2021 GMSS POA 4EXP PRELIM PAPER 1 Answers(with Annotations)

Answers – 2021 POA Prelims 4EXP P1 1a Inventory account Date 2020 Particulars Debit ($) + Inventory Credit ($) - Inventory Balance ($) Apr 5 Trade payable – Zane 105 000 [1] 105000Dr 8 Cost of sales 25 600 [1] 79400 Dr 11 Trade payable – Zane 10 210 [1] 69190 Dr 19 Cost of sales 21 700 [1] 47 490 Dr May 1 Balance b/d 47 490 Dr 1b Invoice [1] 1c Name: Prudence theory [1] Explanation: Prudence theory states that assets and profits should not be overstated and expenses and losses should not be understated. [1] Inventory should be valued at the lower of cost or net realizable value. [1] Hence, when the net realizable value has fallen below the original cost, inventory should be valued at the net realisable value. [1] – Explaining prudence theory [1] – Explaining the valuation rule for inventory 1d  Meng’s rate of inventory turnover has worsened from 5.91 times in 2019 to 3.48 times in 2020.  Elsa’s rate of inventory turnover has worsened from 7.24 times in 2019 to 5.62 times in 2020.  This means that both Meng and Elsa is getting less efficient in managing its inventory over the two years.  Elsa has a better rate of inventory turnover compared to Meng in both years, implying that Elsa is better in managing its inventory. 1 mark per suitable comment, up to a maximum of three marks 1e Sell inventory faster by  reduce selling price for slow-moving goods  provide trade discounts to encourage customers to buy in bulk  attract more customers through marketing campaigns Keep sufficient inventory on hand by  Use technological tools to improve accuracy of predictions about customer demand in order to know when and how much inventory to buy [1] – Mentioning strategy [1] – Explain strategy Asset has debit nature Biz: Meng Supplier: Zane Must have conclusion! Use: worsen/ improve/ better Don’t use: Decrease/ increase/ lower/ higher

2ai The business has estimated trade receivables balance of $4500 to be uncollectible in the previous year. [1] 2aii The business wrote off $150 owing from Jolly to be irrecoverable. [1] 2aiii The business reviewed its trade receivables and estimated a decrease in allowance for impairment of trade receivables by $50. [1] 2b Profit increase by $50. [1] Why? The reversal of impairment loss on trade receivables of $50 will cause a decrease in overall expenses, therefore profit will increase by $50. 2c  The rate of trade receivables turnover has improved from 11.82 times in 2019 to 12.38 times in 2020 to 15.56 times in 2021.  The trade receivables collection period has improved from 80.45 days in 2019 to 74.31 days in 2020 to 65.18 days in 2021.  This indicates that Zeth Trading is taking a shorter time to collect its debt from its credit customers.  This indicates that Zeth Trading is getting more efficient in managing its trade receivables. 1 mark per suitable comment, up to a maximum of three marks 2d True False (i) A trading business can only earn income from the sale of goods.  (ii) A service business shows gross profit in the trading portion of its statement of financial performance.  3a Sole Proprietorship Private Limited Company It is owned by one person who contributes capital to set up the SP; It is owned by 50 or less shareholders where each investor buys shares and contributes capital It is less likely for banks and other lenders to lend money to SP; It is more likely for banks and other lenders to lend money to PLC as there are more business assets of high value to serve as collaterals. The SP exists as long as the owner is alive and desires to continue operation. The company exists forever until wound up or struck off. Any one pair of reasonable corresponding points – 2m 3b  Types of storage  Nature of product  Customer preference  Economic outlook Any other reasonable points – 1m 3c The non-accounting information provides a qualitative view of the business and provides information about the business operations. Conclusion Can earn other income too! Service biz has no trading portion! Non-accounting information is usually a consideration that is not related to the price of the item.

3d Non-current liabilities are due to be paid beyond one financial year [1], while current liabilities are due to be paid within one financial year. [1] 3e Helps in the preparation of financial statements – [1] Check for arithmetic accuracy in recording – [1] 3f Trial balance is not an absolute proof of accuracy. There may be errors not revealed by trial balance. [1] 3g Assets = Liabilities + Capital + Income – Expense – Drawings 2240 + 8000 + 42000 = 2500 + 6000 + 240 + 35000 + 630 + 21350 – 11400 – 1300 – 500 – D 52240 = 52520 – D D = 280 [1] – Total assets [1] – Total liabilities / equities tallied correctly [1] – answer 4a Amount of rental income earned = -800 + 3500 + 1800 – 710 = $3790 [2] 1m each for adding any two amounts. 2m in total. 4b Date 2020 Particulars Debit ($) Credit ($) Dec 31 Rental income [1] - income 3790 Income summary [1] 3790 4c Accrual basis of accounting theory states that business activities that have occurred, regardless of whether cash is paid or received, should be recorded in the relevant accounting period. [1] Use expanded accounting equation