ANSWERS TO SAMPLE EXAMINATION QUESTIONS

Multi-choice answers

1. C
2. D
3. D
4. D
5. A
6. B
7. A
8. C
9. A
10. D
11. A
12. C
13. B
14. A
15. C
16. B
17. D
18. B
19. C
20. A
Question 1

(b) Explain and illustrate the way in which the following accounting concepts and
accounting policies affect the Profit and Loss Account and Balance Sheet of a
company:

(c) Realization
(d) Conservatism (Prudence)
(e) Matching ( or Accruals)
(f) Cost
(g) Consistency
(h) Disclosure
(i) Depreciation
(j) The valuation of stock and work-in-progress

(k) Discuss briefly, the limitations of the balance sheet.

(Marks would be awarded per point well explained – See the textbook)

Question 2

(a) (Show the workings/tabulations for each part)

“WIK” “CHAD”

(i) 12,000 units 15,000 units

(ii) (£160,000) £48,000

(iii) £480,000 £432,000

(iv) 17,000 units 23,333.33 units

(v) Chad has a lower contribution and takes longer to break even.

Wik has higher contribution to sales ratio, therefore, the profit increases faster
when the volume increases.

(b) Limiting factors

The limiting factor (also called the key factor or principal budget factor) is the factor
which constrains/limits the activities of a business. Thus, when budgets are being
prepared, the limiting factor is the starting point of the budgeting process and has to be
taken into account first. For example, if sales demand is the limiting factor, i.e. if the
company could only sell a limited number of products during a period, this would limit the
production needed, the amount of labour, the material requirements, and so on.
It would also be useful to illustrate their effect by providing a computational illustration,
and mentioning that management by their actions can eliminate or
Reduce the effect of a particular limiting factor.

(Marks would be awarded for explanations/illustrations)

Question 3
(a)

DL Software Ltd Cash Budget to June 30, 20X7

Time Time lag

lag 2 months
1
month
Mon Bala Capit Sales Purchas Rent General Fixed Balance
th nce al es and Assets c/f
b/f Salaries
£000 £000 £000 £000 £000 £000 £000 £000

Jan 500 9 14 300 177

Feb 177 10 14 173
Mar 173 30 16 14 173
Apr 173 40 18 9 14 172
May 172 40 22 14 60 116
Jun 116 40 22 14 120
160 78 18 84 360
+ + Depre. 45
Debtors Creditors
65 48
225 126 Net book 315
value
Total Total
Sales Purchases

Projected profit and loss account for the six months to June 30 20x7

£ £
Sales 225,000
Cost of Sales:
Purchases 126,000
Less Closing stock (12,000)
114,000
Gross Profit 111,000
Expenses:
Rent 18,000
Salaries and General Expenses 84,000

Depreciation 45,000
147,000
 Net Loss (£36,000)

Projected balance sheet at June 30, 20x7

£ £
Fixed assets:
Equipment at cost 360,000
Less Accumulated depreciation 45,000
315,000
Working capital ( Net current assets ):
Current assets:
Stock 12,000
Debtors ( credit period one month ) 65,000
Cash ( as per the Cash budget ) 120,000
197,000
Current liabilities:
Creditors ( credit period two months ) 48,000 149,00
0
£464,000
Capital Employed
Ordinary share capital 500,000
Retained earnings (per the Profit and loss account) (36,000)
£464,000

The benefits of cash budgeting and treasury management (Marks would be awarded
per point well explained)