2017 O Level POA Answers Paper 2

Jason chin 

Statement of financial performance for the year ended 30 April 2019

$$
Sales revenue (92385 – 195) 92190
Less: sales returns 780
Net sales revenue 91410
Less : cost of sales 64570
Gross profit 26840
Add: Other Income
Gain on sale of non-current asset 195
Less: Other Expenses
Rent 3500
Wages and salaries8000
General expenses (2000 + 625) 2625
Discount allowed 252
Insurance (450 x 12/15) 360
Loan interest (7500 x 5%) 375
Impairment loss on trade receivables (500 – 300) 200
Depreciation on equipment (28000 x 10%) 2800
Depreciation on motor vehicles ((45000 – 16200) x 20%) 5760
23872
Profit for the year3163

Jason Chin

Statement of financial position as at 30 April 2019

Assets$$$
Non-current asset costAcc. dep.    N.B.V
Equipment 27500082500192500
Motor vehicles480002775020250
Total non-current assets212750
Current assets 
Inventory 32300
Trade receivables30700
Less: allowance of impairment on trade receivables(650)30050
Prepaid rent 6000
Total current assets68350
Total assets281100
Equity and liabilities
Shareholder’s equity
Issued share capital, 300,000 ordinary shares150000
Retained earnings (40625-15000+21400)51675
Total equity 201675
Non-current liabilities
Long term borrowings (35000-5000) 300000
Current liabilities 
Trade payables20900
Bank overdraft 6300
Wages and salaries payable1350
Current portion of long term borrowings 5000
Interest on bank loan payable (3500-2625)875
Dividends payable (300000x$0.05) 15000
Total current liabilities 49425
Total equity and liabilities 281100

a) Liquidity is the ability of the business to convert assets to cash to meet its current obligation.

b) 

20162017
Working capital ratio58400/20500= 2.85 68500/36230= 1.89

c) The working capital ratio is on a declining trend from 3.62:1 in 2015 to 2.85:1 in 2016 to 1.89:1 in 2017. This is mainly due to the larger increase in current liabilities as compared to the increase in current assets.Basing on the working capital ratio calculated, Jennifer should be able to pay the debts when they are due. However, as the majority of the current assets is made up inventory which is a non-liquid assets, she might face difficulty to pay the current liabilities especially in 2017.Increasing trend in inventory holding tied up cash, increase trend in trade receivables might result in impairment loss, decreasing cash balances and eventual goes into bank overdraft in 2017 might be the cause for the increasing trend in trade payables and finally the long-term borrowings payable within a year.

d) Profit is derived from income earned less expenses incurred for the period. It will not be affected by collection and payments. Whereas, liquidity calculation used current assets and current liabilities. Therefore, profit or loss has not impact on liquidity as only the movement in current assets and current liabilities will have impact on liquidity.

e) Two profitability ratios 

  • gross profit margin
  • profit margin 

ai) Retained earnings is the accumulated profits over the years that has not been distributed to shareholders. 

aii) Dividends is the distribution from the retained earnings to shareholders. 

b) Shareholders equity will be affected by: 

  • additional shares issued during the year
  • profit or loss during the year
  • dividends declared during the year

c) 

  General journal 

DateParticularsDr Cr 
2017$$
Apr 30Cash at bank (50000 x $1.50)75000
        Issued share capital75000
Being receipt from issue of ordinary shares at $1.50 each.  

d) 

                Retained earnings account

Date Particulars Dr Cr Bal 
2016$$$
Jul 1 Balance b/d 175000 Cr
2017
Jul 30 Profit and loss75000250000 Cr
      30 Dividends (250000 x $0.10) 25000225000 Cr
Jun 1 Balance b/d 225000 Cr

a) 

Trade payables control account

Date Particulars Dr Cr Bal 
2017$$$
Jul 1 Balance b/d 9845 Cr
31Discount received3249521 Cr 
31Cash at bank10245724 Dr
31Inventory 1538214658 Cr
31Inventory72013938 Cr 
31Interest 10514043 Cr
Jun 1Balance b/d 14043 Cr 

b) Interest charge should appear under expenses in the statement of financial performance. 

c) Usage of a trade payables control account : 

  • to prevent overcrowding in general ledger.
  • to serve as an accuracy check against the purchase ledger. 

d) Cash discount might be received to encourage prompt payment. 

a) Cost of sales for August 2017 = $1800 + $650

                                                        = $2450

b) Value of inventory at 29 August 2017 = $5935 + $2450 

                                                                 = $3485

c) Revised value of inventory at 31 August 2017 = $1625 + $1600

                                                                               =  $3225

d)  

   General journal 

DateParticularsDr Cr 
2017$$
Aug 31Impairment loss on inventory (1860 – 1600) 260
            Inventory260
Being loss on inventory revaluation for goods purchased on 29 August 2017.  

e) Net realisable value is the estimated selling price less any additional cost required to make the sale. 

f) Prudence concept. 

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