Subject: Accounting for Business

Module Code: UG03–AB

QUESTION 1 [30 Marks]

Pears Mobiles sells phones and accessories in the UK and has provided the following financial information from its accounting records after the production of its Income Statement for the year ended 31 December Year 3.

You are to carry out an analysis of the company’s financial performance in Year 3.

Notes:

1. 30% of goods were sold on credit.
2. all goods were purchased on credit.

Pears Mobiles

Selected financial data at 31 December Year 3      

	£
Sales Revenue	175,000
Opening Inventory	5,600
Closing Inventory	6,400
Gross Profit	105,000
NET Profit for the Year	20,300
Opening Equity	80,000
Trade Payables	2,000
Trade Receivables	8,000
Property (at Cost)	60,000
Bank & Cash	2,900 (Dr)
Machinery and Tools (at Cost)	75,000
Provision for Depreciation on Machinery and Tools (1 January Year 3)	15,000
Drawings	12,000
VAT	600 (Cr)
Equipment (at Cost bought in year so not depreciated)	9,600
Bank Loan	3,000
Provision for Doubtful Debts (1 January Year 3)	400

 

1.1 Complete the ratio table below by inserting the relevant information for Year 3.  Suggest one possible reason for the difference in each of the ratios below (you should give a different reason for each ratio) [16 Marks]

Ratio	Year 2	Year 3
Rate of Inventory Turnover (times)	10 times	2 marks
Net Profit Ratio (%)	22 %	2 marks
Current ratio	2.4:1	2 marks
Gearing ratio	10%	2 marks
Return on Equity Employed	28%	2 marks
Gross profit ratio	55%	2 marks
Liquid ratio/Acid test ratio	2.2:1	2 marks
Non-current assets turnover	1.1times	2 marks

 

1.2 Comment on the current position of Pear mobiles using the ratios above in terms of profitability and liquidity and say whether you would support investment in this business and why? [14 Marks]

Type your answer here

 

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Question 2 [15 Marks]

2.1

As an accountant, you are working on the accounts of a car repair business when another car repair business approaches you and asks to become a new client of yours. You know that both businesses are competitors and are looking to expand.

Explain at least 2 threats that this request poses to you as a professional and outline how you can safeguard against this. (15 Marks)

Task Response ( 12)	Coherence (3)	Total (15)

 

Write your answer here

 

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Question 3 [25 Marks]

Union Coffee Distribution has three production cost centres — Production, Assembly and Packing, and one service cost centre — Human Resources.

The business has estimated the overheads for Year 4 of her business. (Overhead Analysis Sheet)

3.1 Complete the Overhead Analysis Sheet below. [25 Marks]

UNION COFFEE DISTRIBUTION
OVERHEAD ANALYSIS FOR YEAR 4
COST CENTRE DATA	Production	Assembly	Packing	Human Resources	TOTAL
Floor Area (sq m)	1000	400	300	400	2,100
Cost of Machinery	£34,000	£6,000	£0	£9000	£49,000
Number of Employees	22	6	4	8	40

Complete the Overhead Analysis Sheet by filling in the empty boxes.

OVERHEAD ANALYSIS SHEET
Overheads	Total	Rate	Basis of Apportionment	Production	Assembly	Packing		Human Resources
Heat & Light   5 Marks	£16,800
Staff Supervision   5 Marks	£16,000
Buildings Insurance   5 Marks	£2,100
Depreciation of Machinery & Tools 5 Marks	£1,960
TOTAL COST CENTRE OVERHEADS 5 Marks	£36,860

25 Marks

 

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Question 4 [10 marks]

1. Describe what is meant by a variable cost and give two examples.[5 marks]
2. Describe what is meant by a fixed cost and give two examples. [5 marks]

Type your answer here

 

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Question 5 [20 Marks]

Raj is thinking about starting a new business and has asked you in your role as New Start-Up Mentor for the local Chamber of Commerce for some advice by email. Read Raj’s email and answer each of the queries.

Hi, I’ve been given you details by a friend as I am thinking about setting up a business and I’ve been told that the local Chamber of Commerce offers free independent advice to would be entrepreneurs like me. Firstly, I know someone who would like to come into business with me and I was just wondering what the main benefits would be to start up as a limited company rather than a sole trader? I’ve also been told that I should pay for a book-keeper to maintain my records, could you give me three reasons why I should keep full accounting records? Lastly, if I did set up a Limited Company, what accounting information would I need to provide and who should I provide it to? Thanks Raj

Write you response below addressing the following points:

1. a) Main benefits of a Limited company compared to being a sole trader 5 Marks
2. b) Three reasons why full accounting records should be kept 5 Marks
3. c) What accounting information does a Limited company need to provide and to whom? 5 Marks
4. d) Clear and coherent reply addressing the above points in a fairly accurate and relevant manner. 5 Marks

Dear Raj, Thanks for your recent email. I would be delighted to assist you be answering your queries. Please see my responses below: Write your answer here:

 

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