Mark Scheme (Results)

January 2022

Pearson Edexcel International Advanced Level

In Accounting (WAC12/01)
Paper 02 Corporate and Management
Accounting
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January 2022
Question Paper Log Number P70675
Publications Code WAC12_01_2201_MS
All the material in this publication is copyright
© Pearson Education Ltd 2022
General Marking Guidance

• All candidates must receive the same treatment. Examiners must mark
the first candidate in exactly the same way as they mark the last.
• Mark schemes should be applied positively. Candidates must be
rewarded for what they have shown they can do rather than penalised
for omissions.
• Examiners should mark according to the mark scheme not according
to their perception of where the grade boundaries may lie.
• There is no ceiling on achievement. All marks on the mark scheme
should be used appropriately.
• All the marks on the mark scheme are designed to be awarded.
Examiners should always award full marks if deserved, i.e. if the answer
matches the mark scheme. Examiners should also be prepared to
award zero marks if the candidate’s response is not worthy of credit
according to the mark scheme.
• Where some judgement is required, mark schemes will provide the
principles by which marks will be awarded and exemplification may be
limited.
• When examiners are in doubt regarding the application of the mark
scheme to a candidate’s response, the team leader must be consulted.
• Crossed out work should be marked UNLESS the candidate has
replaced it with an alternative response.
Q1 Mark scheme

(a) (i) [AO1] 2

AO1: Two marks for stating the different treatment.

Irredeemable preference shares would be placed in the equity/ share capital section of the
statement of financial position.(1)AO1
Redeemable preference shares are treated as a non-current liability in the statement of financial
position. (1)AO1

(ii)[AO3] 2
AO3: Two marks for stating the different treatment.

Dividends paid on irredeemable preference shares would be found in the Appropriation

account in the statement of profit and loss and other comprehensive income. (1)AO3
Dividends paid on redeemable preference shares would be treated as an expense in the
statement of profit and loss and other comprehensive income. (1)AO3
(4)

(b)
(i) [AO1] 4
AO1 : Four marks for calculation of gross profit as a percentage of revenue.

Gross profit = £360 000 000 - £225 000 000 = £135 000 000 (1)AO1

Gross profit as a percentage of revenue = Gross profit x 100

Revenue

=£135 000 000 x 100 (1)AO1

£360 000 000 (1)AO1

= 37.5% (1)AO1 (4)

(ii) [AO1] 3
AO1 : Three marks for calculation of net profit after tax as a percentage of
revenue.

Net profit for the year after tax = £24 000 000 - £2 500 000 = £21 500 000 (1)AO1

Net profit for the year after tax as a percentage of revenue =

Net profit for the year after tax as a percentage of revenue x 100
Revenue
 = £21 500 000 x 100 (1)AO1 = 5.97% (1)AO1
£360 000 000 (3)

(iii) [AO2] 3 [AO3] 1

AO2 : Three marks for correct insertion of net profit after tax and of ordinary shares
issued, and correct calculation of earnings per ordinary share.
AO3 : One mark for correct calculation of preference dividends.

Earnings per ordinary share = Net profit after tax – Irredeemable preference dividend
Issued ordinary shares

= £21 500 000 (1o/f)AO2 - £600 000 (1)AO3 = 23.22 pence per share(1o/f)AO2
90 000 000 (1)AO2
(4)

(iv) [AO1] 3

AO1 : Three marks for correct insertion of market price of share and earnings per share
and for correct calculation of price/earnings ratio.

Price/earnings ratio = Market price per share

Earnings per share

= £1.60(1)AO1 = 6.89 times o/f (1o/f)AO1

23.22p (1o/f)AO1 (3)
(v) [AO2] 4

AO2 : Four marks for correct calculation of dividend paid per ordinary share.

Dividend paid per ordinary share = Total ordinary dividend

Issued ordinary shares

= £225 000(1)AO2 + (£90 000 000 x 0.0175) (1)AO2 = 2.00p per share
(1)AO2
90 000 000 (1)AO2
(4)
(vi)[AO1] 1 [AO2] 2

AO1 : One mark for correct insertion of total ordinary dividend.

AO2 : Two marks for correct insertion of net profit after tax less preference dividends and
calculation of dividend cover.

Dividend cover = Net profit after tax – Irredeemable preference dividend

Total ordinary dividend

= £20 900 000 (1o/f)AO2 = 11.61 times (1o/f)AO2

£1 800 000 (1o/f)AO1(3)

(vii)[AO1] 3
AO1 : Three marks for correct insertion of market price of share and dividend per share.
and for correct calculation of dividend yield.

Dividend yield = Dividend per ordinary share x100

Market price of share

= 2.00 p (1o/f)AO1 x 100 = 1.25% (1o/f)AO1

£1.60 (1)AO1 (3)

(viii) [AO2] 7 [AO3] 3

AO2 : Seven marks for correct insertion of net profit after interest; and calculation of
interest on redeemable preference shares, debenture, and bank loan; and calculation of
ordinary share capital, redeemable preference shares; and return on capital employed.
AO3 : Three marks for correct insertion of irredeemable preference shares, other
reserves and debenture and bank loan.

Return on Capital employed = Net profit before interest and tax x 100
Capital employed

= ___£24 000 000 (1)AO2 + £1 120 000(1)AO2 + £1 200 000(1)AO2 + £1 080 000(1)AO2___
(£81 000 000(1)AO2+£10 000 000(1)AO3+£16 000 000(1)AO2+£23 000 000(1)AO3+£15 000
000+£12 000000(1)AO3both)

= £27 400 000 x 100 = 17.45% (1)AO2

£157 000 000 (10)
(ix)
[AO2] 5
AO2: Five marks for correct calculation of gearing ratio.

Gearing ratio = Fixed Cost Capital

Capital employed

=£10 000 000 (1)AO2 + £16 000 000(1)AO2 + £15 000 000 + £12 000 000(1)AO2 both x
100=33.76%(1o/f)AO2
£157 000 000 (1o/f) AO2

(5)

(c) [1 AO1] [1 AO2] [4 AO3] [6 AO4]

Own figure rule applies throughout answer.

Answers may include :

Improved performance in 2021

Gross profit as a percentage of revenue has improved by 7.4% points.
Possible reasons for this include: increased selling price for finished product / reduced costs of
material, direct labour.

Gearing has reduced by 2.73% points which reduces risk.

Possible reasons for this include: an issue of ordinary shares was made / loans were repaid

Worsened performance in 2021

The net profit after tax as a percentage of revenue has reduced by 1.23% points.
Possible reasons for this include: increase in expenses such as rents or managers salaries

Earnings per share have fallen by 3.76 pence per share.

Possible reasons for this include: reduced net profit after tax / an issue of ordinary shares was
made.

Price/earnings ratio has fallen by 1.38 times.

Possible reasons for this include: the market has less confidence in the company, probably
because of the decrease in net profit after tax.

Dividend per share has fallen by 1 penny per share.

Possible reasons for this include: reduced net profit after tax / reduced earnings per share / an
issue of ordinary shares was made.

Dividend cover has fallen by 2.77 times

Possible reasons for this include: reduced net profit after tax which has resulted in a greater
percentage of net profit being paid out as dividends.

Dividend yield has fallen by 0.1% points.

Possible reasons for this include: reduced net profit after tax which has resulted in lower
dividends being paid out.

Return on capital employed has fallen by 3.79% points.

Possible reasons for this include: reduced net profit after tax / a possible increase in share
capital or fixed cost capital.

Conclusion
It appears that the performance of MGH Textiles plc in 2021 was worse than 2020, due to the
net profit after tax being a lower percentage of revenue.

(12 marks)
Level Mark Descriptor

0 A completely incorrect response.

Level 1 1- 3 Isolated elements of knowledge and understanding which are

recall based.
Weak or no relevant application to the scenario set.
Generic assertions may be present.
Level 2 4-6 Elements of knowledge and understanding, which may be applied
to the scenario.
Chains of reasoning are present, but may be incomplete or invalid.
A generic or superficial assessment is present.
Level 3 7-9 Accurate and thorough understanding, supported by relevant
application to the scenario.
Some analytical perspectives are present, with developed chains of
reasoning, showing causes and/or effects.
An attempt at an assessment is presented, using financial and
maybe non-financial information, in an appropriate format and
communicates reasoned explanations.
Level 4 10 - 12 Accurate and thorough knowledge and understanding, supported
throughout by relevant application to the scenario.
A coherent and logical chain of reasoning, showing causes and
effects.
Assessment is balanced, wide ranging and well contextualised
using financial and maybe non-financial information and makes an
informed decision.

(Total for Question 1 = 55 marks)

Question 2
(a)(i) [AO1] 8 [AO2] 7
AO1: Eight marks for correct calculation of individual and total fixed costs
AO2: Seven marks for correct calculation of variable costs, contribution per unit, and break-
even point

= £39 000
Depreciation £40 000 - £1 000 (1)AO1 = £7 800
5 5
Fixed Costs £
Depreciation 7800 (1o/f)AO1
Service (£360 x 3) 1080 (1)AO1
Rent (£25 x 180) 4500 (1)AO1
Salaries (£1 920 x 6) 11520 (1)AO1
Licence (£1 250 x 6) 7500 (1)AO1
Fuel (£35 x 720) 25200 (1)AO1
57600 (1)o/fAO1

Variable costs £
Labour (£8 x 37.5%) 3.00 (1)AO2

Contribution per unit = Selling price - Variable costs

= £ 8.00(1)AO2 - £3.00 (1)o/fAO2
= £5.00 (1)o/fAO2

Break-even point Total Fixed Costs

Contribution per unit

= £57,600 (1)o/fAO2
£5.00 (1)o/fAO2

15
= 11 520 customers (1)o/fAO2 marks

(a)(ii)[AO2] 2
AO2: Two marks for correct calculation of break-even point in sales revenue
Break-even point in sales revenue
= (11520 x £8.00) (1) o/f AO2 = £92 160 (1)o/fAO2
2 marks

(b) [AO2] 3
AO2: Three marks for correct calculation of break-even customers per tour
Break-even customers per tour 11 520 (1)o/f AO2 = 16 per tour (1)o/fAO2
720 tours (1)AO2 3 marks
(c) (i) [AO2] 3
AO2: Three marks for correct calculation of margin of safety in number of customers.
Total number of customers = (180 days x 4 tours x 40 customers) = 28 800 (1)AO2
(28 800 – 11520) = 17 280
Margin of safety in customers = (1)o/fAO2 (1)o/fAO2 3 marks

(c) (ii) [AO2] 3

AO2: Three marks for correct calculation of margin of safety as a percentage of sales
Margin of safety as a
17 280 x
percentage of sales = 100(1)o/fAO2 = 60% (1)o/fAO2
28 800 (1)o/fAO2 3 marks

(d) [AO1]1 [A02] 3

AO1: One mark for correct calculation of profit for the season
AO2: Three marks for correct calculation of revenue, variable costs and fixed costs
Profit for the year
Revenue (£8.00 x 28 800) 230 400 (1)AO2
Less
Variable costs (3 x 28 800) (86 400) (1)o/fAO2
Fixed Costs (57 600) (1)o/fAO2
Profit for year 86 400 (1)o/fAO1 4 marks

(e) [AO1]3 [A03] 6

AO1: Three marks for correct drawing and labelling of scales and axes, and fixed costs
AO3: Six marks for correct drawing and labelling of sales revenue, total costs, break-even
point measured in
number of customers and sales revenue, margin of safety in number of customers, and profit.
 (f) [AO1] 2 [A02] 2
AO1: Two marks for correct calculation of fixed costs and profit for the season
AO2: Two marks for correct calculation of revenue and variable costs.
Number of customers = 180 x 12 = 2 160
Profit for the season
Revenue (£25.00 x 2 160) 54 000 (1)AO2
Less
Variable costs (£10 x 2 160 o/f) (21 600) (1)o/fAO2
Fixed Costs (30 000) (1)AO1
Profit for season 2 400 (1)o/fAO1 4 marks

Question 2 (g) Mark scheme

(g) [AO1 1] [AO2 1] [AO3 4] [AO4 6]

For Option A, the open top bus tours

The profit at the open-top bus is £86 400 which is higher than the profit of £2 400 of the mini-
bus.
The difference is £84 000 for the expected customers.

Evangelos pays himself £86 400 in wages with the open-top bus, but only £21 600 with the mini-
bus.
The difference is £64 800 for the expected customers.

For Option B, the mini-bus tours

The break-even point at 2 000 customers is lower than the break-even point of 11 520
customers in the open-top bus. The difference is 9 520 units.

Fixed costs (rent, managers salaries, and other fixed costs) are lower for the mini-bus. If the
forecast sales do not happen, the mini-bus represents less of a risk.

Evangelos has £40 000 which will all be spent on buying the open-top bus if this option is
chosen. Does he have access to any other monies if some of the other fixed costs need to be
paid in advance, e.g. for a licence to operate?

The mini-bus tours take vehicles out of the town centre which may be congested and this lowers
pollution.
Other points
The figures given are only estimates in some cases. It is not possible to exactly predict the sales
figures for the bus tours. Perhaps the projected sales may not happen, so profits for each bus
will differ from those given above.

How long will the working day be for Evangelos? The open-top bus makes 4 tours a day. How
long is each tour? The mini-bus goes to beauty spots outside the town. How far away are the
beauty spots? How long is the drive to these spots? Does Evangelos have a rest at the beauty
spots?

Conclusion
Although the mini-bus has a lower break-even point, the open-top bus has a higher predicted
profit.
This means the open-top bus should be chosen.

However, if there are doubts concerning the level of sales that can be achieved, it may be better
to choose the mini-bus.

Level Mark Descriptor

0 A completely incorrect response.

Level 1 1- 3 Isolated elements of knowledge and understanding which are

recall based.
Weak or no relevant application to the scenario set.
Generic assertions may be present.
Level 2 4-6 Elements of knowledge and understanding, which may be applied
to the scenario.
Chains of reasoning are present, but may be incomplete or invalid.
A generic or superficial assessment is present.
Level 3 7-9 Accurate and thorough understanding, supported by relevant
application to the scenario.
Some analytical perspectives are present, with developed chains of
reasoning, showing causes and/or effects.
An attempt at an assessment is presented, using financial and
maybe non-financial information, in an appropriate format and
communicates reasoned explanations.
Level 4 10 - 12 Accurate and thorough knowledge and understanding, supported
throughout by relevant application to the scenario.
A coherent and logical chain of reasoning, showing causes and
effects.
 Assessment is balanced, wide ranging and well contextualised
using financial and maybe non-financial information and makes an
informed decision.

(Total for Question 2 = 55 marks)

(Total for Section B = 110 marks)

Question 3
a) [AO1] 5 [AO2] 12 [AO3] 7

AO1 : Five marks for opening and closing balances

AO2 : Twelve marks for :
Entries in ordinary share account for applications received, first and second calls.
Entries in application and allotment account for accepted applications and payments.
Entries in first call and second call accounts.
Entries in Bank account for applications accepted, monies received for first call and
second call, and returns of monies.
AO3 : Seven marks for all entries concerning balances due on allotment and entry in
application and allotment account for return of monies.

(i) Ordinary Share Capital Account

£ 000 £ 000

1 Jan2021 Balance b/d 32 000

(1)AO1

13 March Application & 1 200(1)AO2

Allotment

30 June Application & 1 200

Allotment (1)AO3

15 July First Call 2 100

(1)AO2

31Dec Balance c/d 38 000 31 Aug Second + Final 1 500

Call (1)AO2

38 000 38 000

1 Jan 2022 Balance b/d 38

000(1)AO1

6 marks
 (ii) Share Premium Account

£ 000 £ 000
1 Jan2021 Balance b/d 8 000(1)AO1
31Dec Balance c/d 9 500 30 June Applctn&Allotmnt 1 500(1)AO3
9 500 9 500
1 Jan2022 Balance b/d 9 500
(1)AO1
3 marks

(iii) Application and Allotment Account

£ 000 £ 000

2021 2021

13 Mar Ordinary Share Capital 1 200 13 Mar Bank 1 660 (1)AO2

(1)AO2

24 Mar Bank 460 30 June Bank 2 700 (1)AO3

(1)AO3

30 June Ordinary Share Capital 1 200

(1)AO3

Share Premium 1 500(1)AO3 _____

4 360 4 360

6 marks

(iv) First Call Account

£ 000 £ 000

2021 2021

15 July Ordinary Share 2 100(1)AO2 15 July Bank 2 100(1)AO2

Capital

2 100 2 100

2 marks
 (v) Second and Final Call Account

£ 000 £ 000

2021 2021

31 Aug Ordinary Share Capital 1 500(1)AO2 31 Aug Bank 1 500(1)AO2

1 500 1 500 (1)AO1

3 marks

(vi) Bank Account extract

£ 000 £ 000

2021 2021

13 Mar Application and 1 660 24 Mar Application and 460(1)AO2

Allotment (1)AO2 Allotment
account account

30 June Application and 2 700(1)AO3

Allotment
account

15 July First Call account 2 100

31 Aug Second Call 1 500(1)AO2

account both

4 marks

(24)

(b) [AO2] 1 [AO3] 2 [AO4] 3

Answers may include:

Case for Divesocean Hotels plc Ordinary shares

• It is fairly straightforward to ask existing shareholders if they would like to purchase

more shares.
• No “outside” parties having any influence on the running of the Divesocean Hotels plc,
e.g. a place on the board, which banks may request if they provide funds.
• Shareholders do not have to be paid dividends, which is useful if Divesocean Hotels plc is
short of funds.
 • No interest has to be paid, so the profits of Divesocean Hotels plc will be higher than
taking a bank loan. This will also help cash flow and liquidity.
• Issue of shares results in lower gearing, which decreases the risk to Divesocean Hotels
plc.

Case against Divesocean Hotels plc Ordinary shares

• Administration costs involved in the issue of ordinary shares would be much greater than
the administration costs of taking out a bank loan.
• A share issue may not be fully subscribed. If Divesocean Hotels plc then turn to a bank
for funding, the bank may see the company as high risk and charge a high interest rate.

Conclusion

Should relate to points made above. For example, ordinary shares are a good source of finance.

(6)

Level Mark Descriptor

0 A completely incorrect response.

Level 1 1-2 Isolated elements of knowledge and understanding that are recall
based.
Generic assertions may be present.
Weak or no relevant application to the scenario set.
Level 2 3-4 Elements of knowledge and understanding, which are applied to
the scenario.
Some analysis is present, with developed chains of reasoning,
showing causes and/or effects applied to the scenario, although
these may be incomplete or invalid.
An attempt at an evaluation is presented, using financial and
perhaps non-financial information, with a decision.
Level 3 5-6 Accurate and thorough knowledge and understanding. Application
to the scenario is relevant and effective.
A coherent and logical chain of reasoning, showing causes and
effects is present.
Evaluation is balanced and wide ranging, using financial and
perhaps non-financial information and an appropriate decision is
made.

(Total for Question 3 = 30 Marks)

Question 4
(a)(i) [AO2] 2
AO2 : Two marks for correct calculation and insertion of purchases
(a) Purchases
Budget April May June July
27000 27000 (1)AO2 both 27000 27000 (1)AO2 both

2 marks
(a)(ii)[AO1] 3 [AO2] 5 [AO3] 2
AO1: Three marks for correct addition of monthly totals
AO2: Five marks for correct calculation of one and two months credit figures and April and May three months credit figures.
AO3: Two marks for three months credit figures for June and July
Trade Payables
Budget April May June July
B - One month credit 10800 10800 10800 10800 (1)AO2 all
C - Two months credit 8100 (1)AO2 16200 16200 16200 (1)AO2 all three
D - Three months
credit 2700 (1)AO2 5400 (1)AO2 8100 (1)AO3 8100 (1)AO3
Total 21600 (1o/f)AO1 32400 (1o/f)AO1 35100 35100 (1o/f)AO1 both

10 marks
(b)(i) [AO2] 2
AO2: Two marks for correct calculation of sales figures
Sales
Budget April May June July
44712 (1)AO2 48600 48600 48600 (1)AO2 all three

2 marks
(b)(ii) [AO1] 2 [AO2] 3 [AO3] 5
AO1: Two marks for correct addition of monthly totals for April to July
AO2: Three marks for correct calculation of cash sales figures, and total for April.
AO3: Five marks for six months credit figures.
Cash Budget
extract April May June July
Cash sales 22 356 (1o/f)AO2 24 300 24 300 24 300 (1o/f)AO2 all three

Six months credit 0 3 726 (1)AO3 7 776 W1 [2] 11 826 W2 [2]

Total 22 356 (1o/f)AO2 28 026 (1o/f)AO1 32 076 36 126 (1o/f)AO1both

Workings
3 726
W1 June (1o/f)AO3 + 4 050 (1o/f)AO3 = 7 776 [2]
7 776
W2 July (1o/f)AO3 + 4 050 (1o/f)AO3 = 11 826 [2] 10 marks
4(c)

For the terms

Purchases – there are a range of terms offered which means QPKSHeating plc do not have to
pay for all purchases in one go, at the start of trading for this store.

Two or three months’ credit allows QPKS Heating plc time to sell boilers before they need to pay
for them.

50% of sales for cash generate an instant cash flow after a sale.

Six or seven months to pay for a boiler will generate sales, especially as items are expensive.

Against the terms

60% of all purchases need to be paid for within one month.

50% of all sales do not have payment complete until seven months after the sale.

Evaluation

Conclusion must relate to argument put forward and should have a key reason for the final
decision.

Given that the mark-up of QPKS Heating plc is 80% and all purchases are sold within the same
month as purchases, cash flow should not be a problem for this store.
Level Mark Descriptor

0 A completely incorrect response.

Level 1 1-2 Isolated elements of knowledge and understanding that are recall
based.
Generic assertions may be present.
Weak or no relevant application to the scenario set.
Level 2 3-4 Elements of knowledge and understanding, which are applied to
the scenario.
Some analysis is present, with developed chains of reasoning,
showing causes and/or effects applied to the scenario, although
these may be incomplete or invalid.
An attempt at an evaluation is presented, using financial and
perhaps non-financial information, with a decision.
Level 3 5-6 Accurate and thorough knowledge and understanding. Application
to the scenario is relevant and effective.
A coherent and logical chain of reasoning, showing causes and
effects is present.
Evaluation is balanced and wide ranging, using financial and
perhaps non-financial information and an appropriate decision is
made.

6 marks
(Total for Question 4 = 30 marks)
 Question 5 (a)(i) [AO2] 4

[AO2] : Four marks for entries in Property, plant and equipment Account.

Property, plant and equipment Account

Date Details £000 Date Details £000

1 Jan2021 Balance b/d 6 439 (1)AO2 4 Apr2021 Disposals 252 both

25 Oct Bank (Plant) 125 (1)AO2 23 Jun Disposals 1 760 (1)AO2

2021

_____ 31Dec Balance c/d 4 552 (1)AO2

6 564 6 564

1 Jan 2022 Balance b/d 4 552

4 marks

(a)(ii) [AO1] 5 [AO2] 8 [AO3] 7

[AO1] Five marks for entries of profit and tax, and totals for operating cash flow before
working capital changes, cash generated from operations and net cash from operating
activities.

[AO2] Eight marks for calculation and inclusion of interest, profit on sale of fixed asset,
loss on sale of fixed asset, increase or decrease in inventories, trade and other
receivables, and trade and other payables.

[AO3] Seven marks for calculation of depreciation and amortisation of intangibles.

Statement of Cash Flows for y/e 31 December 2021

Cash Flows from operating activities £ 000
Profit from operations (1 432(1)AO1 + 2 (1)AO2) 1 434 [2]
Add Depreciation 201 W1 [5]
Add Amortisation of intangibles 195 W2 [2]
Less Profit on sale of non-currentasset (577) (1)AO2
Add Loss on sale of non-current asset 13 (1)AO2
Operating cash flow before working capital changes 1 266 (1)AO1 o/f
Add decrease in Inventories 1 (1)AO2
Add decrease in Trade receivables 8 (1)AO2
Less increase in Other receivables (5) (1)AO2
Less decrease in Trade payables (202)
(1)AO2
Add increase in Other payables 6 both
 Cash generated from operations 1 074 (1)AO1o/f
Less Interest paid (2) (1)AO2
Less Tax paid (298) (1)AO1
Net Cash from Operating Activities 774 (1)AO1o/f

W1 - Working for depreciation:

Depreciation Account

Date Details £000 Date Details £ 000

4 Apr 2021 Disposals 78 (1)AO3 1 Jan2021 Balance b/d 2 548 (1)AO
3
23 June Disposals 525 (1)AO3 31 Dec Statement of 201 (1)AO
Comprehensive 3
Income
31Dec Balance c/d 2 146 (1)AO3 _____
2 749 2749
1 Jan 2022 Balance c/d 2 146

W2 – Working for amortisation

Figures in £000

(1 900 + 595) - 2 300 (1)AO3 = 195 (1)AO3

20 marks

(b) [AO2] 1 [AO3] 2 [AO4] 3

Case for usefulness of Statement of Cash Flows

The statement helps Valetta Motors plc study where the company has generated its cash over
the last financial year and how it is applied. This may help decision-making in the next financial
year.

The statement is broken down into three key sectors, net cash flows from operating, investing
and financing activities. The three parts are added together to give an overall figure for an
increase or a decrease in cash for the last financial year.

The statement helps to explain why the overall change in the bank balance might be
significantly different (or even contradict) the amount of profit or loss generated.

The statement looks back and uses figures that are nearly all actual figures (except for
depreciation and amortisation).
Case against usefulness of Statement of Cash Flows

The statement is fairly complicated. It may not be fully understood by all readers.

It may take time, effort and funding of Valetta Motors plc to produce.

Conclusion

The statement must be produced by Valetta Motors plc and is regarded as a useful tool to
inform readers about liquidity of the company.

(6)

Level Mark Descriptor

0 A completely incorrect response.

Level 1 1-2 Isolated elements of knowledge and understanding that are recall
based.
Generic assertions may be present.
Weak or no relevant application to the scenario set.
Level 2 3-4 Elements of knowledge and understanding, which are applied to
the scenario.
Some analysis is present, with developed chains of reasoning,
showing causes and/or effects applied to the scenario, although
these may be incomplete or invalid.
An attempt at an evaluation is presented, using financial and
perhaps non-financial information, with a decision.
Level 3 5-6 Accurate and thorough knowledge and understanding. Application
to the scenario is relevant and effective.
A coherent and logical chain of reasoning, showing causes and
effects is present.
Evaluation is balanced and wide ranging, using financial and
perhaps non-financial information and an appropriate decision is
made.
(Total for Question 5 - 30 marks)
6
(a) [AO1] 2 [AO2] 12 [AO3] 4
AO1 : Two marks for fixed overheads and opening inventory.
AO2 : Twelve marks for calculation of revenue, direct materials, direct labour,
semi-variable costs, closing inventory units and marginal costing value, profit.
AO3 : Four marks for calculation of absorption costing closing inventory.

Statement of Profit or Loss and Other Comprehensive Income for Y/E 31 December 2021
Marginal Absorption
£ £
Revenue 3 995 160 3 995 160 (1)AO2
Less
Direct Materials 919 600 919 600 (1)AO2
Direct Labour 1 117 200 1 117 200 W1 [2]
Semi-variable costs 224 200 224 200 W2 [2]
Fixed Overheads 228 000 228 000 (1)AO1
2 489 000 2 489 000
Opening Inventory (160 650) (190 400) (1)AO1
Closing Inventory 140 544 167 680

Profit 1 486 054 1 483 440 (2o/f)AO2

1 each
Workings
W1
Calculation of direct labour
= £1 117
= (1.75 x £8.40) = £14.70 per unit x 76 000 200
(1)AO2 (1o/f)AO2
W2
Calculation of semi-variable costs
= (£0.65 x 76 000) = £49 400 + £174 800 = £224 200
(1)AO2 (1o/f)AO2

Calculation of closing inventory

units
Opening Less Closing
inventory Production sales units inventory
5950 76000 -76830 5120
(1)AO2 (1)AO2
 Calculation of closing inventory
value
x 5120 both
Marginal (12.10+14.70+0.65) (1o/f)AO2 140 544 (1o/f)AO2

Absorption
2489000 (1o/f)AO3 = 32.75 x 5120 = 167 680
76000 (1)AO3 (1o/f)AO3 (1o/f)AO3
18 marks

(b) (i) [AO1] 1 [AO3] 1

1 AO1 mark for point made. 1 AO3 mark for development

Disadvantages of marginal costing

Not recommended by SSAP 9 and IAS 2.(1)AO1 If used to prepare financial statements, it is
argued they would not give a true and fair view / be signed off by auditors. (1)AO3

Not all costs are allocated to the products.(1)AO1 This would mean this method is not suitable
for fixing prices / accepting possible orders etc in the long run.(1)AO3
(2)
(ii) [AO1] 2 [AO3] 2

1 AO1 mark for each point made. 1 AO3 mark for each development

Answers may include:

Disadvantage of absorption costing

All costs are not allocated to the time period in which they are incurred.(1)AO1 It may be argued
that profit for that time period is not accurate as external accounts are drawn up on the basis of
a time period. (1)AO3

Does not follow the prudence concept(1)AO1 Closing inventory may be overstated and
therefore also profit overstated.(1)AO3

May be time consuming and complex to work out the value of closing inventory.(1)AO1

All costs must be included in the valuation of closing inventory.(1)AO3

(4)
(c)

[AO2] 1 [AO3] 2 [AO4] 3

For accepting order

• The order could be accepted on the grounds that £30 is greater than the marginal cost of
£27.45
• The new customer may result in more orders in the future, perhaps at a higher price.
• There are just over 5 000 units in inventory, so the order can be met. There will be no
need to have any extra production runs as the units are in inventory.

For rejecting order

• In the long term, selling at £30 would result in a Net Loss/ not all costs are covered.
• Existing customers would be unhappy to hear of this low price on offer.
• The lower price might invite the belief that the product is now inferior / of lower quality
and this may affect sales.
• If taken out of inventory, this would only leave 120 units. If regular customers request
any extra orders, they may have to wait or be disappointed.

Conclusion
Marginal costing states order should be accepted.

(6)
 Level Mark Descriptor

0 A completely incorrect response.

Level 1 1-2 Isolated elements of knowledge and understanding that are recall
based.
Generic assertions may be present.
Weak or no relevant application to the scenario set.
Level 2 3-4 Elements of knowledge and understanding, which are applied to
the scenario.
Some analysis is present, with developed chains of reasoning,
showing causes and/or effects applied to the scenario, although
these may be incomplete or invalid.
An attempt at an evaluation is presented, using financial and
perhaps non-financial information, with a decision.
Level 3 5-6 Accurate and thorough knowledge and understanding. Application
to the scenario is relevant and effective.
A coherent and logical chain of reasoning, showing causes and
effects is present.
Evaluation is balanced and wide ranging, using financial and
perhaps non-financial information and an appropriate decision is
made.

(Total for Question 6 - 30 Marks)

(Total for Section B = 90 marks)

TOTAL FOR PAPER = 200 MARKS

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