use information in the Report to bring about change in company policy e.g. treatment of disabled Disclosures may be required under Stock exchange regulations , which may be appropriate in the Directors Report e.g. legislation pending Information is given to shareholders which allows them to see in some detail how the company is performing E.g. principal activities, review of position of business Post balance sheet events, future developments Names of directors, interests of directors Employee involvement, disabled employees policy Political and charitable donations Creditor payment policy, creditor payment days Case Against Importance of Directors Report Report costs personnel time to prepare and money to print etc Directors may use Report to give an unrealistic, positive view of the company, as it is in their interest to do so. Conclusion Should relate to above points. E.g. Directors Report is important.

6002/01 GCE Accounting Summer 2008

Question Number 2(a)

Answer

Mark (20)

To obtain tick, entry must show correct figure and narrative. Ordinary Share Capital Account Apr 1 Balance b/d May18 Application & Allotment June30 Application & Allotment 700 000 Sept30 First & Final Call 700 000 Apr 1 Balance b/d + if balanced off correctly o/f 5 Share Premium Apr 1 180 000 May18 180 000 Apr 1 Account Balance b/d Application & Allotment Balance b/d 500 000 40 000 100 000 60 000 700 000 700 000

Mar31

Balance c/d

Mar31

Balance c/d

100 000 80 000 180 000 180 000

+ if balanced off correctly o/f 3 Application and Allotment Account May18 Ordinary Share Capital 40 000 May18 Bank Share Premium 80 000 June30 Bank May25 Bank 24 000 June30 Ordinary Share Capital 100 000 244 000 7 First and Final Call Account 60 000 Sept30 Bank 60 000

174 000 70 000 ______ 244 000

Sept30 Ordinary Share Capital

60 000 60 000

2 + if these two accounts closed off correctly, showing no balance + 2 if ALL dates correct OR + 1 if SOME dates correct

6002/01 GCE Accounting Summer 2008

Question Number 2(b) Oct 1 Nov 1 Question Number 2(c)

Answer

Mark (4)

Buildings Revaluation reserve Profit and Loss General reserve Answer

50 000 40 000

50 000 40 000 Mark (12)

Profit available for distribution: Profit and Loss Reserve = 312 - 40 + 246 = 518 General Reserve = 80 + 40 = 120 Total available = 638 o/f / 2 = 319 o/f C Number of Ordinary shares Dividend per share Question Number 2(d) = = 500 + 200 = 700

319 = 45.57 o/f pence (per share) 700 Mark (4)

Answer

Dividend Yield = Dividend Per share x 100 Market Price of share = 45.6 o/f = 185 o/f

24.6 % o/f

6002/01 GCE Accounting Summer 2008

Question Number 2(e)

Answer

Mark (12)

Maximum of 8 x for arguing one side Answers may include: Case for Ordinary shares Shareholders do not have to be paid dividends, useful when short of funds. No outside parties having any influence on running of company eg place on Board No interest has to be paid, so profits of company higher. No assets offered as security, so no claims on assets by banks, if loan not repaid, or company fails. Do not have to be paid back so are a permanent/long term source of finance. Bank loans result in higher gearing, which increases risk to company. Case for Bank Loans Interest is allowable for tax, so company may be able to retain more funds than if paying dividends. Bank may bring expertise and experience to company, and maybe Board. Bank may be flexible regarding repayments, length of loan etc. Issue of shares may dilute control of existing shareholders Issue of shares results in share price fall so existing shareholders are unhappy. Shares take a longer time to issue e.g. completing forms etc. Shares are costlier to issue e.g. handling applications Conclusion 2 x Should relate to above points made. Eg Ordinary shares are a preferable source of finance.

6002/01 GCE Accounting Summer 2008

Question Number 3(a)

Answer

Mark (12)

Reconciliation of operating profit to net cash flow from operating activities Net Operating Profit Add Interest : Bank overdraft Debenture Loss on Sale of fixed asset Depreciation Decrease in Stock Increase in Debtors Decrease in Creditors Net Cash Inflow from Operating Activities Question Number 3(b) Answer 56 600 3 800 8 000 6 000 20 000 9 600 (600) (2 000) 101 400 o/f C Mark (22)

Cash Flow Statement for the Year ended 31st March 2008 Wording is required to obtain the mark(s). Item also needs to be in correct place. Net Cash Inflow from Operating Activities Returns on Investment and Servicing of Finance Interest Paid Preference Dividend Paid Taxation Tax Paid Capital Expenditure + Financial Investment Payments to acquire tangible fixed assets Receipts from sales of tangible fixed assets Net Cash Flow from Investing Activities Equity Dividends Paid Final Dividend 2007 Interim Dividend 2008 Net Cash Outflow before Financing Financing Issue of Ordinary Shares Redemption of Preference shares Net Cash Inflow from Financing Increase in Cash 101 400 o/f (11 800) o/f (7 200) (17 000) (90 000) 19 000 (71 000) o/f 5 000 8 400 (13 400) (19 000) o/f

100 000 (80 000) 20 000 o/f 1 000 o/f C

6002/01 GCE Accounting Summer 2008

Question Number 3(c)

Answer

Mark (6)

Analysis of Changes in Cash and Bank Balances during year ended 31 March 2008 31 March 2007 31 March 2008 Change in Year Cash 4 000 1 000 (3 000) Bank (22 000) (18 000) 4 000 Total (18 000) (17 000) 1 000 Need first two columns for first Other layouts for reconciliation are acceptable. Question Number 3(d) Answer Answers may include the following: 8 available for arguing only one side. Profit most important Without profit, business would close down in the long run. If short term liquidity problem, many sources are available as source of finance e.g. banks, shareholders, debt factoring etc (need two sources). No/low profits may result in firm unable to attract finance or investors/shareholders. No/low profits may see share price fall, as investors lose confidence. Liquidity most important (or both equally important) Liquidity problems result in unable to pay daily bills eg wages, electricity (need two) Unable to pay some bills may result in closure of business e.g. tax bill Unable to pay some bills may mean business unable to operate e.g. electricity cut off Can survive short term losses if previous profits have been built up 2 for Conclusion e.g. Profit more important Mark (12)

6002/01 GCE Accounting Summer 2008

Question Number 4(a)

Answer

Mark (12)

High Quality Jacket Variable cost for one jacket = (11 x 3) + (15 x 4) = 33 + 60 = 93 o/f Break Even Point = 2 300 = 149 93 o/f 42 jackets o/f

Low Quality Jacket Variable cost for one jacket = (8 x 3) + (13 x 3) = 24 + 39 = 63 o/f Break Even Point = Question Number 4(b) Answer 2 000 99 63 o/f = 56 jackets o/f Mark (4)

Margin of Safety High Quality Jacket Low Quality Jacket Question Number 4(c) (160 - 42) o/f = (210 - 56) o/f = 118 jackets o/f

154 jackets o/f Mark (8) High Quality 23840 210 x 99 5280 8 x 3 x 210 9600 13 x 3 x 210 2300 17180 6660o/f C 56 o/f (o/f from (a)) 160 8960 o/f 2300 6660o/f C Low Quality 20790 5040 8190 2000 15230 5560o/f C 36 o/f 210 7560 o/f 2000 5560o/f C

Answer

Sales Revenue Material Costs Labour Costs Fixed Costs Total Costs Profit OR Contribution per Unit Sales Units Less Fixed Costs Profit

149 X 160 11 x 3 x 160 15 x 4 x 160

6002/01 GCE Accounting Summer 2008

Question Number 4(d)

Answer Case for one side of argument only 4 x maximum Case for High Quality Jacket Profit is higher by 1100 o/f Break Even point in units is lower by 14 units. o/f Contribution is higher by 20 o/f Profit margin is higher so less risky Case for Low quality jacket Margin of Safety is higher by 36 units o/f Figures are only estimates, e.g. may actually sell fewer high quality jackets Costs are lower so less risky (or stated as high quality costs higher) Conclusion Should relate to above points. e.g. high quality jacket is best choice.

Mark (8)

10

6002/01 GCE Accounting Summer 2008

Question Number 5(a)

Answer

Mark (16) Any 2 figures for first 2000 9600 52000 2400 1825 11500 77325 110000 32675 o/f 2500 11400 65000 2800 2125 11500 92825 123750 30925 o/f 3000 12996 78000 3200 2425 11500 108121 133650 25529 o/f

Budgeted Profit and Loss Account for June 2008 OUTPUT Materials Labour Transport Water + Electric Fixed Costs Total Costs Sales Revenue Profit

Question Number 5(b)(i) Question Number 5(b)(ii)

Answer (As output increases), profits are falling. o/f Answer Reduce material costs for larger output by negotiating better discounts Reduce labour costs eg by introducing piecework, bonus, etc Improve transport efficiency eg ensure lorries only travel when full Reduce electric bill eg turn off lights when not needed etc Negotiate better price with customers eg reduce discount given. Produce 2000 units (o/f) as this gives the highest profit level . Investigate figures for a lower output level eg 1500 .

Mark (2) Mark (6)

11

6002/01 GCE Accounting Summer 2008

Question Number 5(c)

Answer For argument one side only max = 4 x Answers may include Case For flexible budgets Allow good decision making as like compared to like eg similar output levels . May save time and money by allowing Management by Exception ie action only if a variance . Allows choice of optimum output eg 2000 units . Meeting the targets leads to motivation of workforce . Case Against flexible budgets Labour time which means money in preparation . Figures are only estimates so some variances may be misleading/action inappropriate . Conclusion Should relate to points made above. Eg Flexible budgets are a very useful tool .

Mark (8)

12

6002/01 GCE Accounting Summer 2008

Question Number 6(a)(i) Package A

Answer

Mark (10) million 5 5 5 15 30 Interest Rate/ Expected return 16% 14% 12% 10% Interest 800 000 700 000 600 000 1 500 000 3 600 000

Debenture Bank Loan Preference Shares Ordinary Shares Total

Both figures needed Both figures needed o/f

Weighted Average Cost of Capital = 3 600 000 o/f 30 000 000 Package B Debenture Bank Loan Preference Shares Ordinary Shares Total million 12 3 3 12 30

x 100 = 12% o/f Interest 1 800 000 405 000 375 000 1 320 000 3 900 000

Interest Rate/ Expected return 15% 13.5% 12.5% 11%

Both figures needed Both figures needed o/f

Weighted Average Cost of Capital = 3 900 000 o/f 30 000 000 Question Number 6(a)(ii) Question Number 6(b) Year 0 1 2 3 4 Answer

x 100 = 13% o/f Mark (2) Mark (12)

Directors should choose Package A o/f (if correct reason) as it has the lowest WACC. Answer

Sales 300 000 500 000 1 200 000 60 000 000

Running Costs Less Depreciation (500 000) (600 000) (1 200 000) (5 000 000)

Net Cash Flow (30 000 000) (200 000) * (100 000) o/f 0 ** 55 000 000 o/f

Discount Factor 1.0 0.893 0.797 0.712 0.636 NPV

Discounted Net Cash Flow (30 000 000) (178 600) o/f (79 700) o/f 0 o/f 34 980 000 o/f 4 721 700 o/f C

* Both (200 000) and (100 000) needed for ** Both 0 and 55 000 000 needed for

13

6002/01 GCE Accounting Summer 2008

Question Number 6(c)

Answer Maximum for argument one side = 4 x Apply o/f rule from (b) to all points made Case For Project NPV is positive / large / substantial / profitable at 4.7m o/f Figures are estimates could be greater profits. Company could establish reputation, other lines/events etc and continue after 4 years Case Against Project Figures are only estimates could be less profits. Need to apply other Investment Appraisal techniques e.g. Payback method Positive cash flow only arrives in year 4, with 2 years of a negative cash flow. Non-financial considerations e.g. building work, traffic problems Need to consider alternative use of funds i.e. opportunity cost or example Conclusion 2 x Should go ahead with project o/f conclusion.

Mark (8)

14

6002/01 GCE Accounting Summer 2008

Question Number 7(a)

Answer

Mark (8)

Calculation of Goodwill Buildings Fixtures and Fittings Furniture Stock Debtors Short Term Loan Creditors Value of Net assets acquired Question Number 7(b) Answer

1600000 75000 30000 3000 1000 -50000 -10000 1649000

All 3 requd Both requd Both requd o/f

Purchase Price Value of Net Assets Goodwill

2000000 -1649000 o/f 351000 o/f C

Mark (4) 100 000 1 000 000 = 10p per share x 3600 = 360

Cash received per share =

15

6002/01 GCE Accounting Summer 2008

Question Number 7(c)

Answer

as at 1April 2008 6600000 475000 for any two 230000 all four 30000

Mark (12) 351000 o/f

Balance Sheet of Hotel Maximus Goodwill Buildings Fixtures and Fittings Furniture Vehicles Stock Debtors Bank Cash Short Term Loan Creditors Working capital Net Assets Ordinary Shares of 1 each Share Premium Profit & Loss Reserve Capital + Reserves

7335000 28000 6000 need both

17000 C 32000 83000 50000 74000 need both 124000 -41000 7645000 3000000 1900000 2745000 7645000

16

6002/01 GCE Accounting Summer 2008

Question Number 7(d)

Answer An intangible fixed asset on the balance sheet Correct treatment of goodwill would be to amortize/depreciate/write off over its useful economic life/over a lengthy time period e.g. over 20 years. Case For this treatment Likely to derive benefits from the expenditure over a number of years, so spread the cost of this expenditure over a number of years i.e. matching concept gives a True and Fair view of the accounts. To write off immediately may make profit unrealistically low, and tax charge would be unfairly low. In line with recommended practice i.e. FRS 10 Case Against this Treatment If written off over a short(er) time period against reserves, the prudence concept is followed. Conclusion Writing off over a number of years is required and beneficial as it gives a true and fair view of the accounts.

Mark (8)

17

6002/01 GCE Accounting Summer 2008