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.


  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


Question 2 [15 Marks]


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


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]

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.

Overheads Total Rate Basis of Apportionment Production Assembly Packing Human Resources
Heat & Light


5 Marks

Staff Supervision


5 Marks

Buildings Insurance


5 Marks

Depreciation of Machinery & Tools

5 Marks


5 Marks




25 Marks


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


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.


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?



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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