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HKDSE BAFS Practice Paper: Financial Accounting and Ratio Analysis (12 questions, 100 marks, 75 minutes)
HKDSE BAFS: Financial Accounting and Ratio Analysis
Original HKDSE BAFS practice paper on financial accounting and ratio analysis: 12 questions, 100 marks, 75 minutes, with full worked answers and marking points.
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Paper details Level: S6 | Subject: BAFS | Time: 75 minutes | Marks: 100 | Questions: 12
Section A (32 marks)
Accounting cycle and profit measurement: show the formula and the unit.
| # | Question | Answer and marking notes |
|---|---|---|
| 1 | A trader’s trial balance at the year end shows debit totals of 486,300 and credit totals of 489,900. (a) Find the difference between the two sides. (b) State which side is short and how the difference is entered to balance the trial balance. (c) Give one type of error that a trial balance cannot detect. |
(a) Difference = 489,900 – 486,300 = 3,600. (b) The debit side is short by 3,600; add 3,600 to the debit column (or deduct it from the credit column) to balance. (c) An error of principle (capital expenditure treated as revenue expenditure), a complete omission of a transaction, or a compensating error will not unbalance the trial balance. |
| 2 | A trading firm reports: sales 960,000, opening inventory 88,000, purchases 612,000, purchase returns 12,000 and closing inventory 104,000. (a) Find the cost of goods sold. (b) Find the gross profit. (c) Find the gross profit ratio (1 decimal place). |
(a) Cost of goods sold = 88,000 + 612,000 – 12,000 – 104,000 = 584,000. (b) Gross profit = 960,000 – 584,000 = 376,000. (c) Gross profit ratio = 376,000 / 960,000 x 100% = 39.2%. |
| 3 | A product has a unit cost of 480 and is priced at a mark-up of 25% on cost. (a) Find the selling price. (b) Find the gross profit margin (1 decimal place). (c) If the mark-up falls to 20%, find the new selling price and the new gross profit margin (1 decimal place). |
(a) Selling price = 480 x 1.25 = 600. (b) Gross profit margin = (600 – 480) / 600 x 100% = 20.0%. (c) New price = 480 x 1.20 = 576; new margin = (576 – 480) / 576 x 100% = 16.7%. |
| 4 | Three inventory items at the year end (cost / net realisable value): X 42,000 / 38,500; Y 27,000 / 29,400; Z 63,000 / 58,800. (a) Value each item using the lower of cost and net realisable value. (b) Find the total inventory value and compare it with total cost. (c) Find the impairment to be charged to profit or loss. |
(a) X 38,500 (net realisable value); Y 27,000 (cost); Z 58,800 (net realisable value). (b) Total inventory = 124,300, which is 7,700 below total cost of 132,000. (c) The impairment of 7,700 is charged to profit or loss. |
Section B (36 marks)
Adjustments, valuation and ratio calculations: show the steps and give a judgement.
| # | Question | Answer and marking notes |
|---|---|---|
| 5 | A machine costs 360,000 with an estimated residual value of 40,000 and a useful life of 5 years. (a) Find the annual depreciation under the straight-line method. (b) Under the reducing balance method at 25% per year, find the depreciation for year 1 and year 2. (c) State which method gives the higher profit in year 1 and explain why. |
(a) Straight-line = (360,000 – 40,000) / 5 = 64,000. (b) Year 1 = 360,000 x 25% = 90,000, carrying amount 270,000; year 2 = 270,000 x 25% = 67,500. (c) Straight-line charges 64,000, less than 90,000 under reducing balance, so profit is higher in year 1; reducing balance front-loads depreciation. |
| 6 | A firm’s reported net profit is 268,000. At the year end it is found that accrued expenses of 14,600 are unrecorded, prepaid rent of 9,200 was wholly charged as an expense, depreciation of 32,000 has not been provided and a bad debt of 6,400 must be written off. (a) State the effect of each adjustment on net profit. (b) Find the adjusted net profit. (c) Explain why prepaid expenses must be adjusted. |
(a) Accrued expenses 14,600 unrecorded: profit falls; prepaid rent 9,200 wrongly expensed: profit rises; depreciation 32,000: profit falls; bad debt 6,400: profit falls. (b) Adjusted net profit = 268,000 – 14,600 + 9,200 – 32,000 – 6,400 = 224,200. (c) Prepaid rent gives future economic benefit, so it is an asset rather than an expense of this period; otherwise this period’s expenses and profit are misstated. |
| 7 | A firm has current assets: inventory 156,000, receivables 128,000 and cash 36,000; current liabilities 200,000; cost of goods sold 624,000 and average inventory 156,000. (a) Find the current ratio and the quick ratio (2 decimal places). (b) Find the inventory turnover in times and in days (1 decimal place). (c) Judge whether short-term solvency is sound, with reasons. |
(a) Current ratio = 320,000 / 200,000 = 1.60; quick ratio = (320,000 – 156,000) / 200,000 = 0.82. (b) Inventory turnover = 624,000 / 156,000 = 4.00 times; days = 365 / 4.00 = 91.2 days. (c) The current ratio 1.60 is above 1, but the quick ratio of 0.82 shows solvency depends heavily on selling inventory; this is not fully sound. |
| 8 | A firm’s year-end receivables are 240,000, of which 4,000 is confirmed irrecoverable and has been written off. An allowance for doubtful debts of 5% of receivables is required; the allowance balance before adjustment is 9,000. (a) Find receivables after the write-off. (b) Find the required allowance and the increase needed this year. (c) Find the total bad and doubtful debts expense for the year. |
(a) Receivables after write-off = 240,000 – 4,000 = 236,000. (b) Required allowance = 236,000 x 5% = 11,800; increase = 11,800 – 9,000 = 2,800. (c) Total expense = bad debt 4,000 + increase 2,800 = 6,800. |
Section C (32 marks)
Financial analysis and CVP questions: set out the calculation and explain its meaning.
| # | Question | Answer and marking notes |
|---|---|---|
| 9 | A firm’s inventory turnover is 92 days, receivable days 45 and payable days 38. (a) Find the operating cycle. (b) Find the cash conversion cycle. (c) If receivable days fall by 10, find the new cash conversion cycle and explain the effect on cash flow. |
(a) Operating cycle = 92 + 45 = 137 days. (b) Cash conversion cycle = 137 – 38 = 99 days. (c) New cycle = (92 + 35) – 38 = 89 days, 10 days shorter; cash is collected faster and working capital pressure eases. |
| 10 | A company has share capital 800,000, retained profits 450,000, profit before tax 187,500, sales 960,000 and long-term borrowings 500,000. (a) Find the return on capital employed (1 decimal place). (b) Find the asset turnover (2 decimal places). (c) Find the gearing ratio (debt / (debt + equity), 1 decimal place). |
(a) Equity = 800,000 + 450,000 = 1,250,000; ROCE = 187,500 / 1,250,000 x 100% = 15.0%. (b) Asset turnover = 960,000 / 1,250,000 = 0.77 times. (c) Gearing = 500,000 / (500,000 + 1,250,000) x 100% = 28.6%, so borrowings are under 30% of total capital. |
| 11 | A product sells for 120 with a unit variable cost of 72; annual fixed costs are 384,000. (a) Find the unit contribution and the contribution margin ratio. (b) Find the break-even sales volume in units. (c) If actual sales are 10,400 units, find the margin of safety in units and as a percentage (1 decimal place). |
(a) Unit contribution = 120 – 72 = 48; contribution margin ratio = 48 / 120 x 100% = 40%. (b) Break-even units = 384,000 / 48 = 8,000 units. (c) Margin of safety = 10,400 – 8,000 = 2,400 units = 23.1% of sales. |
| 12 | A company earns profit after tax of 480,000, has 800,000 ordinary shares of $1 each and paid dividends of 240,000 during the year. (a) Find the earnings per share. (b) Find the dividend per share and the payout ratio. (c) Find the dividend cover and explain its meaning. |
(a) Earnings per share = 480,000 / 800,000 = 0.60. (b) Dividend per share = 240,000 / 800,000 = 0.30; payout ratio = 240,000 / 480,000 x 100% = 50%. (c) Dividend cover = 480,000 / 240,000 = 2 times: profit is twice the dividend, so half is retained for reinvestment and buffer. |
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