B124 17J TMA 01 Questions & solutions

Question 1

There are two parts to question 1 (a, and b). You are required to answer each part.

Question 1a (15 marks)

The word limit for Question 1a is 400 words.

(i) Explain the term ‘stakeholder’ in relation to a business. Give an example of an internal
stakeholder, and briefly discuss the information needs of such a stakeholder.
(4 marks)

(ii) Using an appropriate accounting example, explain the importance of benefit exceeding
cost in the context of useful information.
(4 marks)

(iii) Using appropriate examples, explain the difference between tangible and intangible
assets.
(4 marks)

(iv) Explain why a mortgage is classified in accounting as a ‘non-current liability’.

(3 marks)

Question 1b (10 marks)

The word limit for Question 1b is 300 words.

(i) Using your knowledge of Figure 2.1 in Book 1, Chapter 2, as well as your general
knowledge of double-entry accounting, give an example of how a specific transaction is
captured in the accounting information system as an ‘input’, a ‘process’ and an ‘output’.
(3 marks)

(ii) Explain the importance of an ‘audit trail’ in financial accounting.

(2 marks)

(iii) Explain by means of a diagram what is meant by ‘the transaction cycle’. Briefly discuss
the time length of a transaction cycle compared to an accounting cycle.

(5 marks)
(Total: 25 marks)

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 Question 1a Solutions
Source: Glossary, Chapter 1 Sessions 1.1 and 1.4 of Book 1

(i) The glossary defines a stakeholder as ‘all those who have an interest in an organisation.
They may be users of, or persons with a varying degree of interest in, an entity's
financial statements and dependent on or influenced by its financial performance.’

An example of an internal stakeholder is an employee.

Such a stakeholder would want financial information about job security and prospects, in
comparison with conditions in other organisations.

(ii) It is an accepted quality of useful information that the cost of producing, understanding
and using information should be less than the benefit generated from its use.

An appropriate accounting example may be a badly designed computerised accounting

system that is not value for money.

(iii) The glossary states the following: ‘The word tangible means something that can be
touched.  In terms of assets, a tangible asset is an asset that has physical form.  An
intangible asset therefore does not have physical form and cannot be touched, though
the existence of many kinds of intangible assets (e.g., copyrights, patents and
trademarks) may be evidenced by some form of documentation.  This is not the case
with goodwill, however, which is probably the most intangible of all assets.

(iv) A mortgage is a loan agreement secured on a premise and is thus a liability. It is a non-
current liability as it is generally assumed that the mortgage is not due within the current
financial year.

Question 1b Solutions
Source: Chapter 2 Sessions 2.1 to 2.4 of Book 1

(i) An example, just one of many, could be a cash sale. The ‘input’ could be the recording
of the source document of the sale, perhaps a till slip, in a cash book or other book of
original entry. The ‘process’ would be the posting of the original entry to the double-entry
system, i.e. a credit to the sales account and a debit to the cash or bank account.
Finally, the ‘output’ of the financial information system would be any report which
contains the new information, perhaps a monthly management account or even an
annual financial statement.

(ii) The module material states that an ‘an audit trail gives a step-by-step recording of a
transaction from the original or source document to its final presentation in a summary
financial report. A reliable and easy to follow audit trail provides objective evidence of
proper record keeping in a business.’

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(iii)

Initiation of
transaction

Exchange of good for cash

New ownership
Cash sale or promise of cash (via
of good
credit given)
Bought

Credit sale

The above represents the transaction cycle

The module material states that ‘transaction cycles can be longer or shorter than an
accounting cycles. It depends on the type of transaction or accounting cycle. In the
case of constructing a building the transaction cycle may take several years. An
accounting cycle to produce a monthly management report needs to take a maximum of
a month. Only in the case of a cash transaction cycle, which can take as short as a
minute, is the transaction cycle definitely shorter than the accounting cycle.’
.
(Question 1 Total 25 marks)

Question 2

There are two parts to Question 2 (a, and b). You are required to answer each part.

Question 2a (13 marks)

The word limit for Question 2a is 400 words.

(i) What is unusual about the term ‘accountant’ unlike the terms ‘doctor’ and ‘lawyer’ in
many countries, including the UK? How does this affect the public in choosing the
services of an accountant?
(3 marks)

(ii) Communication skills are essential in accounting. Identify which type of communication
skill poses the biggest challenge to you, and discuss the steps you are taking to improve
this skill.
(3 marks)

(iii) Qualified accountants should have the skills and knowledge to practice effective
strategic management. Explain in simple terms what is meant by ‘strategic
management’ and persuasively argue for its importance for a professional accountant.
(5 marks)

(iv) Give an example of how a particular economic factor in a national economy directly
impacts on a particular business.

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 (2 marks)

Question 2b (12 marks)

The word limit for Question 2b is 300 words.

(i) Explain what is meant by ‘professional competence and due care’. Describe how a
qualified accountant can demonstrate compliance with this fundamental ethical principle.
(4 marks)

(ii) Explain how a certain stereotype or prejudice in an organisation can undermine

organisational performance and productivity. Your stereotype or prejudice given should
not be one used in the B124 material.
(3 marks)

(iii) Explain how you currently use a spreadsheet to achieve two different personal, work or
household objectives. One example should be financial and the other non-financial.
(2 marks)

(iv) You have decided to design and use a spreadsheet to achieve a new personal, work or
household objective. Briefly describe this objective and explain the benefits in using a
spreadsheet to achieve it.
(3 marks)
(Total: 25 marks)
Question 2a Solutions
Source: Chapter 3 Sessions 3.2 of Book 1

(i) In most countries, including the UK, certain professionals, such as doctors and lawyers,
have legal protection associated with their status. Only properly qualified and regulated
doctors and lawyers can call themselves by these terms. The term accountant does not
have the same legal protection.

The public needs to be very careful in choosing the services of an accountant. If an

accountant is a member of a professional accounting body a higher level of assurance is
provided as such a body is authorised and regulated.

(ii) The module material suggests a number of challenging communication skills: active
listening, written comprehension, social awareness. Any appropriate communication skill
offered would be acceptable.

Any appropriate steps, sensibly discussed, suggested to improve this communication

skill would be acceptable.

(iii) The module material states that ‘strategic management is the continuous process of
determining, implementing and evaluating decisions that enable an organization to
achieve its objectives’.

A persuasive argument, logically and clearly presented and using appropriate examples,
for the importance of strategic management for a professional accountant would be
acceptable.

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(iv) One example is how an overall increase in interest rates in an economy make it more
expensive for a particular business to borrow money to properly invest in developing the
business.

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Question 2b Solutions
Source: Chapter 3 Session 3.3 and Chapter 5 of Book 1

(i) Professional competence and due care for a professional accountant reflects a
continuing duty to maintain professional knowledge and skill at the level required to
ensure that a client or employer receives competent professional service based on
current developments in practice, legislation and techniques.

A qualified accountant demonstrates compliance with professional competence and due

care by completing, for example, appropriate CPD (Continuous professional
development).

(ii) Stereotypes or prejudices in an organisation that can undermine organisational

performance and productivity would, for example, be negative judgements about
someone purely because of their gender or ethnicity.

(iii) Uses of a spreadsheet to achieve a financial personal, work or household objective

would be a budget or a mortgage repayment table.
Uses of a spreadsheet to achieve a non-financial personal, work or household objective
would be a food diet that records calories or a database of names, addresses and other
contact details.

(iv) An example of a new spreadsheet to complete a new personal, work or household

objective might be the costs of a new work or home project. Your answer should
include a sufficiently clear and detailed explanation of the benefits in using a
spreadsheet to achieve this goal. Such benefits might be accuracy, clarity of
presentation, ability to be used again as a template and the ability to be sent by email.

(Question 2 Total 25 marks)

Question 3 (30 marks)

There are three parts to Question 3 (a, b and c). You are required to answer each part.

Justina, a sole trader, owns and manages a small business, which sells exclusive toys.
Justina balances the business accounts at the end of each month of the financial year.

On 1 July the balances on her accounts were as follows:

Account name £ £
Capital 24,500
Van 8,000
Equipment 11,500
Bank 5,684
Receivables 3,016
Payables 3,700

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During July, the following transactions took place.

Date Amount of Transaction

transaction
(£)
1 950 Pays a supplies account (payable)
1 725 Receives payment from a receivable
2 293 Gives a credit note to a customer for toys that were previously
invoiced but not delivered
5 730 Pays cash on delivery for toys from wholesaler
6 47 Uses business cash for personal expense
8 2,800 Purchases toys on credit
8 679 Receives payment from a receivable
9 267 Receives a credit note from a payable for stationery that was
previously invoiced but not delivered
10 40,000 Puts £40,000 of own money into the business
12 285 Delivers toys to a customer and is paid in cash
13 215 Delivers toys to a customer and agrees 30 days credit terms
15 630 Invoices a customer on 30 days credit terms
16 1,897 Receives payment from a customer
17 1,250 Justina purchases new office equipment for her own business
19 18,000 Purchases a van for deliveries and pays in cash
22 300 Justina takes drawings
25 706 Invoices a customer on 30 days credit terms
27 515 Invoices a customer on 30 days credit terms
29 1,700 Pays a supplier
31 903 Invoices a customer on 30 days credit terms

Required:

(a) Set out Justina’s general ledger accounts at 1 July. Present the ledger accounts as T
accounts.
(4 marks)
(b) Following on from a), post the July transactions and balance off the general ledger
accounts. (As well as the general ledger accounts at 1 July you will also need to open
T-accounts for sales, sales returns, purchases, purchase returns and drawings.)
(20 marks)

(c) Present the trial balance at 31 July.

(6 marks)
(Total: 30 marks)

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Question 3 Solutions
Source: Book 2
(a, and b)

Capital
£ £
  1 July Balance b/d 24,500
64,50
31 July Balance c/d 10 July Bank 40,000
0
64,50
64,500
0
  1 Aug Balance b/d 64,500

Van
£ £
1 July Balance b/d 8,000
1 18,00
July Bank 31 July Balance c/d 26,000
9 0
26,000 26,000
26,00
1 Aug Balance b/d
0

Equipment
£ £
11,50
1 July Balance b/d
0
17 July Bank 1,250 31 July Balance c/d 12,750
12,750 12,750
12,75
1 Aug Balance b/d
0

Bank
£ £
1 July Balance b/d 5,684 1 July Payables 950
1 July Receivables 725 5 July Purchases 730
8 July Receivables 679 6 July Drawings 47
40,00
10 July Capital introduced 17 July Equipment 1,250
0
12 July Sales 285 19 July Van 18,000
16 July Receivables 1,897 22 July Drawings 300
  29 July Payables 1,700
  31 July Balance c/d 26,293
49,27
0 49,270
26,29
1 Aug Balance b/d 3

Receivables account
£ £
1 July Balance b/d 3,016 1 July Bank 725
1
July Sales 215 2 July Sales ret 293
3

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1
July Sales 630 8 July Bank 679
5
2 1
July Sales 706 July Bank 1,897
5 6
2
July Sales 515  
7
3 3
July Sales 903 July Balance c/d 2,391
1 1
5,985 5,985
1 Aug Balance b/d 2,391

Payables account
£ £
1 July Bank 950 1 July Balance b/d 3,700
9 July Purchases returns 267 8 July Purchases 2,800
2
July Bank 1,700  
9
3
July Balance c/d 3,583    
1
6,500   6,500
  1 Aug Balance b/d 3,583

Sales
£ £
Jul
285
  12 y Bank
Jul
215
  13 y Receivables
Jul
630
  15 y Receivables
Jul
706
  25 y Receivables
Jul
515
  27 y Receivables
3 Jul
903
1 Oct Balance c/d 3,254 31 y Receivables
3,254 3,254
  1 Aug Balance b/d 3,254

Sales returns
£ £
Jul
2 July Receivables 293 31 y Balance c/d 293
293 293
1 Aug Balance b/d 293

Purchases
£ £
5 July Bank 730
Jul
2,800
8 July Payables 31 y Balance c/d 3,530

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 3,530 3,530
1 Aug Balance b/d 3,530

Purchases returns
£ £
3 Jul
1 July Balance c/d 267 9 y Payables 267
267 267
  1 Aug Balance b/d 267

Drawings
£ £
6 July Bank 47
2 Jul
July Bank 300 31 Balance c/d 347
2 y
347 347
1 Aug Balance b/d 347

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(c) Trial balance at 31 July

Account name Debit Credit

£ £
Capital 64,500
Van 26,000
Equipment 12,750
Bank 26,293
Receivables 2,391
Payables 3,583
Sales 3,254
Sales returns 293
Purchases 3,530
Purchases returns 267
Drawings 347
Totals 71,604 71,604

(Question 3 Total 30 marks)

Question 4 (20 marks)

Martin prepares his business accounts for the year ending 30 September each year. At 30
September 2017 the following general ledger balances were available:

Trial Balance Debit Credit

£ £
Equipment 20,000
Motor vehicle 18,000
Inventory at 30/09/2017 8,500
Receivables 6,600
Bank 26,400
Payables 3,700
Bank loan 25,000
Capital balance at
32,600
1/10/2016
Capital introduced 3,000
Drawings 8,000
Net profit   23,200
87,500 87,500

Required:

(a) Prepare the balance sheet for Martin as at 30 September 2017.

(12 marks)

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(b) Explain the difference between cash discounts allowed and cash discounts given, and
state the accounting treatment of each in the financial statements.
(4 marks)

(c) (i) Explain the difference between gross profit and net profit, and show how net profit
will affect the accounting equation.

(ii) By means of appropriate examples, explain the difference between drawings and
expenses.

(4 marks)
(Total: 20 marks)

Question 4 Solutions on next page

Source: Book 2

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(a) Martin Balance Sheet as at 30 September 2017

£ £
Non-current assets
Equipment 20,000
Motor vehicles 18,000
38,000
Current assets
Inventory 8,500
Receivables 6,600
Bank 26,400
41,500
Total assets 79,500

Capital
Opening balance 32,600
Add: Capital introduced 3,000
Net profit 23,200
58,800
Less: Drawings 8,000
50,800
Non-current liabilities
Bank loan 25 ,000

Current liabilities
Payables 3,700

Total capital and liabilities 79,500

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(b) Source: Chapter 3 Session 3.8.3 of Book 2

Cash discounts allowed are offered to a customer for prompt payment of a sales
invoice. They are therefore a reduction in the amount paid by a customer. Cash
discounts received are given by a supplier for prompt payment of a purchase invoice.
They are therefore a reduction in the amount paid to a supplier.

Cash discounts allowed appear in the income statement as an expense. Cash

discounts received appear in the income statement immediately after gross profit,
representing another form of income received, but before expenses are deducted.

(c) Source: Chapter 3 Session 3 and Chapter 1 Session 1 of Book 2

(i) Gross profit is the difference between the selling price of goods sold and the cost of
purchasing the goods sold. Net profit is gross profit less the expenses of running
the business during the accounting period. Only net profit is relevant to the
accounting equation i.e. Assets = Liabilities + Capital + (Sales/Revenue – all
expenses).

(ii) Drawings are monies or goods taken out of the business by the owner for her or his
personal use, while expenses refer to all costs of running a business. An example
of a drawing is a sole trader using the cash takings to buy a personal item such as a
guitar. An example of an expense is a stationery item, such as a pen, needed to
run the business.
(Question 4 Total 20 marks)

END OF TMA01 Questions & solutions

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