DSE Business, Accounting And Financial Studies Practice Paper: Financial Accounting (12 Questions, 50 Marks, 75 Minutes)

DSE Business, Accounting and Financial Studies Practice Paper: Financial Accounting (12 Questions, 50 Marks, 75 Minutes)

2026-11-03

DSE Business, Accounting and Financial Studies

DSE BAFS: 12 original questions, 50 marks, 75 minutes on depreciation, ratios, bank reconciliation, bad debts, break-even and payback. Full solutions included.

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Paper details　Level: S6 | Subject: Business, Accounting and Financial Studies | Time: 75 minutes | Marks: 50 | Questions: 12

Section A: Short Questions (4 marks each)

Formulae and reference data (you must still substitute the values yourself)

Depreciation (straight line) = (cost – residual value) / useful life. Gross profit ratio = gross profit / sales x 100%. Inventory turnover = cost of goods sold / average inventory. Receivables turnover = credit sales / average receivables. Current ratio = current assets / current liabilities. Quick ratio = (current assets – inventory) / current liabilities. Unit contribution = selling price – unit variable cost. Break-even volume = fixed costs / unit contribution. Margin of safety = actual sales – break-even sales. Accounting rate of return = average annual profit / average investment x 100%. Debt ratio = liabilities / total assets x 100%. Return on equity = profit / equity x 100%. In every answer, state the formula first, then substitute the data, and finish with the unit and a conclusion.

Answer all questions. For calculations, show the formula, the substitution and the units.

#	Question	Answer and marking notes
1	A company buys a machine for 240,000 dollars. It is expected to last 6 years and to have a residual value of 24,000 dollars. (a) Using the straight-line method, calculate the annual depreciation and the carrying amount after 3 years. (b) If the reducing-balance method at 20% per year is used instead, calculate the first-year depreciation and state how this method affects profit in the early years. (4 marks)	(a) Annual depreciation = (240,000 – 24,000) / 6 = 36,000 dollars. Accumulated depreciation after 3 years = 108,000 dollars, so the carrying amount = 240,000 – 108,000 = 132,000 dollars. (b) First-year depreciation = 240,000 x 20% = 48,000 dollars. The reducing-balance method charges a larger expense in the early years, so profit is lower at first and higher later; total depreciation over the useful life is unchanged.
2	A trading company has sales of 500,000 dollars and cost of goods sold of 350,000 dollars for the year. (a) Calculate the gross profit and the gross profit ratio. (b) If selling prices stay the same but cost of goods sold rises by 10%, recalculate the gross profit ratio and explain what this means for the company. (4 marks)	(a) Gross profit = 500,000 – 350,000 = 150,000 dollars; gross profit ratio = 150,000 / 500,000 x 100% = 30.0%. (b) New cost of goods sold = 350,000 x 1.10 = 385,000 dollars; gross profit = 115,000 dollars; ratio = 115,000 / 500,000 x 100% = 23.0%. A fall of 7.0 percentage points means 7.0 dollars less gross profit on every 100 dollars of sales, so the company must adjust prices, control purchase costs or improve its product mix, otherwise profit will be squeezed.
3	A company has opening inventory of 80,000 dollars, closing inventory of 100,000 dollars and cost of goods sold of 360,000 dollars. (a) Calculate the inventory turnover in times and the inventory turnover period in days, using 365 days a year and one decimal place. (b) Give two possible reasons why the period differs from the industry average of about 60 days. (4 marks)	(a) Average inventory = (80,000 + 100,000) / 2 = 90,000 dollars; turnover = 360,000 / 90,000 = 4.0 times; turnover period = 365 / 4.0 = 91.3 days. (b) Possible reasons: over-buying or too many product lines, so slow-moving stock accumulates; sales slowing down without a matching cut in purchases; weaker stock records or replenishment procedures, so old stock is not cleared in time.
4	A company has current assets of 480,000 dollars, including inventory of 180,000 dollars, and current liabilities of 300,000 dollars. (a) Calculate the current ratio and the quick ratio. (b) If the company repays 60,000 dollars of current liabilities in cash, recalculate both ratios and explain why the quick ratio does not change. (4 marks)	(a) Current ratio = 480,000 / 300,000 = 1.6; quick ratio = (480,000 – 180,000) / 300,000 = 1.0. (b) After repayment, current assets = 420,000 dollars and current liabilities = 240,000 dollars: current ratio = 420,000 / 240,000 = 1.75; quick ratio = (420,000 – 180,000) / 240,000 = 1.0. The quick ratio is unchanged because cash and current liabilities fall by the same amount, so the excess of quick assets over liabilities, 240,000 dollars, falls in the same proportion as the denominator.
5	The cash book of a company showed a debit balance of 42,000 dollars on 31 December. After checking, the following were found: bank charges of 300 dollars not yet recorded in the cash book, unpresented cheques of 8,500 dollars, and deposits of 12,000 dollars not yet credited by the bank. (a) Calculate the adjusted cash book balance. (b) Calculate the balance on the bank statement on that date. (4 marks)	(a) Adjusted cash book balance = 42,000 – 300 = 41,700 dollars. Only the bank knows about the charges, so the company must record them in its own cash book first. (b) Bank statement balance + deposits not yet credited – unpresented cheques = adjusted cash book balance, so the bank statement balance = 41,700 – 12,000 + 8,500 = 38,200 dollars.
6	A company had credit sales of 600,000 dollars for the year, opening receivables of 100,000 dollars and closing receivables of 140,000 dollars. (a) Calculate the receivables turnover and the average collection period, using 365 days a year and whole days. (b) The industry average collection period is 45 days. Give two possible reasons for the difference and one suggestion for improvement. (4 marks)	(a) Average receivables = (100,000 + 140,000) / 2 = 120,000 dollars; turnover = 600,000 / 120,000 = 5.0 times; average collection period = 365 / 5.0 = 73 days. (b) Possible reasons: a looser credit policy to attract customers; customers concentrated in industries that pay slowly; weak collection procedures or no early-settlement discount. Suggestion: offer a cash discount for early payment and review the ageing schedule regularly, stopping credit sales to long-overdue customers.

Section B: Application Questions (4 marks each)

Answer all questions. Quote the given data and explain in complete sentences.

#	Question	Answer and marking notes
7	A company has year-end receivables of 250,000 dollars. The allowance for doubtful debts is 5% of receivables, and the allowance brought forward has a credit balance of 10,000 dollars. (a) Calculate the required allowance and the amount to be charged for the year. (b) If 30,000 dollars is confirmed irrecoverable and written off first, recalculate the amount to be charged. (4 marks)	(a) Required allowance = 250,000 x 5% = 12,500 dollars; charge for the year = 12,500 – 10,000 = 2,500 dollars. (b) After the write-off, receivables = 250,000 – 30,000 = 220,000 dollars; required allowance = 220,000 x 5% = 11,000 dollars; charge = 11,000 – 10,000 = 1,000 dollars. Writing off bad debts reduces receivables, so the allowance required also falls.
8	A product sells for 120 dollars, its unit variable cost is 72 dollars and annual fixed costs are 240,000 dollars. (a) Calculate the unit contribution and the break-even sales volume. (b) If actual sales are 7,000 units, calculate the margin of safety in units and as a percentage to one decimal place, and the profit. (4 marks)	(a) Unit contribution = 120 – 72 = 48 dollars; break-even volume = 240,000 / 48 = 5,000 units. (b) Margin of safety = 7,000 – 5,000 = 2,000 units, which is 2,000 / 7,000 x 100% = 28.6% of actual sales; profit = 7,000 x 48 – 240,000 = 96,000 dollars.
9	A company is considering equipment costing 600,000 dollars with a useful life of 6 years, annual cash inflows of 150,000 dollars and annual accounting profit of 90,000 dollars. (a) Calculate the payback period. (b) Calculate the accounting rate of return using average investment. (c) State two limitations of the payback method. (4 marks)	(a) Payback period = 600,000 / 150,000 = 4 years. (b) Average investment = (600,000 + 0) / 2 = 300,000 dollars; accounting rate of return = 90,000 / 300,000 x 100% = 30.0%. (c) Limitations: it ignores cash flows after the payback period; it ignores the time value of money; it uses cash inflows rather than profit, so depreciation and accounting policies are not reflected; it also ignores the size of competing projects.

Section C: Long Questions (14 marks in total)

Answer long questions in points, giving a reason or example for each point.

#	Question	Answer and marking notes
10	A company paid rent of 48,000 dollars on 1 April for a full year. Its financial year ends on 31 December. (a) Calculate the rent expense for the period and the prepaid rent at the year end. (b) Monthly utilities are 1,800 dollars and 3 months remain unpaid at the year end. Calculate the accrued expense and its effect on profit. (4 marks)	(a) Nine months fall in the current period: rent expense = 48,000 x 9 / 12 = 36,000 dollars; prepaid rent = 48,000 – 36,000 = 12,000 dollars, shown as a current asset. (b) Accrued expense = 1,800 x 3 = 5,400 dollars, shown as a current liability; charging it reduces this year profit by 5,400 dollars even though cash has not been paid.
11	A company buys goods with a list price of 80,000 dollars and receives a trade discount of 15%. A cash discount of 2% is offered for payment within 10 days. (a) Calculate the invoice amount. (b) Calculate the amount payable if payment is made within 10 days and if payment is made after 20 days. (c) Explain the difference in accounting treatment between trade discount and cash discount. (4 marks)	(a) Invoice amount = 80,000 x (1 – 15%) = 68,000 dollars. (b) Payment within 10 days = 68,000 x (1 – 2%) = 66,640 dollars, a discount of 1,360 dollars; payment after 20 days = 68,000 dollars with no discount. (c) A trade discount is deducted when the invoice amount is worked out and is not recorded separately; a cash discount is recorded only when the customer actually pays early, and the buyer treats it as a purchase discount that reduces the cost of purchases.
12	A limited company has total assets of 1,600,000 dollars, liabilities of 800,000 dollars and profit of 96,000 dollars for the year. (a) Calculate equity, the debt ratio and the return on equity. (b) State two features of a limited company compared with a sole proprietorship and one effect of each on shareholders. (c) Explain why a bank pays particular attention to the debt ratio when approving a loan, using the figures in this question. (6 marks)	(a) Equity = 1,600,000 – 800,000 = 800,000 dollars; debt ratio = 800,000 / 1,600,000 x 100% = 50.0%; return on equity = 96,000 / 800,000 x 100% = 12.0%. (b) Feature one: limited liability, so shareholders lose at most the capital they subscribed and personal assets are not used to repay company debts. Feature two: separate legal entity, so the company can own assets, sign contracts and sue in its own name, and shareholders are distinct from the company in law. (c) A debt ratio of 50.0% means that 50.0 dollars of every 100 dollars of assets are financed by creditors. The higher the ratio, the smaller the buffer provided by shareholders, so creditors carry more risk if profit falls or assets lose value. The bank also compares the ratio with industry levels and the stability of cash flows, and may require security or impose financial covenants.

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