DSE BAFS Practice Paper: Financial Accounting And Cost Budgeting

DSE BAFS Practice Paper: Financial Accounting and Cost Budgeting

2026-11-03

DSE BAFS – Accounting Practice

DSE BAFS practice paper: 12 questions, 100 marks, 75 minutes, on the accounting equation, depreciation, FIFO inventory, bank reconciliation,

Download　Question paper PDF　|　Answer key PDF

Paper details　DSE BAFS, financial accounting, depreciation, bank reconciliation, break even, 12 questions, 100 marks

Section A (Questions 1 to 4, 26 marks)

Read each question and write the correct answer with an explanation. Show working and units for any calculation.

#	Question	Answer and marking notes
1	State the accounting equation and explain the effect of each transaction on assets, liabilities and capital: (a) the owner invests cash of 50,000 to start the business; (b) equipment of 8,000 is bought for cash; (c) inventory of 12,000 is bought on credit.	The accounting equation is: assets equal liabilities plus capital. (a) The owner invests 50,000 in cash: cash, an asset, rises by 50,000 and capital rises by the same amount. (b) Equipment of 8,000 is bought for cash: cash falls by 8,000 and equipment rises by 8,000, so total assets are unchanged and only their composition alters. (c) Inventory of 12,000 is bought on credit: inventory rises by 12,000 and trade payables, a liability, rise by 12,000, so both sides of the equation increase equally and it still balances. Every transaction therefore changes at least one item on each side by the same amount.
2	Give three possible reasons why a trial balance fails to balance, and explain why a balanced trial balance does not prove that the books are free of error (give two reasons).	Three reasons why a trial balance may not balance: (1) only one side of a transaction is recorded, so a debit or credit is missing; (2) the two sides are entered at different amounts, for example a copying error in one figure; (3) an addition error, or an amount posted to the wrong side. A balanced trial balance can still hide errors that do not disturb the equality of total debits and credits: a transaction may be omitted completely; the same transaction may be recorded twice; both sides may be entered in the wrong account, or with both debit and credit reversed; and two errors may cancel each other out. The trial balance is therefore only an arithmetic check, not a substitute for checking source documents.
3	A machine costs 96,000 with an estimated residual value of 6,000 and a useful life of five years. Using the straight line method, find the annual depreciation, the accumulated depreciation at the end of year three and the net book value then.	Annual depreciation equals (cost minus residual value) divided by useful life, that is (96,000 minus 6,000) divided by five, giving 18,000 per year. Accumulated depreciation at the end of year three is 18,000 times three, which is 54,000, and the net book value is 96,000 minus 54,000, which is 42,000. Under the straight line method the charge is the same every year, so the net book value falls by 18,000 each year.
4	A vehicle costing 250,000 is bought at the start of the year and depreciated at 20 per cent per year on the reducing balance method. Find the depreciation for years one to three, the accumulated depreciation and the net book value at the end of year three.	Year one depreciation is 250,000 times 20 per cent, which is 50,000, leaving a net book value of 200,000. Year two depreciation is 200,000 times 20 per cent, which is 40,000, leaving 160,000. Year three depreciation is 160,000 times 20 per cent, which is 32,000, leaving 128,000. Accumulated depreciation is 50,000 plus 40,000 plus 32,000, which is 122,000, and 122,000 plus 128,000 equals the cost of 250,000. The charge falls each year because the reducing balance method applies the rate to the shrinking net book value.

Section B (Questions 5 to 8, 32 marks)

Answer the following questions with working, units and evidence drawn from the data given.

#	Question	Answer and marking notes
5	Opening inventory is 100 units at 20 each; 200 units are bought during the year at 22 each; 150 units are sold. Using first in first out, find the cost of sales and the closing inventory value, and check that the two add up to the cost of goods available for sale.	First in first out assumes the oldest goods are sold first, so of the 150 units sold, 100 come from opening inventory and 50 from the purchases of the year. Cost of sales is 100 times 20 plus 50 times 22, which is 2,000 plus 1,100, giving 3,100. The closing inventory is the remaining 150 units, all from this year purchases, valued at 150 times 22, which is 3,300. The cost of goods available for sale is 100 times 20 plus 200 times 22, which is 2,000 plus 4,400, giving 6,400, and 3,100 plus 3,300 equals 6,400, so the cost allocation is consistent.
6	A bank statement shows a credit balance of 48,600. Cheques not yet presented total 7,200 and deposits not yet credited total 5,400. The bank collected a note of 3,000 and charged a fee of 150, neither of which is in the company books. Find the adjusted bank balance and the cash book balance before adjustment.	The adjusted bank balance is the statement balance 48,600 minus unpresented cheques 7,200 plus deposits not yet credited 5,400, giving 46,800. In the cash book, the note collected by the bank of 3,000 is added and the fee of 150 is deducted, a net adjustment of plus 2,850. Since the two sides must agree after adjustment, the cash book balance before adjustment is 46,800 minus 2,850, which is 43,950. The reconciliation explains each difference between the firm records and the bank records and so reveals omissions and errors.
7	Trade receivables at the year end are 180,000 and the allowance for doubtful debts is 5 per cent of receivables. The allowance account already has a credit balance of 2,000 before adjustment. Find the required allowance and the doubtful debts expense for the year.	The required allowance is 180,000 times 5 per cent, which is 9,000. As the allowance account already carries a credit balance of 2,000, only the difference is charged this year: 9,000 minus 2,000 equals 7,000. The 7,000 is shown as doubtful debts expense in the income statement and credited to the allowance account, so receivables appear in the statement of financial position at the net realisable value of 180,000 minus 9,000, which is 171,000.
8	Compare a sole proprietorship and a limited company in terms of legal status, owner liability, raising capital and taxation of profits.	Legal status: a sole proprietorship has no separate legal identity, so the owner and the business are the same person in law, whereas a limited company is a separate legal entity that can sue, be sued and own property in its own name. Owner liability: a sole proprietor has unlimited liability, so business debts can reach personal assets, while shareholders of a limited company normally have limited liability, confined to any unpaid amount on their shares. Raising capital: a sole proprietorship relies on the owner savings and personal borrowing, which limits its scale, whereas a company can issue shares and debentures to raise funds from the public. Taxation: sole proprietorship profits are taxed on the owner under personal assessment at progressive rates, while company profits bear profits tax at a flat rate.

Section C (Questions 9 to 12, 42 marks)

Write fuller answers using correct subject terms and support them with examples from Hong Kong or daily life.

#	Question	Answer and marking notes
9	Current assets are 360,000 (including inventory of 120,000), current liabilities 180,000, non current liabilities 120,000 and capital 240,000. Find the current ratio, the quick ratio and the gearing ratio.	The current ratio is current assets divided by current liabilities, that is 360,000 divided by 180,000, giving 2.00. The quick ratio is current assets less inventory, divided by current liabilities, that is 240,000 divided by 180,000, giving 1.33. Gearing is total liabilities divided by capital, that is 300,000 divided by 240,000, giving 1.25. A current ratio of 2.00 indicates ample short term liquidity, and a quick ratio of 1.33 shows that even without selling inventory there are enough liquid assets to meet short term debts. Gearing of 1.25 means liabilities exceed capital, so financial leverage, interest burden and financial risk are relatively high.
10	A company has sales of 800,000, cost of sales of 480,000 and operating expenses of 210,000, which include depreciation of 30,000. Prepare a simple income statement and find the gross profit margin and the net profit margin.	Income statement: sales of 800,000 less cost of sales of 480,000 gives gross profit of 320,000; deducting operating expenses of 210,000, which include depreciation of 30,000 as a non cash item, gives a net profit of 110,000. The gross profit margin is 320,000 divided by 800,000, which is 40.00 per cent, and the net profit margin is 110,000 divided by 800,000, which is 13.75 per cent. The gross margin reflects pricing and purchasing control, while the net margin also reflects control of operating expenses; the gap of 26.25 percentage points shows how much of the gross profit is absorbed by expenses.
11	Total cost is 90,000 at an output of 1,000 units and 102,000 at 1,200 units, with linear cost behaviour. Find the variable cost per unit and total fixed cost. If the selling price is 100 per unit, find the break even quantity and the profit at 1,200 units.	Variable cost per unit is the change in total cost divided by the change in output, that is 12,000 divided by 200, giving 60. Total fixed cost is 90,000 minus 60 times 1,000, which is 30,000, and checking with 1,200 units gives 102,000 minus 72,000, also 30,000. Contribution per unit is 100 minus 60, which is 40, so the break even quantity is 30,000 divided by 40, giving 750 units. At 1,200 units the profit is 120,000 minus 102,000, which is 18,000, and the same figure comes from 1,200 times 40 minus 30,000.
12	A company plans sales of 3,000 units with a target closing inventory of 400 units and opening inventory of 300 units. Find the budgeted production. If each unit needs 2 kg of material at 15 per kg and material inventory is unchanged, find the material purchase cost.	Budgeted production is budgeted sales plus target closing inventory minus opening inventory, that is 3,000 plus 400 minus 300, giving 3,100 units. Material required is 3,100 times 2, which is 6,200 kg. Material purchase cost is 6,200 times 15, which is 93,000. Because the material inventory level is unchanged, purchases equal usage; if material inventory rose or fell, purchases would need a further adjustment, otherwise the budget would not match the expected cash payments.

Find a tutor — free Tutor Registration →

A TutorZone practice paper; original questions and passages, not publisher material.