These are real past-paper questions. Think of your answer first, then open the explanation.
May/June 2021 · Paper 1 · Depreciation
Which statements about depreciation are correct? 1 It is an application of the matching concept. 2 It provides funds for the replacement of a non-current asset. 3 It spreads the cost of a non-current asset over its useful life.
- A - 1, 2 and 3
- B - 1 and 2 only
- C - 1 and 3 only
- D - 2 and 3 only
Show answer and explanation
Answer: C. C - 1 and 3 only
Statements 1 and 3 are correct. Depreciation matches cost to revenue and spreads cost over useful life. Depreciation does not provide funds - it is a non-cash expense.
May/June 2021 · Paper 1 · Errors and Rectification
An item of revenue expenditure is wrongly treated as capital expenditure. What is the effect of this error?
- A - non-current assets overstated, profit for the year overstated
- B - non-current assets overstated, profit for the year understated
- C - non-current assets understated, profit for the year overstated
- D - non-current assets understated, profit for the year understated
Show answer and explanation
Answer: A. A - non-current assets overstated, profit for the year overstated
Capital expenditure is capitalised (debited to non-current assets). If revenue expenditure is treated as capital, non-current assets are overstated and expenses are understated, so profit is overstated.
May/June 2021 · Paper 1 · Inventory Valuation
A businessman suspects some of his inventory has been stolen. Sales revenue $45 600, purchases $33 600, inventory at 1 May 2020 $8 300, inventory at 30 April 2021 $4 500. All goods are marked up at a rate of 33 1/3%. What was the value of inventory stolen?
- A - $600
- B - $3 200
- C - $4 400
- D - $7 000
Show answer and explanation
Answer: B. B - $3 200
Cost of goods sold = $45 600 x (100/133.33) = $34 200. Expected closing inventory = $8 300 + $33 600 - $34 200 = $7 700. Actual closing inventory = $4 500. Stolen inventory = $7 700 - $4 500 = $3 200.
May/June 2021 · Paper 2 · Accounting Concepts
(a) State two reasons why the owner of a small business may decide not to maintain full accounting records.
(b) Explain how the accounting concepts of matching and prudence are applied when preparing financial statements.
(c) Calculate total purchases for the year ended 31 July 2020. Closing trade payables $4 560, opening trade payables $3 970, payments to trade payables $46 800, discounts received $1 200, purchases returns $1 280, cash purchases $1 320.
(d) Prepare the income statement for the year ended 31 July 2020.
(e) Calculate how much profit per annum will be made if Suyin moves her business to the new location: rent triples, sales increase 10%, gross margin 60%, bank loan $16 000 at 8%, discounts received no longer available.
(f) Advise Suyin whether or not she should change her business's location. Justify considering both financial and non-financial factors.
Show model answer
(a) May not have the skills/time to prepare full accounting records; may be content with the information provided by current accounting records; may not afford the services of a bookkeeper/accountant or accounting software; business too small to warrant full accounting records (max 2).
(b) Matching requires costs and revenues to be matched for a financial period irrespective of amounts received or paid. Prudence requires losses to be realised as soon as they are anticipated to avoid profits and assets being overstated or losses and liabilities being understated.
Credit purchases: $4 560 - $3 970 + $46 800 + $1 200 + $1 280 = $49 870. Total purchases = $49 870 + $1 320 = $51 190. …
The full model answer is in the app.
