2022 GMSS POA 4E5N PRELIM PAPER 1 ANSWERS

2022POA4E5NPrelimPaper 1Answers1 Layla operates a supermarket, Best Grocer. When preparing thebusinessfinancial statementsfortheyearended30June2022,heraccountantdiscoveredthefollowingerrors. 1 Invoiceof$2000receivedfromcreditsupplierAlex,hadbeenrecordedinAllen’saccount. 2 Chequepaymentof$500forutilities,hadbeenrecordedas$5000. 3 Cashof $600receivedfor goodssold, hasbeendebitedtothesalesrevenueaccountandcreditedtocashinhandaccount. REQUIRED (a) Stateonepurposeofsourcedocument. Sourcedocumentprovidesevidencetocaptureoccurrenceofatransaction. OR Sourcedocumentcontainsdetailsofabusinesstransactionthatareneededfor recording. [1] (b) Preparethejournal entrytocorrecterror 1.Anarrationisnotrequired. Date Debit$ Credit$2022Jun30 Tradepayable–Allen [1] 2000 Tradepayable–Alex [1] 2000 [2] (c) Prepareastatement of adjustedprofit for theyear ended30June2022. Theunadjustedprofitwas$5000. BestGrocer Statementofadjustedprofitfortheyearended30June2022$ Unadjustedprofit 5000 Error1:Noeffect - [1] Error2:Add(utilitiesexpensewasoverstated) 4500 [1]Error3:Add(salesrevenuewasunderstated) 1200 [1] Adjustedprofitfortheyear 10700

GMS(S)/POA/P1/PRELIM2022/4E5N(A) [3](d) Stateoneroleofaccountantsinbusiness. Accountantsarestewardsofbusinesseswhosetuptheaccountinginformationsystemtoprovideinformationtostakeholdersfordecision-making. [1] (e) Name one stakeholder and the decision that he/she might make by using the businessfinancial statements.Employeesuse the businessfinancialstatementsto decidewhetherto continueworking atthebusiness. [2] Otheralternatives: Stakeholders DecisionstakeholdermaymakeOwnersandshareholders Whethertocontinuetoinvestinthebusinessorsellthebusiness,dependingontherisksandreturnsrelatedtothebusinessManagers WhethertoconsiderwaystoimprovetheperformanceofthebusinessEmployees WhethertocontinueworkingatthebusinessLenders Whethertograntloanstothebusiness,dependingonthebusiness’abilitytorepaytheloanprincipalandpayinterestSuppliers Whethertoselltothebusinessoncredit,dependingonitsabilitytopayCustomers Whethertobuyfromthebusiness,dependingonthebusiness’abilitytoprovidethegoodsand/orservicesthattheyneedandgoodafter-salesserviceGovernment WhetherthebusinesscomplieswiththetaxregulationsanddecidestheamountoftaxtocollectfromthebusinessCompetitors Whethertheyarecomparabletothebusinessandhowtoimprovetheirownperformance (f) Ineachgivenscenario,identifytheaccountingtheoryapplied: Scenario Accountingtheory (i) Kayla paidrent inadvancefor themonthof July2022. Shehasnot recordedthisaspartofrentalexpensefortheyearended30June2022. Accrual basis of accountingtheoryorMatchingtheory 2

GMS(S)/POA/P1/PRELIM2022/4E5N(A) (ii) Theexcellentshoplocationandskillsofemployeesarenotrecorded. Monetarytheory [2] [Total:11] 2 ThefollowinginformationwasextractedfromthebooksofClaireHomeSuppliesasat31July2020to2022. 2020 2021 2022$ $ $Motorvehicles 130800 124640 152800Cashatbank 41300 21800 -Tradereceivables 10120 22260 28330Inventory 12300 19800 35200Prepaidrent 1000 2500 4400Tradepayables 16000 28400 30880Currentportionoflong-termborrowings 5000 5000 5000Bankoverdraft - - 4400 Currentratio 3.08 1.99 ?Quickratio 2.45 1.32 ? REQUIRED (a) Distinguishbetweenbankloanandbankoverdraft. 1) Bankloan ispresentedaslong-termborrowingsinnon-currentliabilitiessectionin thestatementoffinancial position. Bankoverdraft ispresentedincurrentliabilities sectioninthestatementoffinancial position. [2] Otheralternatives: 2) Bank loan is a fixed amount borrowed by the business and cash is transferred to thebankaccount while bank overdraft is not a fixed amount, it happenswhenbusinesswithdrawsmorethanitsdepositsinthebankaccount,uptoalimitagreedbybothparties. 3) Toreducebankloan, businesshastopayregularinstalmentsovertheloanperiodorone-timepaymentatendofloanperiod. Toreducebankoverdraft,businesshastodepositcashintobankaccountwithintheyear. (b) Explaintheimportanceofbeingliquid. Businessneedscashfortheirdailyoperationsandemergencypurposes.Ifbusiness doesnothaveenoughcashtomakepayments,suppliersmaynotbewillingtosupply goods,thismayresultinbusinessfailure. [1] (c) Calculatethefollowingratiosasat31July2022.Showyouranswerstotwodecimal places:3

GMS(S)/POA/P1/PRELIM2022/4E5N(A) Currentratio QuickratioWorkings (28330+35200+4400)/(30880+5000+4400) 28330/(30880+5000+4400) Answer 1.69 0.70 [2] (d) EvaluatetheliquidityofClaireHomeSuppliesovertheperiodofthreeyears. Any5reasonablepoints:● ClaireHomeSupplies’scurrent ratiohasworsenedfrom3.08inyear 2020to1.98inyear 2021to1.69inyear 2022, whichfallsbelowgeneral benchmarkof 2.● Thismeansthat thebusinessislessabletopayitscurrent liabilitiesusingcurrent assetsthanthepreviousyears.● The worsening current ratio could be due to an increase in trade payables from$16000 in year2020to$28400inyear 2021to$30880inyear 2022. ● ClaireHomeSupplies’squickratiohasworsenedfrom2.45inyear 2020to1.31inyear 2021to0.70inyear 2022, whichfallsbelowgeneral benchmarkof 1.● Thismeansthat thebusinessislessabletopayitscurrent liabilitiesusingquickassetsthanthepreviousyears.● The worsening quick ratio could be due toanincreaseininventoryfrom$12300inyear 2020to$19800inyear 2021to$35200inyear 2022. Thistiedupcashandresultedinabankoverdraft. ● Hence, theliquidityof businesshasworsenedover theyears. [5] (e) RecommendonewaytoimproveliquidityofClaireHomeSupplies. Any1reasonablepoint, supportedwithexample: Strategy Examples1. Increasesourcesofcash -Obtaincashcontributionfromownerorshareholders. -Obtainlong-termloan. -Sell excessnon-currentassetsforcash. 2. Managecashoutflow -Reduceoperatingexpenses. (forexample: utilities, rental) -Negotiateforlongercredittermsfromsupplier. 4

GMS(S)/POA/P1/PRELIM2022/4E5N(A) [1] [Total:11] [Turnover 3 The following trade receivable account was extracted from the books of Alan LandscapeServicesforJune2022. Tradereceivable–EllieGardens2022 Dr Cr BalanceJun1 Balanceb/d 600Dr 4 Servicefeerevenue 1600 2200Dr9 Cashatbank 2090 110Dr9 Discountallowed 110 018 Servicefeerevenue 1900 1900Dr21 Cashatbank 2090 3990Dr21 Discountallowed 110 4100Dr28 Cashatbank 2800 1300Dr28 Allowanceforimpairmentoftradereceivables 1300 0 REQUIRED (a) Interprettheentriesonthefollowingdates: (i) 1JuneEllieGardensowed$600toAlanLandscapeServicesfor servicesprovidedinMay2022. [1]orThebusinesshasabalanceof $600owedbycredit customer EllieGardens, brought downfromthepreviousmonth. (ii) 4JuneThebusinessprovidedservicesof $1600toEllieGardensoncredit. [1] (iii) 21JuneThebusinesswasinformedthat thechequereceivedon9Julywasdishonoured.[1] Hence, thechequeof $2090wasreversedandthecashdiscount of $110waswithdrawn[1]. (iv) 28JuneThebusinessreceivedachequeof $2800fromEllieGardens[1] and$1300waswrittenoff asconfirmeduncollectible[1]. 5

GMS(S)/POA/P1/PRELIM2022/4E5N(A) (b) Preparethejournal entriesinAlanLandscapeServices’ bookstorecordthetransactionon28June. Narrationisnotrequired. Date Particulars Debit$ Credit$2022Jun28 Cashat bank [1] 2800Allowancefor impairment of tradereceivables [1] 1300 Tradereceivable–EllieGardens [1] 4100 Or Date Particulars Debit$ Credit$2022Jun28 Cashat bank [1] 2800Tradereceivable- EllieGardens 2800 Allowancefor impairment of tradereceivables[1] 1300Tradereceivable- EllieGardens 1300 [3] (c) Trade discount is a reduction to the list price to encourage bulk purchase, customer patronage andcustomer loyalty [1] while cashdiscount isareductiontotheinvoicedpricetoencourageprompt payment.[1] OR Trade discount is not recorded in the ledger [1] while cash discount is recorded in the ledger as discountallowedor discount received. [Total:11] 6

GMS(S)/POA/P1/PRELIM2022/4E5N(A) [Turnover 4 Ianisasoleproprietor.HeownsabookstorecalledIanBooks. On 1 April 2021, the business had a capital balance of $40 000. Thefollowingtransactionstookplaceduringthefinancial yearended31March2022. 2021Nov29 Ian issued a personal cheque of $6 000 to pay off part of thebusinessbankloan.Dec10 Ianwithdrew$1000fromthebusinessbankaccountforofficeuse.2022Jan8 Ianwithdrew$50worthofbooksasagifttohisfriend.Mar31 Lossamountedto$2500. REQUIRED (a) P