Part A Knowledge, interpretation and evaluation

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1 Accounting 2011 Senior External Examination assessment report Statistics Year Number of candidates Level of achievement VHA HA SA LA VLA General comments It was evident that candidates had sufficient time to complete both Paper One and Paper Two. Three candidates this year did not attempt any questions assessing the Challenging practical application criterion in either paper. Others had nil responses in other criteria. If they had completed at least one question, they may have done enough to have been awarded a Sound Level of Achievement. Prospective candidates need to respond to at least one question from each part of each paper to give markers the opportunity to award credit. Some of the presentation of accounting data was disappointing and lacked professionalism. Accounting data should be displayed and presented in a uniform manner, using accounting conventions (especially columns in financial reports). Candidates generally performed better in Paper One than in Paper Two, even though candidates were allowed to take printed materials and other texts into the examination room for Paper Two. Responses to the cash flow statement question in Paper Two were poor. This sort of question can be expected in future examinations and prospective candidates should prepare accordingly. Paper One Part A Knowledge, interpretation and evaluation Generally, the standard of responses in Part A was better than in previous years. Addressing a particular genre is still weak (e.g. the memorandum requirement in Question 1), although most candidates could communicate at a level that was clear and accurate. The use of appropriate terminology was an improvement on previous years.

2 Question 1 Three candidates made no attempt at this question. One misinterpreted the question of two common methods of accounting as manual and computerised, rather than the expected cash and accrual. Of the three theory questions in the examination, Question 1 was the most poorly completed. Candidates must ensure they address each individual bullet point in the question to ensure it is answered fully. Question 2 All candidates answered this question and responses were appropriate. Question 3 All candidates answered this question and could identify three weaknesses and recommendations for improvement. Some candidates could have provided more detail. Part B Routine practical procedures Some candidates performed exceptionally well in this section. Question 1 Candidates generally did very well with the FIFO Stock Ledger Card. The main errors were the stock returns or the adjustment at the end of the month being recorded in the wrong column. There were some different applications of the sales returns; alternative solutions were accepted as the processing of accounting information was of a high standard. The Weighted Average Stock Ledger Card responses were not as strong. The rounding of unit cost figures led to multiple solutions being accepted as the correct processing was carried out. Some candidates used the weighted average unit cost for the purchase return rather than the actual amount the items would have been returned at. Some also used the wrong column to record the returns and adjustment. Question 2 Two candidates did not attempt the bank reconciliation question. Wording for the totalling line of the cash journals varied greatly from total or cash payments balance to nothing. While most candidates did well on the journals, some entered extra items which demonstrated a lack of understanding of the process. Part C Challenging practical application This was the most poorly completed part of Paper One. As mentioned earlier, three candidates did not respond to Part C at all. Only one candidate had a correct solution; most other attempts were quite poor. Question 1 Candidates seemed to have trouble understanding the instructions. Some tried to put all of the transactions into the general journal, rather than just the additional transactions. The calculation of provision for doubtful debts also caused a few problems with several candidates demonstrating their lack of understanding of this process. 2 Accounting 2011 Senior External Examination assessment report

3 Paper Two Part A Knowledge, interpretation and evaluation Question 1 Overall, candidates answered this question well and with confidence. Many candidates were well prepared for this type of question with some receiving full credit. Two candidates did not respond to the question, and two received little or no credit for their responses. Question 2 Very few candidates responded in report genre. Although this was not a difficult task, only one candidate provided a good response. Most failed to define the ratios being assessed and there was little analysis or interpretation of the current situation or comparisons made to industry averages. Most candidates did not suggest recommendations for improvement; if they did they were very general. Some candidates reported on the earning capacity as well as the financial stability and management effectiveness ratios which were surplus to the question requirements. Four candidates failed to complete the question. Part B Routine practical procedures Question 1 Five candidates attempted this question; overall, responses were disappointing. Most candidates had difficulty following through the purchase, depreciation and subsequent sale of the non-current assets. They also struggled to calculate the depreciation on those assets. Balance sheet extracts were not too difficult for the candidates who did respond. Question 2 Disappointingly, most candidates did not attempt to answer the cash flow question. Only one candidate presented a good response with ledger reconstructions and a generally accurate and correct statement. Question 3 Generally, the cash budgets reports were prepared correctly and responses were of a high standard. Candidates were confident in explaining the process they followed in responding to this question. There was some confusion over the GST paid for November and equipment purchased for November. Candidates set out their responses in different formats with appropriate allowances made in marking. Question 4 Responses to this question were pleasing, although most candidates had different solutions to the marking scheme and to each other. Queensland Studies Authority February

4 Part C Challenging practical application Question 1 More than half of the candidates did not answer this question. Candidates who did respond failed to show how to account for the balance day adjustments and alter the trial balance accordingly. They also did not know how to present correctly formatted financial statements. There was some evidence of confusion between current and non-current assets and liabilities, and in the difference between expenses and assets. There was also no evidence that candidates could accurately classify accounts. Sample solutions The sample solutions on the following pages show possible ways of responding to the questions. In some cases, they do not provide the only method of approaching a question. Other approaches and problem-solving strategies may be acceptable. 4 Accounting 2011 Senior External Examination assessment report

5 Paper One: Part A Question 1 The two common methods of accounting are cash accounting and accrual accounting. In cash accounting revenues and expenses are recorded when the cash is received or paid, so that with credit sales the transaction is not recorded in the business records until the cash has actually been received. Accrual accounting on the other hand recognises and records transactions and events when the revenues are earned or expenses incurred. Ms Doyle is utilising the accrual accounting method which is the preferred one as it meets the demands of the Taxation Office, complies with the matching principle and obtains the most accurate profit figure. Ms Doyle is recognising the fact that revenue has been earned when she sells her goods on credit and records the transaction immediately, but needs to understand that the revenue is not actually released until the cash is received, which in her case is often over a month away. A prepaid expense is the portion of an expense that has been paid by a business in one accounting period but will be incurred in a future accounting period and is listed with the current assets in the Balance Sheet. An accrued revenue is the cost incurred by a business in the current accounting period that has not yet been received and is categorised as a current asset in the Balance Sheet. A balance day adjustment is a general journal entry made as at balance day which make adjustments to some accounts in order to better match the revenues and expenses incurred accurately so that a reliable profit or loss can be determined for the particular accounting period. Question 2 Banks are very concerned about providing a secure environment in which their consumers can conduct their financial dealings online and are serious about stopping any breaches of phone and internet banking. The banks need to take the situation seriously as they are continually encouraging customers to use online banking by offering cheaper fees, improved services and guaranteed security. However, breaches of security are still occurring and the banks have shown their good faith by fully reimbursing customers if they are victims of outright fraud. Even though the vast majority of transactions conducted online are very safe and secure, the fact that some account holders have been swindled out of their savings indicates that the banks still have a way to go to providing customers with a totally secure environment. One area in which the banks could improve their e-business process concerns information security to ensure the account holders that their information regarding account numbers, passwords etc have not been tampered with and that the information cannot be accessed without authorisation. Banks need to ensure that they have the most modern and sophisticated anti-virus software to constantly monitor their systems. Another strategy for the banks to use involves the education of their customers and stopping the problem before the need for reimbursement occurs. This would encourage users to regularly change security passwords and ensuring that they only enter commercial websites that have secure sockets layer (SSL) which encodes and scrambles information about their accounts and ensures a secure session on the internet. Queensland Studies Authority February

6 Question 3 Mr George Williams After carefully analysing the accounting procedures used in your wholesale business it appears that there are a number of problems relating to the internal controls safeguarding the assets. One such weakness is with the administrative controls of cash as your accounts clerk occasionally locks cash in the safe overnight before taking it to the bank. While it is good practice to safeguard the cash, it would be more beneficial that all cash received be banked intact daily once a cash float has been kept. This will reduce the possibility of misappropriation or theft of such a valuable, yet liquid asset. The second problem noted was with the credit facilities. Given the business sells much of its stock to retail outlets and has many credit customers it must ensure that this increase in sales is accompanied by an increase in actual revenue earned via prompt payment of the customers. It has been noted that credit customers take too long to pay their accounts and the way to solve this problem is via the development of a credit policy which will contain information about the customer s credit worthiness, terms of payment, interest calculation and collection procedures. There is also the option of changing the way statements of account are sent to customers and the utilisation of an aged analysis of accounts receivable. Inventory control is also a problem area given the range of stock involved and the large amounts of money invested. It is most important to keep tight control of this asset to guard against theft, loss, damage and obsolescence. Stock should be stored in a controlled and organised manner and not merely packed wherever a space can be found as this could result in not being able to locate items for dispatch and cause problems regarding maintaining correct inventory levels. There also needs to be greater controls over the recording of stock purchased and the appropriate payment of invoices. Having the accountant write out cheques for these payments whenever the time is suitable is not an appropriate form of control for the inventory level or control of cash. 6 Accounting 2011 Senior External Examination assessment report

7 Paper One: Part B Queensland Studies Authority February

8 8 Accounting 2011 Senior External Examination assessment report

9 Queensland Studies Authority February

11 Paper One: Part C Queensland Studies Authority February

16 Paper Two: Part A 16 Accounting 2011 Senior External Examination assessment report

17 Question 2 Report to Ms Sutton Monday, 18 July 2011 Introduction This report intends to overview the previous accounting period and the current accounting period for the business of Sutton Entertainment Industries to analyse the financial stability of the business as well as the effectiveness of the management policies. Industry standards and averages are to be utilised in the analysis. Financial Stability The financial stability of the firm is calculated by looking at the short and long term liquidity. The current ratio measures the ability of the enterprise to meet its short term financial obligations, or how much money it has to cover all of the short term debts. It is noted that SEI (Sutton Entertainment Industries) has a lower than satisfactory ration and has decreased more in the current period. It is also noticeably less than the industry averages. Other important ratios to consider are the debt and equity ratios which look at how much of the total assets of the firm are financed from borrowings and the owners finance respectively. It has been found that SEI is working on a higher debt ratio which means that the assets are more likely financed by borrowings, namely the bank overdraft. The percentage of borrowings is not however alarming and there appears to be a downward trend. Management Policies Another measurement concerns how successful the firm has been in directing and maintaining a set of policies concerning the turnover of inventories and accounts receivable. Inventory turnover looks at the sales and inventory levels and how often the initial stock is replaced. It appears that the policies implemented reflect that the inventory is slower moving than other comparable industries and there is too much stock at hand at any one time. The situation has been marginally improved in the current period. The turnover of accounts receivable is also a concern with the collection period too long. This would indicate a loose collection policy and a greater chance of accounts receivable becoming bad debts in the future. The figures have been improving, but the current rate of 73 days is still far too high and should be aiming towards a 30 day turnaround. Recommendations for Financial Position SEI need to ensure that the business can meet its short and long term commitments. In relation to the short term and the current ration, the firm needs to increase current assets such as cash (currently a large overdraft) and attempt to increase cash sales. The other option would be to continue the current trend with current liabilities to maintain the decrease in accounts payable and further decreasing the bank overdraft. A third option is to closely monitor the amount of cash spent on expenses. In relation to the longer term, the debt and corresponding equity ratio is of a lesser concern, but may be worrying if interest rates increase or if the firm requires more debt to finance growth. Recommendations to improve the current situation would be attempting to repay the existing debts such as the mortgage (which has decreased considerably in the last financial year) and minimising the need to hold large and expensive assets. Queensland Studies Authority February