Pears Mobiles sells phones and accessories in the UK and has provided the following financial information from its accounting records after the production of its Income Statement for the year ended 31 December Year 3.

QUESTION 1 [30 Marks]

Pears Mobiles sells phones and accessories in the UK and has provided the following financial information from its accounting records after the production of its Income Statement for the year ended 31 December Year 3.

You are to carry out an analysis of the company’s financial performance in Year 3.

Notes:

30% of goods were sold on credit.
all goods were purchased on credit.

Pears Mobiles

Selected financial data at 31 December Year 3      

£

Sales Revenue
175,000

Opening Inventory
5,600

Closing Inventory
6,400

Gross Profit
105,000

NET Profit for the Year
20,300

Opening Equity
80,000

Trade Payables
2,000

Trade Receivables
8,000

Property (at Cost)
60,000

Bank & Cash
2,900 (Dr)

Machinery and Tools (at Cost)
75,000

Provision for Depreciation on Machinery and Tools (1 January Year 3)
15,000

Drawings
12,000

VAT
600 (Cr)

Equipment (at Cost bought in year so not depreciated)
9,600

Bank Loan
3,000

Provision for Doubtful Debts (1 January Year 3)
400

 

1.1 Complete the ratio table below by inserting the relevant information for Year 3.  Suggest one possible reason for the difference in each of the ratios below (you should give a different reason for each ratio) [16 Marks]

Ratio
Year 2
Year 3
 

Rate of Inventory Turnover (times)
10 times
2 marks 

 

 

Net Profit Ratio (%)
22 %
2 marks 

 

 

Current ratio
2.4:1
2 marks 

 

 

Gearing ratio
10%
2 marks 

 

 

Return on Equity Employed
28%
2 marks 

 

 

Gross profit ratio
55%
2 marks 

 

 

Liquid ratio/Acid test ratio
2.2:1
2 marks 

 

 

Non-current assets turnover
1.1times
2 marks 

 

 

 

 

1.2 Comment on the current position of Pear mobiles using the ratios above in terms of profitability and liquidity and say whether you would support investment in this business and why? [14 Marks]

 

Question 2 [15 Marks]

2.1

As an accountant, you are working on the accounts of a car repair business when another car repair business approaches you and asks to become a new client of yours. You know that both businesses are competitors and are looking to expand.

Explain at least 2 threats that this request poses to you as a professional and outline how you can safeguard against this. (15 Marks)

Task Response ( 12)
Coherence (3)
Total (15)

 

 

Question 3 [25 Marks]

Union Coffee Distribution has three production cost centres — Production, Assembly and Packing, and one service cost centre — Human Resources.

The business has estimated the overheads for Year 4 of her business. (Overhead Analysis Sheet)

3.1 Complete the Overhead Analysis Sheet below. [25 Marks]

UNION COFFEE DISTRIBUTION

OVERHEAD ANALYSIS FOR YEAR 4

COST CENTRE DATA
Production
Assembly
Packing
Human Resources
TOTAL

Floor Area (sq m)
1000
400
300
400
2,100

Cost of Machinery
£34,000
£6,000
£0
£9000
£49,000

Number of Employees
22
6
4
8
40

Complete the Overhead Analysis Sheet by filling in the empty boxes.

OVERHEAD ANALYSIS SHEET

Overheads
Total
Rate
Basis of Apportionment
Production
Assembly
Packing
Human Resources

Heat & Light 

 

5 Marks

£16,800
 
 
 
 
 
 

Staff Supervision 

 

5 Marks

£16,000
 
 
 
 
 
 

Buildings Insurance 

 

5 Marks

£2,100
 
 
 
 
 
 

Depreciation of Machinery & Tools 

5 Marks

£1,960
 
 
 
 
 
 

TOTAL COST CENTRE OVERHEADS 

5 Marks

£36,860
  

 

 
 
 
 
 

25 Marks

 

Question 4 [10 marks]

Describe what is meant by a variable cost and give two examples.[5 marks]
Describe what is meant by a fixed cost and give two examples. [5 marks]

 

Question 5 [20 Marks]

Raj is thinking about starting a new business and has asked you in your role as New Start-Up Mentor for the local Chamber of Commerce for some advice by email. Read Raj’s email and answer each of the queries.

Hi, 

I’ve been given you details by a friend as I am thinking about setting up a business and I’ve been told that the local Chamber of Commerce offers free independent advice to would be entrepreneurs like me.

Firstly, I know someone who would like to come into business with me and I was just wondering what the main benefits would be to start up as a limited company rather than a sole trader? I’ve also been told that I should pay for a book-keeper to maintain my records, could you give me three reasons why I should keep full accounting records? Lastly, if I did set up a Limited Company, what accounting information would I need to provide and who should I provide it to?

Thanks

Raj

Write you response below addressing the following points:

a) Main benefits of a Limited company compared to being a sole trader 5 Marks
b) Three reasons why full accounting records should be kept 5 Marks
c) What accounting information does a Limited company need to provide and to whom? 5 Marks
d) Clear and coherent reply addressing the above points in a fairly accurate and relevant manner. 5 Marks

Dear Raj, 

Thanks for your recent email. I would be delighted to assist you be answering your queries. Please see my responses below:

Write your answer here: