Cambridge International Examinations

Cambridge International Advanced Subsidiary and Advanced Level

ACCOUNTING 9706/32
Paper 3 A Level Structured Questions March 2017
MARK SCHEME
Maximum Mark: 150

Published

This mark scheme is published as an aid to teachers and candidates, to indicate the requirements of the
examination. It shows the basis on which Examiners were instructed to award marks. It does not indicate the
details of the discussions that took place at an Examiners meeting before marking began, which would have
considered the acceptability of alternative answers.

Mark schemes should be read in conjunction with the question paper and the Principal Examiner Report for
Teachers.

Cambridge will not enter into discussions about these mark schemes.

Cambridge is publishing the mark schemes for the March 2017 series for most Cambridge IGCSE,
Cambridge International A and AS Level components and some Cambridge O Level components.

IGCSE is a registered trademark.

This document consists of 16 printed pages.

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1(a) An intangible asset is an identifiable non-monetary asset (1) without physical substance (1) from which future benefits 3
are expected. (1)

1(b) $ 13
Revenue 680 000
Cost of sales W1 (401 714) (2)of
Gross profit 278 286 (1)of
Distribution costs W2 (66 607) (3)of
Administrative expenses W3 (147 837) (3)of
Profit from operations 63 842 (1)of
Finance costs (4 500) (1)
Profit before tax 59 342
Tax (12 385) (1)
Profit for the year 46 957 (1)of

W1
Cost of sales: 117 257 + 378 000 (108 543 15 000 (1)) = 401 714 (1)of
W2 $
Distribution costs:
TB 70 152
Provision 90 (1)
Prepayment (3 635) (1)
66 607 (1)of
W3
Administrative expenses:
TB 145 267
Accrual 2 480 (1)
Provision 90 (1)
147 837 (1)of

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1(c) 87 450 4
Trade receivables turnover = 365 = 47 days (1)of
680 000

105 400
Inventory turnover ratio = 365 = 95.77 days (1)of
401 714

26 550
Trade payables turnover = 365 = 26 days (1)of
378 000

Working capital cycle = 47 + 96 26 = 117 days (1)OF

1(d) It is taking longer to receive payment from customers than the allowed period. (1) 5
There should be a review of the credit control system. (1)
May consider discounts / incentives to encourage prompt payment. (1)
Payment to suppliers is being made quicker than the allowed period. (1)
This maintains a good relationship with the suppliers. (1)
Future discounts / incentives should be protected. (1)
Detrimental to cash flow (1) as payments are received 21 days after payments are made. (1)
Inventory turnover of 95.77 days could be reduced to improve liquidity. (1)

1 for decision + Max 4 for justification

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2(a) 4
Internal auditor External auditor

External auditors are external independent

Internal auditors are employees
persons

Examine the financial statements and give

Review the business practices and internal opinion whether the financial statements present
control system to prevent mistakes a true and fair view and comply with legal
requirements

Report to the senior management Report to shareholders

Accept any reasonable alternative.

(2 marks) 2 explanations

2(b) Responses could include: 8

Proposed dividend The proposed dividend has to be approved by shareholders at the annual general meeting. It
is not regarded as liability at the statement of financial position date. According to IAS 10 Events After The
Reporting Period, a proposed dividend should be treated as a non-adjusting event and entered as a note on the
financial statements.
Depreciation of printing machine According to IAS 16 Property, Plant and Equipment, the depreciation method
used shall reflect the pattern in which the assets future economic benefits are expected to be consumed by the
business. As the consumption of the printing machine is decreasing, reducing balance method should be adopted.
Goodwill IAS 38 Intangible Assets prohibits the recognition of internal generated goodwill. Therefore do not
include this in the financial statements.
Inventory According to IAS 2 Inventories, inventories should be valued at the lower of cost and net realisable
value. Therefore inventory should be valued at $43 400 not $44 500

(2 marks) 4 explanations

It is not necessary to quote the relevant accounting standards.

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2(c) $ 3
Original profit for the year 99 800
Less : Depreciation charge 15 000 (1)
Less : Inventory overstated 1 100 (1)
Revised profit for the year 83 700 (1of)

2(d) Share Revaluation Retained 4

capital reserve earnings Total
$ $ $ $
Balance at start of year 1 000 000 100 000 94 600 1 194 600
Profit for the year 83 700 (of) 83 700
Dividend paid (20 000) (1) (20 000)
Balance at end of year 1 000 000 100 000 158 300 1 258 300
(1) (1) (1of)

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2(e) Redrafted Statement of Financial Position at 31 December 2015 3

$
Non-current assets
Freehold property 700 000
Machinery and equipment ($457 400 $15 000) 442 400 (1of)
1 142 400
Current assets
Inventories ($44 500 $1 100) 43 400 (1of)
Trade receivables 74 800
Cash and cash equivalents 36 000
154 200

Total assets 1 296 600

Equity and liabilities

Equity
Share capital 1 000 000
Revaluation reserve 100 000
Retained earnings 158 300 (1of)
Total equity 1 258 300

Current liabilities
Trade payables 38 300
38 300

Total equity and liabilities 1 296 600

2(f) To prepare true and fair financial statements, it is essential that they are prepared in accordance with applicable 3
accounting standards (1). Euan should voice his concerns and discuss with the directors (1) giving them the opportunity
to revise the statements (1). If the directors do not reflect the changes, the external auditor can consider issuing a
qualified auditor report (1).
Max. 3

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3(a) Differences: 3

Surplus of income over expenditure is used instead of profit. (1)

Excess of expenditure over income is used instead of loss. (1)
Accumulated fund is used instead of capital. (1)
An income and expenditure account is prepared instead of an income statement. (1)
Max 3

3(b) $ $ 6
Revenue 52 750
Deduct cost of sales:
Opening inventory 260
Purchases W1 33 910 (3)
Closing inventory (156) (1) (34 014) (1)of
Snack bar profit 18 736 (1)of

W1: Purchases 33 785 460 (1) + 585 (1) = 33 910 (1)of

3(c) Subscriptions Account 7

$ $
Balance b/d 1 750 (1) Balance b/d 500 (1)
Income and Expenditure Account (1) 77 500 (1) Cash/bank 76 500 (1)OF
Balance c/d 750 Balance c/d 3 000
80 000 80 000
Balance b/d 3 000 (1) Balance b/d 750 (1)

3(d) Apply for overdraft. (1) 4

Seek loan. (1)
Increase membership. (1)
Increase subscription. (1)
Increase prices charged in snack bar. (1)
Introduce other trading activities. (1)
Max 4

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3(e) Advantages 5
Would raise extra funds (1) without need for interest / repayment (1).
Club may get benefit of association with sponsor. (1)

Disadvantages
Sponsor may withdraw. (1)
Club may become reliant on sponsors (1)
Other income sources may suffer. (1)
Any other valid advantages or disadvantage
Max 5

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4(a) Consignment Account 9

$ $ $
Goods sent on consignment 150 000 (1) Tajid W1 202 500 (3)
Tajid Commission 20 250 (1)
Selling 4 000 (1)
Import duty 1 500 (1) 25 750
Bank 3 000
Income statement 23 750
202 500 202 500

W1: Tajid (sale proceeds): 157 500 (1) + 45 000 (1) = 202 500 (1)of

4(b) Tajid Account 3

$ $
Consignment account 202 500 (1)of Consignment account 25 750 (1)of
Bank 176 750 (1)of
202 500 202 500

4(c) Goods sent on consignment Account 2

$ $
Trading account 150 000 (1) Consignment account 150 000 (1)
150 000 150 000

4(d) Sachin Account 5

$ $
Bank (Selling) 4 000 (1) Bank 202 500 (1)
Bank (Import duty) 1 500 (1)
Commission 20 250 (1)
Bank (Remittance) 176 750 (1)
202 500 202 500

4(e) Newer version of appliance may be available. (1) 2

Appliances may be damaged. (1)
There may be competitors selling appliances at a cheaper price. (1)
Max 2

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4(f) There will be a profit of $23 750 (consignment) or $18 000 (home). (1) Therefore, based on these figures, Sachin should 4
make the consignment. (1)of Tajid may not be able to accept the consignment (1) and/or may not be able to maintain
the commission rate. (1) Overseas selling price may continue to fall. (1) There may be further investment opportunities
at home as a result of pursuing this project. (1)

Decision 1
Max 3 justification

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5(a)(i) Material usage 1

Experienced labour
New machinery
Better quality materials (less wastage)

(1 mark) any one reason, max 1

5(a)(ii) Labour efficiency 1

Less skilled labour
Lower grade materials
More idle time than budgeted
Poor supervision
Machine breakdowns

(1 mark) any one reason, max 1

5(b)(i) Material price 2

Std 83 100 kilos $2 166 200

Actual 182 820
16 620 (1) A (1)

5(b)(ii) Material usage 2

Std 17 500 units 5 kilo 87 500

Actual 83 100
4 400 Kilos F
$2
$8 800 (1) F (1)

5(b)(iii) Labour rate 2

Std 37 500 hrs $8 300 000 (1)

Actual 281 250
18 750 (1) F

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5(b)(iv) Labour efficiency 2

Std 17 500 units 2 hrs 35 000

Actual 37 500
2 500 hrs A
$8
$20 000 (1) A (1)

5(b)(v) Fixed overhead efficiency 3

Actual hours 37 500

Std hours 35 000
hours 2 500
$4 (1)
$10 000 (1) A (1)

5(b)(vi) Fixed overhead capacity 3

Actual hours 37 500

Std hours 38 000
hours 500
$4 (1)
$2 000 (1) A (1)

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5(c) $ 4
Standard cost of actual production $34 17 500 595 000 (1)

Variances Fav Adv

$ $
Material price 16 620
Material usage 8 800
Labour rate 18 750
Labour efficiency 20 000
Fixed overhead expenditure 37 000
Fixed overhead efficiency 10 000
Fixed overhead capacity 2 000
64 550 48 620 15 930 F (1of)

Actual cost of production (1) both 579 070 (1)

Working:

Actual cost of production:

$
Direct materials 182 820
Direct labour 281 250
Fixed production overheads 115 000
579 070

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5(d) Assist in setting budgets. 5

Evaluate managerial performance.
Predict future costs for decision making.
Motivate staff by providing targets.
Provide ways of improving efficiency.
Control device uses variance analysis.
Valuing inventories.
Expensive
Time consuming to operate
Requires specialist knowledge

Advice 1 mark 4 for reasons

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6(a) Net present value method of capital investment appraisal uses the present value of the net cash flows less the initial 4
investment. (cash inflows less cash outflows (1) using todays prices levels (1) at the companys cost of capital (1)

max (2)

The internal rate of return method of capital investment appraisal also uses the present values of cash flows. (1)
However it represents the true interest rate earned by the investment over the course of its economic life (1). This rate
will cause the net present value to be returned to zero. (1)
max (2)

6(b) NPV at 14% 9

Net cash flow DF $

0 (260 000) 1 (260 000) 1
1 144 000 0.877 126 288 1of
2 92 400 0.769 71 055.60 1of
3 126 000 0.675 85 050 1of
NPV 22 393.60 1of

Working:

Units
1 36 000 30 26 144 000 (1)
2 42 000 30 27.8 92 400 (1)
3 42 000 31.5 (1) 28.5 126 000 (1)

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6(c) lower rate + (different in rate (low rate npv / low rate npv + high rate npv) 7
14% (1) + (6% (1) 22 393.60 (1of) / 22 393.60 + 2 968.40) = 19.3% (1of)

at 20% NPV is

Net cash flow DF $

0 (260 000) 1 (260 000) (1)
1 144 000 0.833 119 952 *
2 92 400 0.694 64 125.60 *(1)*
3 126 000 0.579 72 954 *
NPV (2 968.40) (1)of

6(d) The net cash flow generated over the 3 years is $102 400 (1). This cash can be put to other uses within the business 5
(1).
Production levels have increased up to 42 000 from 40 000 (1). This means that the business can increase its market (1)
and potentially its profit (1) max
The net present value is positive with a cost of capital at 14%. (1)
The discounted net cash flows exceed the initial cost of the investment (1)
The internal rate of return is larger than the cost of capital (1)
The return of the investment is greater than the cost (1)
Max 5

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