Introduction to Finance 24 November 2015 Marking Scheme · Introduction to Finance 24 November 2015...

Introduction to Finance

24 November 2015

Marking Scheme

This marking scheme has been prepared as a guide only to markers. This is not a set of model answers, or the exclusive answers to the questions, and there will frequently be alternative responses which will provide a valid answer. Markers are advised that, unless a question specifies that an answer be provided in a particular form, then an answer that is correct (factually or in practical terms) must be given the available marks. If there is doubt as to the correctness of an answer, the relevant NCC Education materials should be the first authority.

Throughout the marking, please credit any valid alternative point.

Where markers award half marks in any part of a question, they should ensure that the total mark recorded for the question is rounded up to a whole mark.

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Introduction to Finance © NCC Education Limited 2015

Answer any FOUR (4) questions

Marks

Question 1 a) There are many differences between a partnership and a limited company.

Complete the table below, outlining the different aspects of a partnership and a limited company. The first row has been completed as an example.

Aspect of Business

Partnership Limited Company

Formation By agreement but not necessarily in writing

Registering the company under the Companies Act

Running the business

Accounting Information

Liability

6

Award 1 mark for each correct aspect identified, to a maximum of 6.

Partnership Limited Company

Formation By agreement but not necessarily in writing

Registering the company under the Companies Act

Running a business

All partners share in the running of the business (1 mark)

Shareholders appoint directors to run the business (1 mark)

Accounting Information

Not obliged to make accounting information available to the public (1 mark)

Must make accounting information available to the public – Annual Financial Statement (1 mark)

Liability Partners are jointly and severally liable for money owed by the firm (1 mark)

The personal liability of the owners is limited to the amount they have agreed to pay for shares (1 mark)

Marks

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b) For each of the following forms of financial information, identify whether it would be used primarily within management accounting or financial accounting. Give reasons for your choice.

I. Income Statement II. Break-even analysis

III. Cash Flow Forecast IV. Cash Flow Statement V. Company budget.

15

Award 1 mark per correct identification- additional 2 marks for detailed reason- 3 marks per question- 15 marks maximum.

I. Income Statement Financial accounting; it is used by external investors, for example, to evaluate a company’s financial health.

II. Break-even analysis Management accounting; it is used by company managers, for example, to guide pricing and output decisions concerning a new product. III. Cash Flow Forecast

Management Accounting; it is used by company managers to monitoring of expected cash flows over the time period. It provides early warning of cash deficits or cash surpluses. IV. Cash Flow Statement

Financial Accounting; it is used by investors to evaluate a company’s financial health. It explains cash flows to and from the entity.

V. Company budget Management accounting; it is produced and used by company managers to guide and control resource allocation within the company.

c) Define with examples, the term overheads. 4 Award up to 2 marks for a correct definition and 1 mark per valid example

given (up to a maximum of 2). They are all costs not directly identifiable with units of output Overheads will include indirect materials costs and indirect labour costs. In practice some overhead costs will not be known until the end of the accounting year. It is often necessary for some of these costs to be estimated for the purposes of working out the cost of manufacturing units of output. Examples could be staff salaries, research and development, office administration, maintenance of building, heating etc.

Total 25 Marks

Marks

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Question 2 a) There are two departments in a retail company. A summary of their financial

performance is provided below. Department ‘A’ is making a loss. If the department is closed fixed costs of £30,000 would be saved. Should the department be closed? Justify your answer.

£000s Dept ‘A’ Dept ‘B’ Company Total

Sales 150 250 400

Variable costs 105 100 205

Share of fixed costs

60 60 120

Profit(loss) (15) 90 75

3

Award up to 3 marks for a discussion based around the shared fixed costs. Therefore, no- (1 mark)- if the department is closed profits would fall to £60,000 (1 mark)- Department A is contributing to overheads and should be kept open (1mark).

£000s Dept ‘A’ closed

Dept ‘B’ Company Total

Sales 250 250

Variable costs 100 100

Share of fixed costs 90 90

Profit(loss) 60 60

b) Zero based budgeting was developed as a reaction to the traditional approach to

budgeting.

i) Define zero budgeting 2 Award up to 2 marks for good definition, for instance:

The budgetary period starts from a zero position; it assumes no expenditure unless specifically justified by plans.

Marks

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ii) Discuss TWO (2) advantages and TWO (2) disadvantages of zero-based budgeting.

8

Award up to 2 marks for each developed advantage (to a maximum of 4 marks) and up to 2 marks for each developed disadvantage (to a maximum of 4 marks). Advantages:

Resulting budget is well justified and aligned to strategy

Facilitates broader collaboration across the organization

Supports cost reduction by avoiding automatic budget increases, often resulting in savings

Improves operational efficiency by rigorous challenging of assumptions

Disadvantages:

Costly, complex, and time consuming as budget is rebuilt from scratch annually, whereas simpler and faster traditional budgeting requires justification only for incremental changes

May be cost-prohibitive for organizations with limited funding

Risky when potential savings are uncertain

Execution challenged by budget cycle timing constraints

Typically requires specialized training or personnel to accomplish, and requires more resources in general

May be disruptive to the organization’s operations

c) Identify TWO (2) methods of setting budgets other than ‘zero-based’ 2 Award 1 mark per any relevant budget identified, to a maximum of 2.

Flexible- linked to activity

Incremental

Input based- line item

Output-based budgets that focus on outcomes and effectiveness.

d) Explain the need and use of budget profiling. 3 Award 1 mark per any relevant point, up to a maximum of 3 marks.

Obviously it would be pointless monitoring a budget if you could only compare budget and actual figures on an annual basis. To get round this problem budgets are ‘profiled’, that is breaking them down into periodic amounts e.g. Monthly. There is some value in profiling a budget simply by dividing the annual budget by 12 equal months. However, this would be of limited value if trade has seasonal fluctuations. Budget profiles should reflect expected fluctuations in activity levels.

Marks

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e) A small retail business sells all products for cash. A cash flow forecast has been partially completed. All figures are £(000s).

January February March April

Receipts/Cash In

12 15 ?

25

Payments/Cash Out

Wages 3 ? 3 4

Stock 2 3 3 6

Building maintenance

5 12 16 10

Other Costs 4 4 5 ?

Total Outflow 14 22 27 25

Net Cash Flow (2) (7) (7) 0

Opening Balance

6 ? (3) (10)

Closing balance ? ? (10) ?

Complete the cash flow forecast.

7

Award 1 mark per valid calculation- 7 marks maximum as indicated.

January February March April

Receipts/Cash In

12 15 20-1 mark

25

Payments/Cash Out

Wages 3 3 -1 mark 3 4

Stock 2 3 3 6

Building maintenance

5 12 16 10

Other Costs 4 4 5 5-1 mark

Total Outflow 14 22 27 25

Net Cash Flow (2) (7) (7) 0

Opening Balance

6 4 -1 mark

(3) (10)

Closing balance 4 -1 mark (3) -1 mark

(10) (10) -1 mark

Total 25 Marks

Marks

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Question 3 a) The value of a piece of machinery purchased for £12,000 is being depreciated

using a reducing balance basis. The depreciation rate is 50%. Calculate the annual depreciation rate for each year and also the net book value at the end of each year.

10

Award 1 mark per calculation as indicated- 10 marks maximum.

Year Net Book value at start of year

Annual Depreciation @50%

Net Book value End Year

1 12000 6000 -1mark 6000-1mark

2 6000 3000-1mark 3000-1mark

3 3000 1500-1mark 1500-1mark

4 1500 750-1mark 750-1mark

5 750 375-1mark 375-1mark

b) Explain the impact on the balance sheet if the asset is sold for £2000 at the end

of year 5. 4

The asset is reduced by £375 to zero value (1), the ‘cash’ asset is increased by £2000(1); there is no effect on liabilities(1); ownership interest is increased by £1625 (1) (to a maximum of 4 marks).

c) If the machinery in (a) was depreciated using a straight line method with an

estimated scrap value of £375. Calculate the annual depreciation rate and the total depreciation on the asset. Comment briefly how this compares to the reducing balance method.

5

Annual Depreciation rate= Cost- residual value ÷ expected working lifetime (1 mark) = 12000-375 ÷ 5= £2525 per year (1 mark) Total depreciation is 5x £2525= £11625 (1 mark) This is same total depreciation as the reducing balance method (1 mark) Reducing balance depreciation charge is much higher than straight line method charge for first two years and then continues to decline as asset reaches end of its useful life (1 mark)

Marks

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d) Identify the THREE categories of accounting and briefly explain their main focus. 6 Award 1 mark for each category identified and 1 mark for indicating their

focus. Financial accounting – monetary transactions Management accounting – support to decision-making processes Strategic management accounting – looks outside the organisation at the market, the trading environment and competitors

Total 25 Marks

Marks

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Question 4 a) The following trial balance has been extracted from Amazing Books’ ledgers as

at 31st December 2015. Amazing Books operates as a sole trader. Dr Cr £ £ Bank 5000 Capital at 1st January 2015 11000 Cash 1000 Drawings 8000 Motor vehicle at cost 6000 Motor vehicle expenses 3000 Office Expenses 2000 Purchases 36000 Trade Payables 4000 Trade receivables 14000 Sales 60000 75000 75000

There is no opening or closing stocks

i) Prepare an Income Statement for the year ended 31 December 2015. 9

Trading & profit & loss Account

£

Sales 60,000

Less cost of goods sold

Purchases 36,000

Gross profit 24,000

Less expenses

Motor vehicle expenses 3,000

Office expenses 2,000 5,000

Net profit 19,000

9 marks available for complete accurate Income Statement. For each error deduct 2 marks from the total of 9, for example, if there is one error, award 7 marks, etc. Avoid punishing errors which are simply the result of a previous error that has already led to a marks deduction. Note for markers- if all calculations/data entry incorrect but some recognition that gross and net profit needed to be calculated- award 1 mark.

Marks

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ii) Prepare a Statement of Financial Position (Balance Sheet) for the year ended 31 December 2015.

16

Balance Sheet 31st December 2015

Non-current assets (Fixed Assets)

Motor vehicles 6,000 Current assets Trade receivables 14,000 Bank 5,000 Cash 1,000 20,000 Current liabilities Trade payables 4,000 16,000 Net assets 22,000 Capital 11,000 Add net profit 19,000 Less drawings 8,000 Total Equity 22,000

Other appropriate formats acceptable. Award 16 marks available for complete and accurate statement of financial position. For each error deduct 2 marks from the total of 16, for example, if there is one error, award 14 marks, etc. Avoid punishing errors which are simply the result of a previous error that has already led to a marks deduction.

Total 25 Marks

Marks

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Question 5 a) Explain why inventory is NOT valued at its expected selling price on the

statement of financial position (balance sheet) and how it is valued in practice. 3

Award 1 mark for every correct point made, up to a maximum of 3. Inventory is recorded at the lower of cost (1 mark) or net realisable value rather (1 mark) than the expected selling price. ‘Cost’ includes those incurred in bringing the stocks to their current condition and location (1 mark). This ensures profit on the sale of inventory is only realised when the actual

sale takes place (1 mark).

b) A stock record card detailing the purchases and issues to production is detailed

below.

Date Received Unit price

Price paid

Issued to production

Units £ £ Units

1 June

100 3.00 300 0

5 June

200 3.30 660 0

8 June

50 3.50 175 0

14 June

50 3.70 185 0

15 June

150 4.00 600 0

21 June

250

i) Calculate (showing workings) the value of the stock issued to production

using the First In First Out (FIFO) method. 3

Award 1 mark for each correct part of the calculation, up to a maximum

of 3:

100 @ 3.00 each = £300 1 mark 150 @ £3.30 each= £495 1 mark Total value issued = £795 1 mark

Marks

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ii) Calculate (showing workings) the value of the stock issued to production using the Last In First Out (LIFO) method.

4

Award 1 mark for each correct part of the calculation, up to a maximum of 4: 150 @ £4.00 = £600 1 mark 50 @ 3.70 = £185 1 mark 50 @ £3.50= £175 1 mark Total= £960 1 mark

iii) Calculate (showing workings) the value of the stock issued to production

using the average cost method. 4

Award marks as follows for the average cost calculation: Received 550 units; total cost £1920.00 (2 marks) Average cost therefore = £3.49 each (1 mark) Total cost to production = 250 units at £3.49 each = £872.50 1 mark

c) There are several methods to classify costs. i) Define product costs and period costs. 2 Award 1 mark for each correct definition:

Product costs – “... those costs associated with goods or services purchased or produced for sale to customers” (1 mark). Period costs – “... those costs which are treated as expenses in the period in which they are incurred” (1 mark).

ii) Define stepped costs and provide an example. 2 Award 1 mark for a definition and 1 mark for an example.

Costs may not be entirely linear in behaviour, for example, if activity is doubled there may be a need for larger premises. Thus there will be a ‘step’ in accommodation costs at the capacity limit of existing premises.

iii) Identify THREE (3) purposes of classifying costs. 3 Award 1 mark per relevant purpose identified- 3 marks maximum.

Planning – ‘what if ...’ Decision-making – ‘should we do ... Control – ‘how and why ...’

Marks

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d) Outline the possible composition of the master budget and the subordinate budgets for a manufacturing company.

4

Award up to 2 marks for each budget described to a maximum of 4 marks. The top level Master Budget comprises Statement of Financial Position (Balance Sheet), Income Statement (Profit and Loss) and Cash Flow budgets reflecting how events will eventually be reported (2 marks) – it is usually highly summarised and amounts to an aggregation of a large number of subordinate budgets. Subordinate budgets include production (materials, labour and overheads), sales, marketing and administration etc. (2 marks).

Total 25 Marks

End of paper

Marks

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Learning Outcomes matrix

Question Learning Outcomes assessed

Marker can differentiate between varying levels of achievement

1 1,3 Yes

2 4 Yes

3 2,1 Yes

4 2 Yes

5 3,4 Yes

Grade descriptors

Learning Outcome

Pass Merit Distinction

Analyse the use of accounting in organisations

Demonstrate adequate ability to analyse

Demonstrate ability to provide detailed and coherent analysis

Demonstrate ability to provide comprehensive, lucid analysis

Prepare and analyse financial statements

Demonstrate adequate ability to analyse

Demonstrate ability to provide detailed and coherent analysis

Demonstrate ability to provide comprehensive, lucid analysis

Examine the use of costs in organisations

Provide examination of the subject with some suitable examples and references

Provide detailed examination of the subject with adequate use of appropriate references and examples

Provide consistently critical and detailed examination of the subject with innovative use of highly appropriate references

Examine how accounting is used to support decision-making

Provide examination of the subject with some suitable examples and references

Provide detailed examination of the subject with adequate use of appropriate references and examples

Provide consistently critical and detailed examination of the subject with innovative use of highly appropriate references

Introduction to Finance 24 November 2015 Marking Scheme · Introduction to Finance 24 November 2015...

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