Accounting 2012 Senior External Examination — Assessment report Statistics Year Number of candidates Level of achievement VHA HA SA LA VLA 2012 13 2 3 7 1 0 2011 10 1 1 3 5 0 2010 15 0 3 8 4 0 2009 14 0 4 7 3 0 2008 14 2 1 3 6 2 General comments There was an overall improvement in candidates’ responses in 2012 compared to previous years. There were no nil responses, with candidates attempting all questions. Standards awarded for the Knowledge, interpretation and evaluation (KIE) criterion were generally lower than the two practical criteria. Accounting data should be presented using appropriate structure, layout and presentation. Although candidates were allowed to take printed materials into the examination room in Paper Two, they generally performed better in Paper One. In Paper Two, candidates appeared unaware of the balance needed between knowledge, interpretation and evaluation with some candidates providing knowledge-based responses only. Their responses often focused around one particular objective and failed to respond in full to this criterion. Candidates did not always communicate information clearly, accurately or cohesively. In addition, appropriate layout for the required genre was not always evident. Largely, the cash flow statement and the accrual accounting financial reports questions in this paper were not answered effectively.
General comments There was an overall improvement in candidates’ responses in 2012 compared to previous years. There were no nil responses, with candidates attempting all questions. Standards awarded for the Knowledge, interpretation and evaluation (KIE) criterion were generally lower than the two practical criteria. Accounting data should be presented using appropriate structure, layout and presentation.
Although candidates were allowed to take printed materials into the examination room in Paper Two, they generally performed better in Paper One. In Paper Two, candidates appeared unaware of the balance needed between knowledge, interpretation and evaluation with some candidates providing knowledge-based responses only. Their responses often focused around one particular objective and failed to respond in full to this criterion. Candidates did not always communicate information clearly, accurately or cohesively.
In addition, appropriate layout for the required genre was not always evident. Largely, the cash flow statement and the accrual accounting financial reports questions in this paper were not answered effectively.
Part A — Knowledge, interpretation and evaluation Questions 1–5 assessed the majority of the knowledge sector of this criterion; the quality of responses varied. Question 6 was comprehensive and required candidates to apply their knowledge of accounting concepts to analyse and interpret information to solve problems. Many candidates had difficulty with this question as identifying the correct amounts and then explaining them proved challenging. Question 7 was generally well attempted; however, explanations justifying the required recommendations often lacked detail. Although one candidate demonstrated a very high standard of communication skills, the majority of candidates included abbreviations and spelling and grammatical errors in their responses and showed little evidence of clear and accurate communication.
Part B — Routine practical procedures Question 1
Overall, candidates’ responses were sound. Most candidates demonstrated sound knowledge of the bank reconciliation process. Prospective candidates should note they only need to record the cash at bank account once in either T-form or 3-column style. Paper for both styles is provided to offer choice to candidates. Some candidates unnecessarily recorded the ledger in both styles. Care needs to be taken to include the unpresented cheque from the previous bank reconciliation statement if and when it carries through to the next month.
Question 2
The FIFO stock card question was generally completed well. While some inaccuracies were evident in responses it was obvious that the accounting process was understood. Responses to the weighted average stock card question contained more errors, especially in stock returns. Issues with decimals and rounding resulted in a number of inaccurate responses but the accounting process was largely followed. A number of candidates did not attempt the required general journal entries for the inventory adjustment.
Question 3
Although there were some rounding errors, there was evidence that candidates understood the accounting process in relation to non-current assets. A number of candidates did not record the closing entries to profit and loss. The recording of the revenue expense (insurance) was also largely omitted.
Part C — Challenging practical application Candidates either did not clearly read the instructions or misinterpreted what was required from them in this question. Several candidates entered all entries into the general journal rather than using the cash journals. A number of other candidates entered the entries into the cash journals and then repeated them in the general journal too. Almost half recorded the interest revenue as an interest expense, a fundamental aspect of the unit.
Although the ledger was a routine aspect of part of the question, it was the area most poorly attempted. Two candidates, however, demonstrated that they could accurately apply knowledge and concepts to consistently and correctly process information including complex elements, and consistently and effectively solve problems involving complex practical processes.
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Paper Two
Part A — Knowledge, interpretation and evaluation Question 1
Overall, responses to this question were of a sound standard. Candidates made choices in terms of the data provided although, at times, the choices were not well justified or did not consider all aspects of the question.
Question 2
Some candidates did not respond to Question 2 in the correct genre (report). Additionally, candidates were unable to balance the Knowledge, interpretation and evaluation objectives. Many responses favoured the knowledge segment only and discounted the evaluation section. Some candidates’ responses failed to include any recommendations for the business owner to consider.
Part B — Routine practical procedures Question 1
About half the candidates completed the Cash Flow statement. Most of these completed it accurately. Some candidates either did not complete part of the process (Reconstruction and/or Statement) or did not attempt the question at all. It was apparent that candidates may have left the practical questions until last and allocated insufficient time to complete them.
Question 2
Candidates wrote effective responses to the Accounting Package question and demonstrated their understanding of how to use the package.
Question 3
The Cash Budgets question was mostly completed accurately. Candidates were able to demonstrate their understanding of a cash budget and how it had been prepared.
Part C — Challenging practical application Question 1
About half the candidates completed this process in full. Some candidates omitted their balance day adjustments and did not complete their reports/statements.
There were some lapses in the balance day adjustments recorded and in the categorisation of accounts with these fully classified statements. There was also considerable variation in how candidates presented their financial reports.
Sample solutions The sample solutions on the following pages show possible ways of responding to the questions. In some cases, they do not provide the only method of approaching a question. Other approaches and problem-solving strategies may be acceptable.
Recognising revenue means that, although cash may not have been received, the business records “recognise” the fact that the revenue has been earned. This revenue is not “realised” until the cash is received.
Therefore, the main difference between recognising and realising revenue is that recognising revenue is recorded in the business records without the receipt of the actual cash, whereas realising the revenue occurs when the cash for the revenue is received.
Question 2
The Income Statement is a general-purpose financial report prepared from information contained in the general ledger. The financial report provides information for decision-making purposes to interested parties. Interested parties for a sole trader would include the owner/manager, tax department, customers and lending authorities. Access to the financial information of a business is available to these interested parties through financial reports, not the ledger. Hence, the information must be presented in a report as the ledger (in particular, the Profit and Loss Account) is not available for viewing by external parties.
Question 3
Balance Day Adjustments are general journal entries made as at balance day in order to compare (match) the revenues and expenses accurately so that the profit (loss) can be determined. In order to carry out the matching principle, adjustments may need to be made to some accounts because transactions do not always fit neatly into the accounting period. Adjustment entries in financial records facilitate better matching of revenue and expenses and, therefore, ensure a more accurate profit figure for the accounting period in question.
Question 4
Relevance means financial information must have value in terms of:
• assisting users in making and evaluating decisions about the allocation of financial, physical and human resources
• reflecting accountability by the preparers of financial information.
Reliability means financial information must be free from:
• bias (information must be neutral)
• undue errors.
Question 5
Prior to allowing credit to customers, it is important to obtain appropriate credit approval. This can be achieved by the following credit controls:
• ascertain the creditworthiness of customers
• determine maximum credit limits
• terms of payment, including any discount period
• whether interest will be charged on outstanding accounts
• collecting procedures for overdue accounts.
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Question 6 a. Telephone Expense — $870 The remainder to be paid must be added to the amount realised for telephone expense as it is
owing for the period. b. Wages Expense — $28 000 Wages realised from the previous period, and $2000 adjusted as owing for this period. c. Advertising Expense — $10 000 The amount of $6000 must be removed as it is a prepaid expense and relates to the next
accounting period.
Question 7
This report is to analyse Miss Paula Stevens’ business and its current lack of internal controls. The report will highlight the flaws within the business, as well as suggest any recommendations that need to be implemented in order to safeguard cash. Cash is of great value to the business and must be safe and secure to avoid loss.
Currently, there are a number of issues evident within this business. Miss Stevens fails to bank money received and stores it in a cupboard. Such a procedure provides an opportunity for the money to be misplaced or stolen. Additionally, it is unacceptable that Miss Stevens signs blank cheques, storing them with the unbanked cash. A further issue is that money is taken from the collection of cash for purchases within the business. There appears to be no record of the money taken. Further, Miss Stevens does not insist on a full bank reconciliation being completed. There is also an issue with Emily, an assistant who controls the receipting, recording and reconciliation of cash. Emily should not be responsible for all duties, particularly as she now appears to be responsible for all accounting records. Without addressing these issues, Miss Stevens is placing her business at risk and needs to spend more time in her business to safeguard her cash.
To improve the current system, the following procedures should be implemented:
• Making payments by cheque — Cheques provide a tracking mechanism and ideally require two signatures for authorisation. They should only be written when required by the owner. Blank cheques should not be written. All cheques should be written to the payee, and crossed with “not-negotiable” in an effort to control the funds within the business.
• Banking deposits intact daily — Money should not be left in the cupboard. This provides an opportunity for theft. All cash received during the day must be banked. This limits the amount of cash kept on the premises and allows the business to earn bank interest.
• Division/rotation of duties — The business needs to establish a clear division/rotation of duties. This is because the assistant is responsible for a number of tasks in the business; many overlapping. If a division was in place, different staff members could take responsibility for tasks. If a rotation was introduced, employees would fear being caught if fraud was occurring.
• Bank Reconciliation/Petty Cash — The business has implemented a bank reconciliation process, which is very positive. However, the process is not completed in a thorough manner. With no division of duties, recording transactions and depositing money is the task of one person. These tasks should be given to an independent staff member — i.e. someone who does not have access to the cash/records — and completed in full. Additionally, the lack of a petty cash system is concerning. It is unacceptable that there is no record of money taken from the daily takings. A separate fund should be set up for small purchases, with the fund regularly reconciled.
The information provided by Andrew Smith indicates the following:
• Most revenue is generated by Perfume 1.
• Perfume 1 has the highest total variable costs.
• Perfumes 2 and 3 have the lowest variable costs.
• Perfume 3 contributes 74 cents in each dollar of sales ($74) to the contribution margin.
• Perfume 2 generates more revenue than Perfume 3.
• Perfume 2 has a higher total variable cost in comparison to Perfume 3.
• Perfume 2 contributes significantly less to the contribution margin (57%) than the other two perfumes.
Interpreting the information from the comparative contribution margin income statement, Andrew Smith can see that:
• Perfume 1 generates the highest number of sales, with Perfume 3 the lowest.
• Perfume 1 has the highest level of variable costs but with high levels of sales.
• Perfume 3 has the lowest level of variable costs but with low levels of sales.
• Perfume 3 contributes the highest contribution margin towards fixed costs.
In summary:
• Perfume 1 generates the highest revenue and the highest contribution margin percentage so should not be eliminated.
• Perfume 2 generates an acceptable level of sales but with high variable costs and the lowest contribution to fixed costs.
• Perfume 3 generates the lowest level of sales but with low variable costs and contributes significantly towards fixed costs.
Overall, the business could consider:
• eliminating Perfume 2 as it makes the lowest contribution to fixed costs
or
• Look at lowering the variable costs of Perfume 2 to increase the contribution margin. Sourcing a cheaper supplier to decrease the cost of goods sold could do this.
Question 2
Title: Financial Position of ICAN DOIT
Prepared by: Examiner
Date: August 2012 Introduction
This report has been written to analyse the financial position of the business ICAN DOIT. The financial position of business will be analysed and interpreted using ratio calculations and industry averages. Within the report, two groups of calculations will be analysed and interpreted.
Financial Stability Ratios indicate the ability of the business to meet its financial obligations in its current financial structure. Current Ratio
The Current Ratio indicates the ability of the business to meet its short-term debts from its short-term assets (due this year). The ratio of 3.5:1 compares poorly to the industry average of 5:1. It is, however, above the industry standard of 2:1, indicating that the business has the ability to meet short-term debt from its current assets. Quick Ratio
The Quick Ratio indicates the ability of the business to pay immediate debt from its most liquid assets (cash). The ratio result stands at 2:1, above the acceptable standard of 1:1. However, this result is below the industry average of 4:1. The ratio indicates that the business can meet its immediate debts from its most liquid assets. Equity Ratio
The Equity Ratio demonstrates the extent that the business is financed by the owner. This ratio indicates that the business is financed by the owner at a level of 40%. This is below the industry average of 65%, but closer to the 50% acceptable standard for this ratio. This ratio indicates that the proportion of the assets financed by the owner is less than half. Debt Ratio
The Debt Ratio is the extent that the business is financed by external sources such as financial institutions. This ratio stands at 60%, above the acceptable standard (50%) as well as the industry average (35%). This result indicates that the business is more heavily geared through debt as opposed to owner’s capital. Management Effectiveness Ratios
Management Effectiveness Ratios measure how successful managers have been in directing and maintaining the set policies of an enterprise. Turnover of Inventories
The Turnover of Inventories rate measures how efficiently the inventory of the business is being managed. This ratio indicates the number of times per year that inventories are turned over. The result of this ratio at 85 days is lower than the industry average of 55 days. This indicates that it takes a longer period of time to replace initial inventory. Turnover of Accounts Receivable
The Turnover of Accounts Receivable rate measures the efficiency of the business in managing its accounts receivable. It indicates how quickly the average balance of accounts receivable is converted into cash. Again, the result of 45 days is below the industry average of 30 days. This indicates that it takes longer for this business to realise cash from its debtors. Conclusion
The financial stability of ICAN DOIT indicates that Ms Ican’s business can meet short term and immediate debt (although below industry average), but that the business is more heavily financed through debt than from the owner’s capital. The management effectiveness of the business is below industry standard, indicating that the business is not turning over as much stock as similar businesses and is slower to realise cash from accounts receivable.
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Recommendations
The question was asked whether ICAN DOIT is generating a profit, and whether the business should expand. An issue with making a decision about how well the business is faring in terms of profit is that the relevant ratios have not been provided to determine this. Profitability ratios help to indicate the ability of the business to generate profit from its current financial structure. This includes profit generation, return on investment, and use of assets. Without such ratio calculations and industry averages, the profitability of the business is hard to determine.
If decisions were to be made, the following could be assumed:
• The business appears to be able to service its debt, and can do so with some ease.
• The business has a higher proportion of debt already within the business and, if it were to expand, would need to consider introducing more capital to cover the expansion rather than generating more debt.
• The business needs to introduce stronger policies to manage its accounts and turnover of stock. The business can improve in this area to ensure that it is generating more income and collecting cash earned (that can also generate bank interest).
