AC1205
Principles of Accounting
Candidates should answer Sections A, B and C.
Section A of this examination consists of 15 Multiple Choice Questions. You should
attempt to answer ALL the questions. Each question has four possible answers (A-
D). There is only one correct answer to each of the questions. The maximum mark
for this section is 30.
Sections B and C: Please answer question 16 (30 marks) of Section B, ONE
question from Section C and ONE further question from either section B or C (except
for question 16 all questions are worth 20 marks).
For sections B and C only, workings should be submitted for all questions requiring
calculations. Any necessary assumptions introduced in answering a question are to
be stated.
Extracts from compound interest tables will be given after the final question on this
paper.
© University of London 2023
Page 1 of 20
SECTION A
Candidates should answer ALL questions from this section.
1. Which of the following statements most accurately explains ‘capital expenditure?
A spending on the purchase or improvement of non-current assets
B spending on the acquisition of expenditure on expensive assets
C spending on the issue of additional share capital
D spending on the maintenance and repair of non-current assets
2. Hendry Ltd opened his new business on 1 January 2022. On that date, the only
asset was a bank balance of £11,000. During the year, Hendry’s drawings from
the business totalled £36,000. On 31 December 2022, the assets and liabilities
of the business were as follows:
Computers and furniture £61,000; inventory of raw materials £17,500; finished
goods, at cost £8,400; bank overdraft £12,600; trade payables £6,500;
prepayments £2,500; trade receivables £5,500; the provision for bad debts
£3,000; bank loan £40,000; interest payable £1,500; accrued expenses £3,600.
What is the profit of the business in the year ended 31 December 2022?
A £41,700
B £52,700
C £66,700
D £88,700
3. Which of the following is not an objective of internal control procedures?
To ensure that:
A the company receives all the income to which it is entitled
B all expenditure is properly authorised
C all assets are properly recorded and safeguarded
D the accounts comply with the law and accounting standards
Page 2 of 20
4. The equity of Duffy Ltd at 1.12.2022 was as follows:
£
Share capital 100,000 shares of 10p each 10,000
Share premium 30,000
Revaluation reserve 40,000
Retained profits 90,000
170,000
On 10.12.2022, the company made a bonus issue. 10 shares were issued for every
share in existence at that date in such a way as to maximise the retained profits.
The double entry reflecting this share issue is which of the following:
£
A Dr: Share premium 10,000: Cr: Share capital 10,000
B Dr: Retained profits 90,000 Dr: Share premium 10,000
Cr: Share capital 100,000
C Dr: Share premium 30,000 Dr: Revaluation reserve 40,000
Dr: Retained profits 30,000 Cr: Share capital 100,000
D Cr: Share premium 30,000 Cr: Revaluation reserve 40,000 Cr:
Retained profits 30,000 Dr: Share capital 100,000
5. The following information relates to Taylor Ltd:
£
Trade receivables at 1.2.22 101,000
Trade receivables at 28.2.22 107,000
Trade payables at 1.2.22 52,000
Trade payables at 28.2.22 49,500
Payments to suppliers in the month 145,100
Sums received from customers in the month 271,500
Cash discounts received in the month 1,500
Cash discounts allowed in the month 2,700
Bad debt written off in the month 1,000
Inventory at 1.2.22 85,000
Inventory at 28.2.22 77,000
What is the gross profit of Taylor Ltd for the month of February 2022?
£
A 129,100
B 132,100
C 154,100
D 171,200
Page 3 of 20
6. Brown Ltd made an operating profit of £185,500 after charging depreciation of
£31,200. During that year, trade payables increased by £26,600 and inventory
increased by £40,300. There was no change to trade receivables. Assuming that
no other factors affected it, the cash generated from operations would have
been:
A £283,600
B £203,000
C £149,800
D £230,400
7. What is the concept of going concern?
A Understating the assets and revenues and overstating the liabilities
and expenses
B Including all expenses for the year, irrespective of the date on which
they were paid
C A company that has the resources needed to continue operating
indefinitely until it provides evidence to the contrary
D Using caution when making estimates in conditions of uncertainty
8. At the end of the year, Cahill Ltd has inventory in hand at a selling price of
£20,600. What was the cost of inventory assuming inventory is sold at a margin
of 60%?
A £8,000
B £8,240
C £12,875
D £12,360
9. In 2022, Lilley Ltd produced and sold 200,000 items and the sales revenue
arising was £1m. The variable costs of production were £1.75 each. They made
a loss of £130,000. Assuming there is no change in any costs or revenues, how
many items must be made and sold to make a profit of £220,000 in 2023?
A 184,312
B 200,000
C 278,563
D 307,692
Page 4 of 20
10. Pinches Ltd makes cooking oil which sells at £20 a bottle. Variable costs are £12
a bottle. The business is working at full capacity. What is the minimum price at
which this product could be sold without making a loss for an order of 12,000
bottles? To fulfil this additional order, the company would incur additional fixed
costs of £50,000 and variable costs of £70,000. You may assume a linear
relationship between costs and selling price.
A £96,000
B £120,000
C £216,000
D £240,000
.
11. The normal credit terms offered by Hugill Ltd to its customers is payment 60
days from delivery and the issue of an invoice, both of which always occur on the
same day. At today’s Board meeting, the directors are considering offering
customers a 3% cash discount if they pay in 30 days. The company’s bankers,
MoneyCash charge Hugill Ltd overdraft interest at 2.4% per month. Consider a
sales invoice of £2,000. Is the company financially better or worse off by offering
this discount, and by how much?
A worse off £12
B better off £12
C better off £48
D worse off £48
12. Flanders Ltd makes travel gadgets. The standard cost of making a travel gadget
is as follows:
£
Direct material 4.40
Direct labour 1.90
Variable overheads 0.45
Fixed overheads 1.00
Standard cost 7.75
Selling price 20.00
Standard profit 12.25
Budgeted for March 2023 sales were £360,000. In March, in fact, 22,000 units were
sold for £418,000. The sales price variance and the sales contribution volume
variance for the month were:
Sales price variance £ Sales contribution volume variance £
A £11,000 favourable £26,750 favourable
B £11,000 unfavourable £27,750 unfavourable
C £22,000 favourable £53,000 unfavourable
D £22,000 unfavourable £53,000 favourable
Page 5 of 20
13. Samson Ltd is considering replacing equipment. The cost on 1.1.2023 will be
£3m. The expected economic life of the equipment will be 4 years. The company
depreciates its equipment using the straight-line methods. The company expects
to sell this equipment for £400,000, after the end of its useful economic life.
There are expected cost savings arising from this investment of £1,200,000 in
each of years 1 and 2 and £800,000 in each of years 3 and 4.
What is the payback of this investment?
A 2 years
B 2 years and 9 months
C 3 years
D 3 years and 2 months
14. Lachman Ltd is considering replacing a machine. The cost on 1.1.2023 will be
£2.3m. The expected economic life of the equipment will be 4 years. The
company depreciates its equipment using the straight-line method. The company
expects to sell this equipment for £200,000 after the end of its useful economic
life. There are expected cost savings arising from this investment of £900,000 in
each of years 1 and 2 and £600,000 in each of years 3 and 4. To the nearest
£100, NPV at a discount rate of 8% is + £369,100 and at a discount rate of 20%,
it is - £192,700.The Internal Rate of Return of this project is:
A 11.5%
B 12.1%
C 14.0%
D 15.9%
15. Walters Ltd is considering replacing a packaging machine. The cost on 1.1.2023
will be £4.5m. The expected economic life of the machine will be 4 years. The
company depreciates its equipment using the straight-line methods. The
company expects to sell this equipment for £400,000, after the end of its useful
economic life. There are expected cost savings arising from this investment of
£1,650,000 in each of years 1 and 2 and £1,800,000 in each of years 3 and 4.
You can assume that all cash flows occur on the final day of the year to which
they relate, unless otherwise stated.
What is the accounting rate of return using the average investment?
A 33.3%
B 15.0%
C 12.5%
D 28.6%
Page 6 of 20
SECTION B
Answer question 16 and not more than one further question from this section.
16. The balances below have been extracted from the accounting records of
Quinn Ltd at 31 March 2022:
£000 £000
Inventory at 1 April 2021 157
Trade receivables - 35
Land and buildings at cost 960
Land and buildings, accumulated 33
depreciation at 1 April 2021 .
Patent at cost 90
Patent, accumulated amortisation at 1 27
April 2021
Plant and equipment at cost 480
Plant and equipment, accumulated 234
depreciation at 1 April 2021
5% Loan notes redeemable 2025 280
Cash and cash equivalents 44
Ordinary share capital of 550,000 shares 550
of £1 each
Retained earnings at 1 April 2021 121
Share premium 110
Trade and other payables 91
Sales revenue . 1,200
Purchases 508
Interest 7
Administrative expenses 210
Distribution costs 90
Dividend paid on 1 September 2021 55
Under-provision for income tax for 10
year ended 31 March 2021
2,646 2,646
Page 7 of 20
You are given the following information:
i. The company depreciates its buildings at 3% per annum using the
straight-line method. The cost of land included in land and buildings is
£260,000. The land is not depreciable.
ii. Up until 31 March 2021 the company policy was to depreciate all plant and
equipment at 12.5% per annum using the straight-line method. However,
some plant and equipment has been wearing out at a faster rate than
expected. On 1 April 2021 the company reassessed the expected useful life
of this type of plant and equipment and decided that it should be changed
to a total of six years from the date of acquisition. The affected plant and
equipment was purchased on 1 April 2017 and had an original cost of
£120,000. This plant and equipment has no residual value.
The company did not purchase any plant and machinery during the year.
Depreciation is provided on a monthly basis.
iii. On 1 April 2018 the company purchased a patent for a recipe for a
manufacturing process for one of its food supplements. The patent gives
the owner the right to manufacture the supplement for 10 years with no
residual value.
iv. The inventory at 31 March 2022 was valued at a cost of £220,000. This
includes £45,000 of slow moving goods. The company is trying to sell these
to its regular customers and other retailers.
The best price it has been offered is £11,000.
v. Included within administrative expenses is £75,000 which relates to the
purchase of an insurance policy. The company paid cash upfront for the policy
which is valid from 1 January 2022 until 31 December 2022.
vi. On 22 February 2022 the directors discovered that Warren Ltd, one of its
customers, had gone into liquidation. They have been informed that the
company will not receive the outstanding balance of £2,500 and the amount
should be written off. The directors have also decided to create a provision
for doubtful debts of 4% of the remaining trade receivables balance.
vii. The 10-year loan notes incur annual interest at 5% per annum, paid six
monthly in arrears.
viii. The income tax expense was under-estimated for the year ended 31 March
2021. The tax due for the year ended 31 March 2022 is estimated to be
£52,000.
Page 8 of 20
Required:
(a) Prepare an Income statement for Quinn Ltd for the year ended 31 March 2022, a
Statement of Financial Position and a Statement of Change in Equity at that date, in
good style, for the directors.
(26 marks)
(b) Explain why the historic cost accounting convention has been criticised and
explain some of the advantages associated with its use.
(4 marks)
(Total 30 marks)
Page 9 of 20
17. The statements of financial position of Atrill Ltd as at 31 March 2021 and 2022
and the income statement for the year ended 31 March 2022 are shown below:
Atrill Statement of Financial Position as at 31 March
2022 2021
£000 £000
Non-current assets
Property, plant and equipment 1,580 1,000
Current assets
Inventory . 250 130
Receivables 454 362
Cash at bank and in hand 220 144
Total assets 2,504 1,636
Non-current liabilities
Loans 800 700
Current liabilities
Trade payables 374 310
Accrued administrative 6 3
expenses
Tax payable 36 29
Equity
Issued share capital 120 100
_Share premium account 88 49
Revaluation reserve 203 130
Retained earnings 877 315
Total equity and liabilities 2,504 1,636
Atrill Income Statement as at 31 March
2022
£000
Sales revenues 1,700
Cost of sales . (900)
Gross Profit 800
Distribution costs (5)
Admin expenses (120)
Operating profit 630
Interest income 80
Interest expense (65)
_ProfitProfit before tax 645
Income tax 28
Profit for the year 617
Page 10 of 20
The following additional information is provided:
1. The company sold equipment during the year which had a net book value of
£200,000. The cost of sales includes a loss of £10,000 on this disposal.
2. Depreciation of £42,000 is included in the cost of sales.
3. Dividends of £55,000 were paid during the year.
Required:
(a) Produce a Statement of cash flow for the year ended 31 December 2022 in
accordance with IAS 7.
(15 marks)
(b) Explain why profits and cash flow from operations are not always equal. What
part do accruals play in this difference?
(5 marks)
(Total 20 marks)
Page 11 of 20
18. The statements of financial position of Allen Ltd as at 31 December 2022 and
2021 and a summary of the income statement for the year ended 31 December 2022
appear below:
Statement of financial position at 31 December
2022 2021
£000s £000s
Non-Current Assets 3,700 2,860
Current Assets
Inventory 1,280 980
Trade receivables 2,460 2,160
Cash at bank 160 240
3,900 3,380
Total assets 7,600 6,240
Equity & liabilities
Equity
Ordinary share capital: £1 shares 1,600 1,600
Retained earnings 2,490 1,750
Total equity 4,090 3,350
Non-current liabilities
Long-term loans 1,600 1,200
Current liabilities
Trade and other payables 1,500 1,380
Tax 190 150
Bank overdraft 220 160
1,910 1,690
Total equity and liabilities 7,600 6,240
Summary Income Statement for the year ended 31 December
£000s £000s
2022 2021
Sales 22,400 19,500
Cost of sales 16,920 13,650
Gross profit 5,480 5,850
Expenses 4,390 5,090
Operating profit 1,090 760
Interest payable 160 120
Profit before tax 930 640
Tax 240 160
Profit after tax 690 480
Note 1: Dividends paid in 2022 were £150,000 (2021: £100,000)
Note 2: The share price at 31.12.22 was £4.14 (31.12.21: £3.66)
Page 12 of 20
The latest industry average ratios as published by the industry trade association are
as follows:
Ratio Industry average
Return on capital employed 22.3%
Gross profit ratio 19%
Operating profit % 5.5%
Current ratio 1.6
Receivables period 35 days
Inventory period 20 days
Gearing 39%
Dividend cover 2.5
Earnings per share 65c/share
PE ratio 16
Required:
(a) Compute comparable ratios to those listed above for Allen Ltd for 2022 and 2021.
All calculations must be clearly shown.
(10 marks)
(b) Write a report to the company’s directors, commenting upon the ratios in 2022
compared to the previous year and with the industry average ratios.
(10 marks)
(Total 20 marks)
Page 13 of 20
SECTION C
Answer ONE question from this section and ONE further question from either
Section B or Section C.
19. Connington Ltd manufactures three products: Simple, Modified, and Custom.
Simple is a standard product directed at the mass market and produced in large
volumes. Modified is a variation of the Simple product, for a smaller segment of the
main market. Custom is a fully customised version of the product, for a specific
market niche. The unit price of the three products is calculated by applying a mark-
up to the full manufacturing cost per unit. The mark-up applied is 15% for the Simple
product, 25% for the Modified product, and 30% for the Custom product.
The company has traditionally allocated overheads to the three products based on
labour hours. However, its management accountant has recently reviewed the
company’s costing system and concluded that the current overhead allocation
method is outdated and likely to distort product costs. He suggested adopting
activity-based costing.
The following information is extracted from the monthly budget:
Simple Modified Custom Total
Production volume
(units) 2,500 1,250 500 4,250
Direct materials
Costs £99,000 £50,000 £30,000 £179,000
Overheads:
Assembly £30,000
Machining £40,000
Purchasing £25,000
Delivery £22,000
Total Overheads £117,000
Additionally, the management accountant has produced the following analysis of
cost driver usage by type of product:
Page 14 of 20
Cost Usage of cost driver by product:
Activity Driver Simple Modified Custom Total
Labour
Assembly
Hours 4,000 1,500 500 6,000
Machine
Machining
Hours 300 600 700 1,600
Number of
Purchasing purchase
orders 4 6 10 20
Number of
Delivery
deliveries 10 5 7 22
Required:
a) Calculate the price per unit of Simple, Modified and Custom under the current
costing system
(6 marks)
b) Discuss merits and limitations of the current costing system. As part of your
discussion, comment on whether the current system is likely to support the
marketing of the three products.
(5 marks)
c) Calculate the price per unit of Simple, Modified and Custom under activity-
based costing.
(9 marks)
(Total 20 marks)
Page 15 of 20
20. Omicron Ltd produces a range of garden tools. Recently, it has realized an
updated version of a classic “Omicron” product and the directors of the company are
now considering whether this product should be put into production. The following
information has been produced to help evaluate the commercial viability of the new
product.
1. The cost of developing the new product was £125,000. In addition, market
research was carried out by a firm of marketing consultants at a cost of £80,000.
The development costs have all been paid and the market research costs are
due for payment next month.
2. The company expects to sell 10,000 units per year for each of the next five years.
The selling price per unit will be £70.
3. Machinery which originally cost £1,500,000 and which has a written down value
of £950,000 will be required to produce new garden tools. If production does not
go ahead, the machinery will be sold immediately for £840,000. If, however,
production goes ahead, the machinery will be sold at the end of five years for
£50,000.
4. Additional working capital of £150,000 will be required immediately in order to
support production of the new product. This can be released at the end of the
production period.
5. To produce the new product, two types of material will be required. Type A
material is used throughout the product range of the business and 20,000 kilos
are already in stock at a purchase cost of £14 per kilo. Recently, however, the
supplier of the material has raised the price to £15 per kilo. Type B material is
also in stock although there is no further use for this material except for use in the
production of the new product. There are 12,000 kilos in stock at a purchase cost
of £2 per kilo; however, the replacement cost is £2.50 per kilo. If production does
not go ahead, the existing stock will be sold immediately for £1.50 per kilo.
Each unit requires one kilo of Type A materials and three kilos of Type B
material.
6. Labour costs are estimated at £14 per unit. If the new product is not produced
some existing employees will be made redundant immediately at a cost of
£50,000 to the company. If, however, the new product is produced, these
employees will be used to produce the new product and will be made redundant
at the end of the production period at a cost of £80,000 to the company.
7. Total fixed costs apportioned to the new product will be £200,000 per annum of
which £70,000 per annum is estimated to arise as a direct result of the decision
to produce the new product.
8. The company has a cost of capital of 12% per year.
Assume cash flows occur at the end of the year concerned unless indicated
otherwise. Taxation is to be ignored.
Page 16 of 20
Required:
a) Advise the directors of Omicron Ltd whether or not the company should
produce and sell the new type of garden tools using the net present value
(NPV) method of investment appraisal. Present your main calculation in a
table, with a column for each year.
(16 marks)
b) Evaluate the use of the net present value (NPV), internal rate of return (IRR),
payback and accounting rate of return (ARR) methods of capital investment
appraisal.
(4 marks)
(Total 20 marks)
Page 17 of 20
21. You have been asked to prepare a monthly cash flow forecast for Gordon Ltd.
The business is manufacturing its product and, at present, it is a single product
business. You have established the following data:
a) Selling price per unit £20 and variable costs are material £10, labour £2 and
overhead £1.
b) Monthly fixed costs are £3,000 and are paid at the end of the month to which
they relate.
c) Sales units on credit, cash sales units paid for at the point of sale and units
produced are as follows:
Month Sales on credit Cash sales Production (units)
(units) (units)
May 1,000 100 1,200
June 1,200 100 1,400
July 1,400 100 1,600
August 1,600 100 2,000
September 1,800 100 2,200
October 2,000 100 2,600
November 2,200 100 2,400
December 2,400 100 2,200
d) Cash sales are paid for at the point of sales but at a discount of 5% of selling
price.
e) Credit customers are expected to pay as follows: 25% in the month following
sale and 75% 2 months after sale.
f) Suppliers of material are paid in the month following production.
g) Wages are paid in the month of production.
h) 70% of the variable overheads is paid in the month of production and the
remainder in the following month.
i) Corporation tax of £10,000 is to be paid in October.
j) A new van will be acquired in June. It will cost £7,000 and will be paid for in
August. The old van is expected to be sold in July for £300.
k) At the 1st July, the company is expected to have an overdraft of £2,500.
Required:
(a) Prepare a columnar monthly cash flow forecast for the four months July to
October
(16 marks)
(b) If the company has an agreed overdraft limit of £3,000, what steps would you
recommend if the forecast overdraft exceeds this sum?
(4 marks)
(Total 20 marks)
Page 18 of 20
END OF PAPER
Extracts from Compound Interest Tables are attached on the following page.
Page 19 of 20
Present value of £1
P
%
R 1 2 3 4 5 6 7 8 9 10
Period
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
%
" 11 12 13 14 15 16 17 18 19 20
Period
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
Annuity of £1
% 1 2 3 4 5 6 7 8 9 10
Period
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
% 11 12 13 14 15 16 17 18 19 20
Period
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
Page 20 of 20
