O-LevelAccountingAnalysis and interpretation7707/22 · Oct/Nov 2019 · Q420 Marks
Rani is in business buying and selling goods on credit. She provided the following information. At 1 October 2017 $ Capital 75000 Bank loan (repayable 2023) 40000 For the year ended 30 September 2018 Expenses 65000 Profit for the year 15000 Mark-up 25% Rani did not make any drawings during the year. REQUIRED Rani is concerned about the level of her profitability. She decided to increase the mark-up to 50% on her goods for the year ended 30 September 2019. The following information is available for the year ended 30 September 2019. $ Purchases 212000 Expenses 60000 Inventory at 1 October 2018 36000 Inventory at 30 September 2019 28000
- (a)Calculate the following for the year ended 30 September 2018. Workings Answer Revenue Percentage of profit for the year to revenue (to two decimal places) Percentage return on capital employed (to two decimal places) Use the capital employed at 30 September 2018[6]
- (b)Calculate the following for the year ended 30 September 2019. Workings Answer $ Cost of sales Revenue Profit for the year[6]
- (c)Comment on the profitability of Rani's business over the two years.[4]
- (d)Name the accounting principle/concept being applied by Rani in the following situations. Principle/concept Rani always ensures that her personal transactions are not recorded in the business accounting records. Rani does not calculate annual depreciation on low-value office equipment items such as staplers. Rani requires reports on the progress of the business at regular intervals. Rani's assets and expenses are recorded in the ledger accounts at their actual cost.[4]
Mark scheme
Marking points from the official mark scheme (Oct/Nov 2019). The mark or mark type is shown in brackets.
- [2] Revenue: Gross profit = Expenses + Profit for the year = $65 000 + $15 000 = $80 000. Mark-up 25% means Cost of Sales = 80000 / 0.25 = $320 000. Revenue = Cost of Sales + Gross Profit = $320 000 + $80 000 = $400 000. (Alternatively, Gross Profit / 25% = Cost of Sales -> 80000 / 0.25 = 320000. Revenue = 320000 * 1.25 = 400000 or 80000 * (100+25)/25 = 400000)
- [2] Percentage of profit for the year to revenue: (15000 / 400000) × 100 = 3.75%
- [2] Percentage return on capital employed: Capital at 30 Sep 2018 = $75 000 (initial capital) + $15 000 (profit) = $90 000. Capital employed = $90 000 (capital) + $40 000 (bank loan) = $130 000. (15000 / 130000) × 100 = 11.54%
- [2] Cost of sales: $36 000 (inventory 1 Oct 2018) + $212 000 (purchases) – $28 000 (inventory 30 Sep 2019) = $220 000
- [2] Revenue: Mark-up 50% means Revenue = Cost of Sales * (100% + 50%) / 100% = $220 000 * 1.5 = $330 000
- [2] Profit for the year: Gross Profit = $330 000 - $220 000 = $110 000. Profit for the year = Gross Profit - Expenses = $110 000 - $60 000 = $50 000
- [1] Increased the gross profit from $80 000 to $110 000
- [1] Increased the gross profit to revenue ratio from 20% to 33 1/3%
- [1] The profit for the year increased/improved from $15 000 to $50 000
- [1] Profitability has improved
- [1] The profit for the year to revenue ratio increased
- [1] The ROCE has increased.
- [1] The expenses reduced/controlled helping the increase in profit for the year
- [1] Customers may go elsewhere for cheaper goods
- [1] Max 4 Accept other valid points.
- [1] Accounting/business entity
- [1] Materiality
- [1] Accounting year
- [1] Historical cost
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