2022 O Level 7087 Answer

Suggested Solution O-Level 2022 Principles of Accounts Paper 1 Q1 (a) 4 stages of accounting cycle: 1) Stage 1: Identify and record Source documents are used to record transactions in the journal daily. Journal entries are posted to the ledger. 2) Stage 2: Adjust The ending balances of ledger accounts are listed in a trial balance. Any adjusting entries are recorded in the journal and posted to the ledger. Accounts are adjusted at least once in a financial year. 3) Stage 3: Report Based on adjusted trial balance, financial statements are prepared at least once in a financial year. 4) Stage 4: Closing After the financial statements are finalised, income, expenses, income summary, drawings and dividends accounts are closed. Accounts are closed once at end of financial year. [4] (b) Transaction Source document Purchase motor vehicle on credit Invoice Paying credit supplier by cheque Payment voucher Notifying credit customer of overcharge Credit note [3] (c) Transaction Account to be debited Account to be credited 1 Office equipment Capital 2 Trade payable Aisha Inventory [4] [Total: 11] Q2 (a) Revenue Recognition Theory [1] Revenue is earned when goods have been delivered or services have been provided. [1] (b) (i) 31 Dec 2021 – the business provided service to a customer on credit for $34,900. [1] (ii) 30 Sep 2022 – Service fee revenue of $3,600 was received in advance as service has not been provided. [1] (c) (i) Service fee revenue received in advance is not earned during the year, hence should be deducted from the statement of financial performance. Not adjusting it would cause profit for the year to be overstated by $3,600. [1] (ii) Service fee revenue received in advance is a current liability. Not adjusting for it will cause the current liabilities to be understated by $3,600 [1]. Profit for the year overstated by $3,600 would cause equity to be overstated by $3,600. [1]

(d) Advertising expense to be transferred to income summary = 7500 + 780 + 50 = $8,330 [2] (e) Extract of Statement of Financial Performance for the year ended 30 September 2022 $ Service fee revenue 82 600 [1] Other Income Rental income (9000+500) 9 500 [1] Less: Other Expenses Advertising expense 8 330 [1] [3] [Total: 12] Q3 (a) Working capital is current assets less current liabilities. [1] (b) The current ratio considers the total current assets of the business but the quick ratio considers only the quick assets, which does not include inventory and prepayments. [2] (c) • The current ratio improved from 1.95 in 2021 to 2.64 in 2022. [1] • This was due to the $45 000 increase in total current assets and the slight $3 400 decrease in total current liabilities. [1] • However, the quick ratio worsened slightly from 1.58 in 2021 to 1.54 in 2022, but it is still above the general benchmark of 1