ESSS 2022 4E5N Prelim P1 ANS

Answer to4E5NPrelim2022P1Question1Geremihasjuststartedabusinessandhassomequestionsonaccountingmattersthathewouldliketoclarify. REQUIRED(a) Whenatrialbalanceisbalanced,itdoesnotmeanthattherearenoerrorsintheaccounts.Explainthereasonforthis. [1] Thisisbecauseledgeraccountsmaycontainerrorswhichdonotaffectthebalancingofthetrialbalance. [1] (b) Explainwhyitisimportanttohaveinternalcontrolsinabusiness. [2] Anytwoofthefollowingpoints[1markfor eachpoint]- Tosafeguardtheassetsofthebusiness- Toensurethatbusinesstransactionsarerecordedaccurately- Toensurethatbusinesscomplywithlawsandregulations (c) Statetwoexamplesofinternalcontrolprocedureovercash. [2] Anytwoofthefollowingpoints[I markfor eachpoint]- Separatecashhandlingandcashrecordingdutiesamongdifferentemployeessothatnosinglepersonhascontrolovertheentirecashprocess- Securecashandchequesinalockedstorageandlimitaccesstoauthorisedpersonnel- Depositcashandchequesdailyintothebanktominimisetheamountofcashorchequeskeptovernightatthebusinesslocation- Obtainproperapprovalsforallpaymentsfromauthorisedpersonnel- Requirevalidsourcedocumentsforallpayments- Preparebankreconciliationtocheckinternalrecordsagainstexternaldocuments. (d) Explainoneadvantageofoperatingabusinessasasoleproprietorshipinsteadofaprivatelimitedcompany. [1] Anyoneofthefollowingpoints[1]- Asoleproprietorhasfullcontroloverthebusiness- Asoleproprietorshipbusinesshasminimumadministrativedutiestoadhereto (e) Explainonedisadvantageofoperatingabusinessasasoleproprietorshipinsteadofaprivatelimitedcompany. [1] Anyoneofthefollowingpoints[1]- Asoleproprietorhasunlimitedliabilityandhastousehispersonalassetstopaybusinessdebtsifthebusinessisunabletodoso- Asoleproprietorshipbusinesshaslimitedresourcesasthereisonlyoneownerwhocancontributecapital- Asoleproprietorshipmayfinditdifficulttoborrowloansasthereislimitedresourcestouseascollaterals

2 (f) Explainwhyabusinessneedstopreparefinancialstatementsatregulartimeintervalswiththesupportofanaccountingtheory [2] Accordingtothegoingconcerntheorywhichstatesthatthebusinessisassumedtohaveanindefiniteeconomiclifeunlessthereiscredibleevidencethatitmayclosedown[1],abusinessneedstopreparefinancialstatementsatregulartimeintervalsinordertoprovidetimelyfinancialinformationtostakeholderstohelpthemmakedecisions.[1] Or Accordingtotheaccountingperiodtheory,thelifeofabusinessisdividedintoregulartimeintervals[1]andfinancialstatementsarepreparedatregulartimeintervalstoprovidetimelyfinancialinformationtostakeholderstohelpthemmakedecisions.[1] [Total: 9]

3 Question2ThefollowingservicefeerevenueaccountwasextractedfromthebooksofGetTogetherPteLtd,whichisaneventorganiser. ServicefeerevenueAccount Date Particulars Dr Cr Balance2022 $ $ $Mar 1 Servicefeerevenuereceivedinadvance(1) 4,900 4,900CrMar 6 Cashinhand 2,300Mar15 Cashatbank(3) 3,600Mar22 Tradereceivables(4) 7,300Mar31 Servicefeerevenuereceivedinadvance(2) 1,500 REQUIRED(a) Explainthedifferencebetweenentries(1)and(2). [2] Entry(1)isthereversingentryfor$4,900whichwasreceivedduringthepreviousaccountingperiodbutwasnotearnedduringthepreviousaccountingperiodandwillbeearnedthisaccountingperiodwhenservicesareprovided.[1]Entry(2)istheadjustingentryfor$1,500whichwasreceivedduringthisaccountingperiodbutisnotearnedforthisperiodandwillbeearnedduringthenextperiodwhenservicesareprovided.[1] (b) Statetheamountofservicefeerevenuetobepresentedinthestatementoffinancialperformanceforthemonthended31March2022. [1] Theamountofservicefeerevenue=$4,900+2,300+3,600+7,300–1,500=$16,600[1] (c) Explainthedifferencebetweentransactions(3)and(4). [2] Transaction(3)isacashtransactionwherechequesarereceivedforservicesprovided[1]whereasTransaction(4)isacredittransactionwhereserviceswereprovidedoncredittocustomers.[1] (d) Statetheeffectonthefollowingifnoadjustmentwasmadetoservicefeerevenueon31March2022. (i) Statementoffinancialperformance [2]Servicefeerevenuewouldbeoverstatedby$1,500[1]causingprofittobeoverstatedby$1,500.[1] (ii) Statementoffinancialposition [1]Servicefeerevenuereceivedinadvanceismissingcausingcurrentliabilitiestobeunderstatedby$1,500.[1]Equitywouldbeoverstatedby$1,500becauseprofitwasoverstated.(e) GetTogetherPteLtdisaservicebusiness.Explainthedifferencebetweenaservicebusinessandatradingbusiness. [2]

4 Aservicebusinessearnsitsmainincomebyprovidingservices[1]whileatradingbusinessearnsitsmainincomebysellinggoods.[1] [Total: 10] Question3ThefollowinginformationisextractedfromthebooksofResilienceTradingfortheyearsended30June. 2021 2022$ $Salesrevenue 165,000 188,600LessSalesreturns (4,200) (7,500)NetSalesrevenue 160,800 181,100LessCostofsales (64,270) (71,200)Grossprofit 96,530 109,900 Endinginventory 18,200 25,700Dayssalesininventory 96.5 REQUIRED(a) Calculate,toonedecimalplace,thedayssalesininventoryfortheyearended30June2022. [2] Dayssalesininventory=365/RateofInventoryTurnover RateofInventoryTurnover=Costofsales/Averageinventory=71,200/(18,200+25,700)÷2=71,200/21,950=3.243735763[1] Dayssalesininventory=365/3.2437357=112.5days[1] Note: If theanswer isincorrect, give1markfor thecorrect formula. (b) Commentonthechangeindayssalesininventoryoverthetwoyears. [3] Anythreeofthefollowingpoints[1markper point, max3]- Thedayssalesininventoryhasworsenedfrom96.5daysin2021to112.5daysin2022.- Thisshowsthatthebusinesshastakenmoredaystosellitsaverageinventoryin2022comparedto2021.- Thebusinesshasbecomelessefficientininventorymanagementin2022.- Thismaybeduetothebusinessbuyingmoreinventoryin2022butwasunabletosellthemfastenough.- Thismayalsobeduetotheinventoryofthebusinessappearingunattractivetocustomersandthereforecouldnotbesoldasfast. (c) Explainwhyefficiencyininventorymanagementisimportanttoabusiness. [2]

5 Efficiencyininventorymanagementcanhelpthebusinessearnmoreprofitbyreducingunnecessaryexpensestostoreexcessiveinventoryorincurringimpairmentlossoninventory.[1] Beingefficientininventorymanagementwillalsohelpthebusinessimproveitsliquidityaslessfundsaretiedupininventoryandmorefundscanbeusedforpayments.[1] (d) Suggesttwowaysinwhichthedayssalesininventorycanbeimproved. [2] Anytwoofthefollowingways[1markfor eachpoint]- Reducesellingpriceforslow-movinggoodstoattractcustomerstobuy- Providetradediscountstoencouragecustomerstobuyinbulkorregularly- Attractmorecustomersthroughadvertisingandmarketing- Trackthelevelsofinventoryandordersufficientinventoryforsaleandalittlemoretocaterforunexpecteddemandsandnottobuyexcessiveinventory Harhash,apotentialinvestorwhoisinterestedininvestinginResilienceTradinghascomputedthereturnonequity. REQUIRED(e) Explainthemeaningofreturnonequity. [1] Returnonequitymeasurestheamountofprofitabusinessearnsforeverydollarofequityinvestedbytheownerorshareholdersofthebusiness.[1] (f) ExplainhowHarhashcanusethereturnonequitythathehascomputedtomakehisdecisiononwhethertoinvestinResilienceTrading. [2] AnyoneofthefollowingHarhashcancomparethereturnonequityofResilienceTradingwiththatofotherbusinesses[1]anddecidetoinvestinResilienceTradingifitsreturnonequityisbetterthantheotherbusinesses.[1] HarhashcancomparethereturnonequityofResilienceTradingwithhisexpectedrateofreturnfromhisinvestment [1]anddecidetoinvestinResilienceTradingifitsreturnonequitymatchesorisbetterthanhisexpectedrateofreturn. [1] HarhashcancomparethereturnonequityofResilienceTradingovertimetoevaluateifthebusinessisbecomingmoreprofitable. [1]Ifthebusinessisbecomingmoreprofitable,HarhashmaydecidetoinvestinResilienceTrading.[1] [Total: 12] Question4

6 Gonzalesstartedabusinesstoprovidedeliveryserviceson1May2020bypurchasingtwodeliveryvanscosting$12,000each,payingbycheque.Anothervancosting$15,000waspurchasedon1August2021oncreditfromToyodaLtd.Itwasthebusiness’policytodepreciatemotorvehiclesat20%usingthereducingbalancemethod.REQUIRED(a) Explainwhymotor vehiclesneedtobedepreciatedusingarelevant accountingtheory. [2]Motorvehiclesprovidebenefitsoverseveralaccountingperiodsandthereforetheircostsneedtobeallocatedasexpensesovertheirusefullivestocalculateprofitfairlyforeachaccountingperiod.[1]Thisistocomplywiththematchingtheorywhichstatesthatexpensesincurredmustbematche