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Give two reasons why it is important for a business to

prepare final accounts or financial statements each year.

• to calculate profit or loss

• to know what assets and liabilities the business has
• to compare with previous years
• to compare with other businesses, to calculate
accounting ratios
• for use by other parties e.g. bank

Define working capital.

Current assets - current liabilities


State one advantage of the imprest system of petty cash.

• The chief cashier knows exactly how much is spent

each month
• The cash remaining and the vouchers received should
equal the imprest
• Can help reduce fraud

State what is meant by the term ‘rate of inventory turnover'.

The number of times a business sells and replaces its inventory

in a given period of time.

State one reason why a trader might use books of prime

(original) entry.

• To avoid multiple entries in the ledger (1)

• Different books of prime entry can be maintained by
different people (1)
• Acts as an aid for posting to the ledger by analysing a
transaction into debit and credit entry
• Helps to reduce the amount of detail in the ledger as
only totals are posted to the ledger (1)
• Provides evidence of transactions since they are
recorded from source documents
• Helps in the auditing/tracking process/facilitates cross-
referencing (1)
• Easy reference to source of a transaction (1)
• Helps in gathering and summarising of accounting
information (1)
• Groups together similar types of transactions in one
book in date order (1)
• Reduces number of entries in ledger (1)

State what is meant by a dishonoured cheque.

The debtor's bank refused payment (1)

Name the two accounts which are posted with the totals from
a three column cash book.

Discount allowed (1) Discount received (1


Explain what is meant by a bank overdraft.

Paying more from the bank account then there is in it (1). This
means that the business owes the bank money (the bank is a
current liability) (1).

State why the directors chose to issue debentures rather than

issue more ordinary shares.

• To avoid dilution of control (1)

• because debentures don't have voting rights (1)
• Ensure existing owners retain control of business (1)

State what is meant by an asset.

Something which is owned by a business/owed to a business (1)


State one reason why accounts are maintained in different


• So that accounts of the same type can be kept together

• Ease of maintenance/navigation Speed
• Easier to check/locate error Frees up the general
• Divides the work between several people

State what is meant by the term work in progress.

Units of production which have been started but which have not
been completed (1

Name one other accounting objective.

• Comparability
• Relevance
• Understandability

Explain two factors Syed Zilani should consider when

comparing his results with those of another business.

• Should compare with a business in the same trade

• Should compare with a business of approximately the
same size/same capital
• Should compare with a business of the same type (sole
• The financial statements may be for one year which
will not show trends
• The financial statements may be for one year which is
not a typical year
• The financial year may end on different dates (when
inventories are high/low)
• The businesses may operate different accounting
• The statements do not show non-monetary factors
• It may not be possible to obtain all the information
needed to make comparisons

State two reasons why a trader should reconcile the cash

book balance with the balance shown on the bank statement
at the end of each month.

• Obtain correct bank balance

• Identify errors on the bank account
• Identify errors on the bank statement
• Assist in discovering fraud and embezzlement
• Identify amounts not credited by the bank
• Identify cheques not presented
• Identify any stale cheques
Capital expenditure

Money spent on acquiring, improving and installing non-current

assets (1)

Revenue expenditure

Money spent on running a business on a day-to-day basis (1)


State two ways the issue of debentures may affect the

ordinary shareholders.

• Reduction in profit available for ordinary shareholders

• Prior claim on the assets of the company in the event of

a winding up
State two features of ordinary share holders

• Ordinary shareholders are members of the company

• Ordinary shares carry voting rights
• Ordinary share dividend is a share of the profit
• Ordinary share dividend is variable
• Ordinary share dividend is paid after any dividend on
preference shares
• Ordinary shareholders are repaid last in the event of a
winding up

State two features of debentures

• Debentures are long-term loans

• Debenture-holders are not members of the company
• Debentures do not carry voting rights
• Debentures carry a fixed rate of interest
• Debenture interest is not dependent on the company's
• Debentures are often secured on the assets of the
• Debenture-holders are repaid before the shareholders in
the event of a winding up