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UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS

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General Certificate of Education Advanced Level

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ACCOUNTING 9706/31
Paper 3 Multiple Choice October/November 2010
1 hour
Additional Materials: Multiple Choice Answer Sheet
Soft clean eraser
*3796654791*

Soft pencil (type B or HB is recommended)

READ THESE INSTRUCTIONS FIRST

Write in soft pencil.

Do not use staples, paper clips, highlighters, glue or correction fluid.
Write your name, Centre number and candidate number on the Answer Sheet in the spaces provided
unless this has been done for you.

There are thirty questions on this paper. Answer all questions. For each question there are four possible
answers A, B, C and D.
Choose the one you consider correct and record your choice in soft pencil on the separate Answer Sheet.

Read the instructions on the Answer Sheet very carefully.

Each correct answer will score one mark. A mark will not be deducted for a wrong answer.
Any rough working should be done in this booklet.
Calculators may be used.

This document consists of 12 printed pages.

IB10 11_9706_31/6RP
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1 A company has operating profit of $326 000 after taking into account the following information.

depreciation 24 000
goodwill impairment 11 000
increase in inventory (stock) 18 000

What is the net cash flow from operating activities?

A $321 000 B $343 000 C $357 000 D $361 000

2 Why is goodwill adjusted in the accounts when a new partner is admitted?

A a more accurate value of non-current (fixed) assets is shown in the balance sheet
B original partners can be credited for their efforts in building up the partnership business
C partners can take higher drawings as a result of their share of the goodwill
D the new partner knows how much they have to introduce as capital

3 A company prepares internal accounts as follows.

year 1 year 2
$ $

profits 30 000 40 000

cost of goods sold 240 000 320 000

It then discovers that at the end of year 1 the value of stock was overstated by $2000.

What are the correct profit and cost of goods sold figures?

year 1 year 2
profits cost of goods sold profits cost of goods sold
$ $ $ $

A 28 000 238 000 42 000 322 000

B 28 000 242 000 40 000 320 000
C 28 000 242 000 42 000 318 000
D 32 000 238 000 38 000 318 000

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4 X, Y and Z are in partnership sharing profits and losses equally. The data shown is extracted
from their books.

Net assets at end of year 600 000

Capital account balances at start of year 320 000
Current account balances at start of year (credit) 100 000
Partnership salary – Y 30 000
Total drawings during year 60 000

What was X’s share of net profit for the year?

A $40 000 B $60 000 C $70 000 D $80 000

5 A company has been wound up and the only assets that remain have realised $45 000.

A summary of the company’s capital structure shows the following.

ordinary shares 20 000

preference shares 40 000
loan stock 30 000

How will the $45 000 be distributed?

ordinary shares preference shares loan stock

$ $ $

A 10 000 20 000 15 000

B – 15 000 30 000
C 20 000 25 000 –
D – 40 000 5 000

6 A plc company redeemed 50 000 ordinary shares of $5 each at par.

The redemption was in part financed by a new issue of 80 000 preference shares of $1 each,
issued at a premium of $1 per share.

By what amount will distributable reserves be reduced?

A $90 000 B $160 000 C $170 000 D $250 000

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7 The table shows the assets and liabilities of a business.

$000

trade payables (creditors) 50

trade receivables (debtors) 15
fixtures and fittings 70
goodwill 15
inventory (stock) 20

How much did the purchaser pay for the business if the new balance sheet after the purchase
shows a goodwill figure of $20 000?

A $55 000 B $70 000 C $75 000 D $145 000

8 A company purchases a business that it estimates has maintainable future earnings of $100 000
per annum.

The net assets purchased have a book value of $225 000, but are valued by the purchaser at a
fair value of $300 000.

The company negotiated a purchase price, which met its return on investment of 20 %.

What was the amount paid for goodwill?

A $75 000 B $200 000 C $275 000 D $500 000

9 A limited company is acquiring the business of a sole trader by:

the issue of 50 000 $0.50 shares at a premium of $0.20 each

the issue of $20 000 debentures at a discount of 10 %
a cash payment

If the fair value of the acquired business is $80 000, how much will the cash payment be?

A $10 000 B $25 000 C $27 000 D $35 000

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10 A company has the following costs for an item of inventory (stock).

purchase costs 12 000

carriage in 2 000
conversion costs 18 000
storage costs 8 000

What should the inventory (stock) be valued at?

A $12 000 B $14 000 C $32 000 D $40 000

11 A company has the following account balances at the end of its financial year.

cash in hand 1 200

cash at bank 16 000
bank overdraft 8 000
deposit, available at 2 months’ notice 7 000
deposit, available at 6 months’ notice 5 000

What is the figure for cash and cash equivalents to appear in the cash flow statement?

A $9200 B $16 200 C $17 200 D $21 200

12 X Plc incurred the following costs as a result of purchasing a new machine.

purchase price 7 000

installation cost 5 000
testing the machine before use 1 000
manufacturer’s list price 10 000
advertising the new products to be made by the machine 4 000

What is the maximum initial cost of the machine that would be recognised as an asset of the
company?

A $13 000 B $16 000 C $17 000 D $20 000

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13 A business has a trade receivables (debtors) turnover period of 40 days and annual sales of
$479 970.

What is the year end trade receivables (debtors) figure?

A $11 999 B $15 780 C $39 997 D $52 599

14 Which ratio measures the return on an investment in shares which continue to be held?

A dividend cover
B dividend yield
C earnings per share
D interest cover

15 A company’s authorised share capital is 1 million ordinary shares of $1 each. 800 000 shares
have been issued and have a market value of $2.50 each.

Year end results show the following.

profits before interest and taxation 100 000

profits after interest and taxation 80 000
profits after interest, taxation and ordinary dividends 50 000

What is the price-earnings ratio?

A 10 B 20 C 25 D 40

16 The trade receivables (debtors) collection period of a business has reduced from 90 to 55 days.

Which reason could account for this?

A a large bad debt written off

B a large credit sale made just before the year end
C a major customer in financial difficulty
D poor credit control

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17 The capital structure of a company is given.

400 000 ordinary shares of $0.50 200 000

reserves 90 000
9 % debentures 2010 – 2012 50 000

The company issues $30 000 10 % debenture stock 2015 – 2017 at par and makes a rights issue
of 1 ordinary share for every four held at $0.60.

It also raises an unsecured loan of $50 000.

How will these transactions affect the balance sheet?

gearing reserves

A decrease decrease
B decrease increase
C increase decrease
D increase increase

18 The equity section of a company’s balance sheet is as follows.

ordinary shares of $0.50 each 200 000

preference shares of $1 each 100 000
share premium 50 000
retained earnings 120 000

The following items have not yet been adjusted.

1 purchase returns of $10 000 have been credited to the sales returns account
2 a long term loan of $40 000 has not been recorded
3 a rights issue during the year of 200 000 ordinary shares at a premium of $0.10
each

What will the total of equity be after the above adjustments have been made?

A $590 000 B $600 000 C $630 000 D $640 000

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19 Which may result in an over-absorption of overheads?

A absorption based on actual expenditure and actual activity

B activity below budget
C expenditure below budget
D expenditure in excess of budget

20 The table shows the annual results of a company’s three departments.

department
X Y Z
$ $ $

sales 200 000 280 000 320 000

less: variable costs 130 000 190 000 100 000
headquarters fixed costs – apportioned 80 000 90 000 130 000
210 000 280 000 230 000
net profit (loss) (10 000) 0 90 000

Headquarters fixed costs will not be reduced if any department is closed.

What should the company do, on the basis of these results?

A Close department X and Y.

B Close department X only.
C Close department Y only.
D Keep all departments open.

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21 The table shows the budgeted resources required for production and sales, and the available
resources.

Market research shows sales demand for 120 000 units.

resources required
resources available
per unit

material (kilos) 4.0 460 000 kilos

direct labour hours 3.0 400 000 hours
machine hours 0.5 70 000 hours

What is the principal limiting factor in this case?

A direct labour hours

B machine hours
C material
D sales

22 The table shows the costs involved in the production of 1000 units.

direct materials 4 000

direct labour 6 000
variable overheads 2 000
fixed overheads 8 000

If production increases by 25 %, what will be the effect on the total cost per unit?

A decrease of $1.60 per unit

B decrease of $5.00 per unit
C increase of $1.60 per unit
D increase of $5.00 per unit

23 When should a system of ‘Flexible Budgeting’ be used?

A to allow accurate comparison when budgeted and actual activity levels differ
B to budget for changes in costs arising from price increases
C to enable a company to change its budgetary control period
D to prepare budgets when selling prices are continuously changing

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24 A company has the following production budget.

opening inventory (stock) 600 units

budgeted sales 10 000 units
closing inventory (stock) 800 units
selling price per unit $25
material cost per unit $13

What will be the production cost budget for material usage for the year?

A $120 000 B $127 400 C $130 000 D $132 600

25 A standard costing system uses routine exception reporting of variances.

What does this mean?

A Variances are investigated between certain limits.

B Variances are investigated if managers require it.
C Variances are only reported if unfavourable.
D Variances are reported if above or below agreed limits.

26 The standard direct materials cost per unit is as follows.

100 kg of material at $5 per kg

Last week 2000 units of the product were manufactured using 230 000 kg of material at a total
cost of $1 035 000.

What was the material price variance?

A $100 000 adverse

B $100 000 favourable
C $115 000 adverse
D $115 000 favourable

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27 A company manufactures a product.

The following standard information per 100 units is available.

materials content price / gm

component 1 25 gm $0.05
component 2 30 gm $0.03

direct labour content rate / hr

department A 1 hr $4.60
department B 1.5 hrs $5.00

Production overheads are $1.50 for each direct labour hour.

What is the standard unit cost of production?

A $0.16 B $0.18 C $0.19 D $0.20

28 The direct labour costs for a product are as follows.

standard 40 000 hours at $6.00 per hour

actual 36 000 hours at $6.30 per hour

What is the labour rate variance and the labour efficiency variance?

labour rate variance labour efficiency variance

A $10 800 adverse $24 000 favourable

B $10 800 favourable $24 000 adverse
C $24 000 adverse $10 800 favourable
D $24 000 favourable $10 800 adverse

29 Which statement about the use of payback as a method of capital investment appraisal is
correct?

A Payback allows cash to be used to generate profit in the most effective way.
B Payback can only be used to compare two projects when they have the same capital cost.
C Payback determines how long it takes before a profit is made.
D Payback determines how long it takes before the cash invested is returned.

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30 A company has evaluated the net present value of a project based on two separate discount
rates, as follows.

net present value $

at 11 % 14 219 positive
at 16 % 5 368 negative

What is the internal rate of return of the project?

A 11.73 % B 12.61 % C 14.63 % D 15.73 %

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University of Cambridge International Examinations is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of University of
Cambridge Local Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge.

© UCLES 2010 9706/31/O/N/10