Mark Scheme

Section A — Module 1

Question 2 (fully worked — Question 1 indicative content follows)

(a) (4) — 1 mark each, max 4: to identify and explain differences between the balance shown by the cash book and that shown by the bank statement; to detect errors made by the business or by the bank; to identify items known to the bank but not yet recorded by the business (charges, standing orders, direct credits) so the cash book can be updated; to establish the true bank balance for inclusion in the statement of financial position; to act as a deterrent and detection control against fraud and misappropriation.

(b)(i) Updated cash book (8) — 1 mark per correct entry, 2 for the correct closing balance.

Only items not yet recorded by the business and errors in the cash book are adjusted here. Candidates who adjust the cash book for unpresented cheques or uncredited deposits lose the corresponding marks — those are timing differences known to the business already and belong in the reconciliation statement.

(b)(ii) Bank reconciliation statement (8) — 2 marks per correct line, 2 for the correct agreement.

Full marks require the reconciliation to agree with the updated cash book figure from (b)(i). Where a candidate's cash book balance is wrong but the reconciliation is correctly constructed and agrees with their own figure, award full method marks by error carried forward. A statement that does not agree and is not labelled scores a maximum of 4. Note on the cheque error: the cheque was for $720 but recorded as $270, so payments are understated by $450 and the cash book must be credited with a further $450.

(c) (5) — 2 marks for each of two developed benefits, 1 for overall quality. Indicative: independent verification of the cash book against a third-party record, so recording errors and omissions are detected promptly; detection of unauthorised payments, forged or altered cheques and teeming-and-lading fraud; segregation of duties where the reconciler is not the person recording cash; confirms the existence of the bank balance reported in the financial statements; identifies stale or long-unpresented cheques requiring write-back.

Question 1

(a) (12) — 3 marks per concept: 1 for naming, 1 for explanation, 1 for a valid consequence of non-application. Accept any four.

• Accruals (matching) — revenues and expenses are recognised in the period in which they are earned or incurred, not when cash moves. Consequence: profit is misstated, with expenses recognised in the wrong period and accruals or prepayments omitted from the statement of financial position.
• Going concern — the entity is presumed to continue in operation for the foreseeable future. Consequence: if the presumption is invalid, assets must be measured at net realisable rather than carrying value, and non-current items reclassified as current; users would be misled about recoverable amounts.
• Prudence — exercise caution in conditions of uncertainty so that assets and income are not overstated and liabilities and expenses are not understated. Consequence: overstated profit and assets, leading to overdistribution of dividends out of profits that were never realised.
• Consistency — the same accounting policies are applied from period to period. Consequence: year-on-year comparison and trend analysis become meaningless, and policy changes could be used to manipulate reported results.
• Business entity — the affairs of the business are recorded separately from those of its owners. Consequence: owners' private transactions distort profit and capital; drawings would be misclassified as expenses.
• Materiality — items are disclosed separately where their omission or misstatement could influence users' decisions. Consequence: either the statements are cluttered with trivia, or significant items are obscured.
• Historical cost, realisation, money measurement and duality are equally acceptable.

(b) (8) — Distinction (3): capital expenditure is incurred to acquire, improve or extend a non-current asset, benefiting more than one accounting period, and is capitalised in the statement of financial position and depreciated over its useful life; revenue expenditure is incurred in the day-to-day running of the business or in maintaining the existing earning capacity of an asset, benefits only the current period, and is charged in full to profit or loss. Effects of the error (5): expenses are overstated, so profit for the year is understated (1); non-current assets are understated in the statement of financial position (1); the depreciation charge is understated in this and every subsequent year (1); retained earnings and therefore total equity are understated (1); profit in later periods is correspondingly overstated as the depreciation that should have been charged is not (1). Reward candidates who note that the total effect reverses over the asset's life — the error is one of timing and classification, not of total profit.

(c) (5) — 1 mark per user with a valid decision, max 3, plus up to 2 for the quality of the decisions identified. Indicative: shareholders and prospective investors (whether to buy, hold or sell shares; adequacy of dividends); lenders and banks (whether to advance credit and on what terms; ability to service debt); trade suppliers (whether to grant credit and what limit); employees and unions (job security, wage bargaining); government and tax authorities (assessment of tax, statistics, regulation); customers (continuity of supply and warranty support); management (planning and control).

Section B — Module 2

Question 3

(a) (3) — Suspense = $1,086,400 − $1,032,400 = $54,000 credit (2). It is presented temporarily, pending investigation; since the debit side is the smaller, the suspense balance is a credit and would appear among liabilities, but candidates should note that a suspense account is not a permitted item in published financial statements and the underlying errors must be found and corrected (1).

(b) Statement of profit or loss (15) — 1 mark per correctly treated item.

Caribbean Crafts Ltd — Statement of Profit or Loss for the year ended 31 December 2025

Marks: cost of sales computation (3); each of the six expense adjustments (1 each = 6); correct finance cost of $6,000 rather than the $3,000 paid (2); gross profit (1); profit from operations (1); profit for the year (1); good-form heading (1). The two principal discriminators are reducing balance depreciation calculated on carrying amount ($63,000) rather than cost, and recognition of the full year's debenture interest of $6,000 with the $3,000 unpaid accrued as a current liability. A candidate charging 20% × $90,000 = $18,000 loses that mark and the consequent profit figures, though error carried forward applies to the statement of financial position.

(c) Statement of financial position (12) — 1 mark per correctly treated item; error carried forward from (b).

Caribbean Crafts Ltd — Statement of Financial Position as at 31 December 2025

Marks: non-current asset section with correct accumulated depreciation (2); receivables shown net of the revised allowance (2); prepayment as a current asset (1); retained earnings correctly rolled forward (2); debentures correctly classified as non-current (1); accruals including the outstanding interest (2); suspense included so the statement balances (1); good-form heading (1). Award the balancing mark only where the statement actually balances on the candidate's own figures.

Question 4

(a)(i) Appropriation account (8)

Marks: interest on drawings added to profit (2 — a common error is to deduct it); salary and interest on capital deducted (2); correct residual of $135,680 (2); correct 3:2 split (2).

(a)(ii) Current accounts (10) — columnar form required; 1 mark per correct entry, 2 for correct closing balances.

Salaries and interest on capital must be credited to the current accounts, not the capital accounts, unless the question states that capital accounts are fluctuating. A candidate who posts them to capital accounts loses 3 marks but retains the remainder by error carried forward.

(b) (7) — 1 mark per advantage (max 3) and per disadvantage (max 2), plus up to 2 for development. Advantages: greater capital available from combined contributions; sharing of the workload and of managerial responsibility; complementary skills and specialisation; shared risk and losses; continuity during a partner's absence; easier borrowing on a broader asset base. Disadvantages: unlimited liability for the debts of the firm (in a general partnership); each partner binds the firm by their acts, so all bear the consequences of one partner's decisions; profits must be shared; potential for disagreement and slower decision-making; the partnership may be dissolved on the death, bankruptcy or retirement of a partner.

(c) (5) — Where no agreement exists, the default provisions of the applicable Partnership Act apply (1). Under these: profits and losses are shared equally regardless of capital contributed (1); no salary is allowed to any partner (1); no interest on capital is allowed (1); no interest is charged on drawings, and interest at 5% per annum is allowed on advances (loans) made by a partner beyond agreed capital (1). Credit candidates who note that the absence of an agreement is the commonest source of partnership dispute and that a written agreement should always be recommended.

Section C — Module 3

Question 5

(a) (12) — 1 mark per ratio per company. Award the mark for a correct formula with correct substitution; accept reasonable rounding.

Where a candidate uses average inventory or a different but clearly stated gearing formula consistently for both companies, award full marks. Ratios stated without workings score half marks.

(b) (10) — Levels-marked. Profitability: Alpha is more profitable on every measure despite generating only two-thirds of Beta's revenue — a gross margin of 35.0% against 26.0% suggests better purchasing terms, a premium product or tighter cost control, and the gap widens at the net level (12.0% v 8.0%), indicating Alpha also controls its overheads more effectively. Beta's strategy appears to be volume at lower margin; on absolute profit the two are close ($108k v $112k), but Beta requires far more revenue to achieve it. Liquidity: Alpha is comfortably liquid, with a current ratio of 1.96 and — more tellingly — an acid-test of 1.27, meaning it can meet its current liabilities without selling any inventory. Beta's acid-test of 0.82 is below 1, so it depends on converting inventory to settle short-term obligations, and its cash balance of just $12k against current liabilities of $320k is thin. Beta's slower inventory turnover (4.9 v 6.5 times) compounds this, since the inventory it is relying on is moving more slowly. Financial risk: Beta is geared at 45.5% against Alpha's 16.7%. Beta therefore carries substantially higher fixed interest obligations, which magnify returns to equity in good years but make profits volatile and increase the risk of default in a downturn — a particular concern given its weak liquidity position. Advice (required for the top band): Alpha is the better long-term investment. It is more profitable at every level, is liquid enough to withstand a downturn, and its low gearing leaves headroom to borrow for expansion. Beta's combination of thin margins, sub-1 acid-test and high gearing means a modest fall in trading would place it under real strain. A candidate may legitimately argue for Beta on growth grounds, provided the risks are acknowledged and the recommendation is justified. Award Level 4 only where all three areas are covered with figures cited and a clear recommendation is given. A response that recalculates or restates the ratios without interpreting them caps at Level 2.

(c) (3) — 1 mark each, max 3: ratios are based on historical data and may not indicate future performance; different accounting policies (depreciation methods, inventory valuation, revaluation) make inter-company comparison unreliable; financial statements are a snapshot at one date and may be window-dressed or seasonally unrepresentative; ratios ignore non-financial factors such as management quality, staff morale, brand strength and market conditions; the effects of inflation are not reflected in historical cost figures; company size and industry differences distort comparison.

Question 6

(a) (7) — Distinction (3): profit is the excess of income over expenses recognised on the accruals basis, so it includes credit sales not yet received and excludes cash movements that are not income or expense; cash flow is the actual movement of money into and out of the business. Non-cash items such as depreciation reduce profit without affecting cash, while purchases of non-current assets, loan repayments and drawings reduce cash without affecting profit. Reasons for failure (2 each, max 4): overtrading — expanding sales faster than working capital allows, so receivables and inventory absorb cash faster than it is generated; poor credit control, with customers taking extended credit while suppliers demand prompt payment; excessive investment in non-current assets from short-term funds; high drawings or dividends taken out of a profitable but cash-poor business; seasonal mismatch between the timing of cash outflows and inflows. Reward the general principle that a business fails when it cannot meet obligations as they fall due, which is a liquidity rather than a profitability test.

(b) (9) — 1 mark for classification and up to 1 for the reason, 1.5 per item rounded in the candidate's favour; mark the six items out of 9 overall.

• Purchase of a delivery van — investing; acquisition of a non-current asset.
• Issue of ordinary shares — financing; a change in the equity funding structure of the entity.
• Payment of a trade payable — operating; settlement of a liability arising from the principal revenue-producing activities.
• Receipt of interest on a deposit — investing (accept operating where the candidate states the entity's chosen policy and applies it consistently, which the standard permits); return on funds held.
• Repayment of a bank loan — financing; repayment of borrowed funds. Reward candidates who split the payment, treating the principal as financing and the interest element as operating or financing per policy.
• Depreciation charge — none of the three; it is a non-cash item and appears only as an adjustment reconciling profit to cash generated from operations under the indirect method. This is the discriminating item — a candidate who classifies it as operating expenditure rather than identifying it as non-cash scores 0 for it.

(c) (9) — 3 marks per limitation: 1 for identification, 2 for development. Indicative: they are historical, reporting on a period already closed, whereas most decisions concern the future; they are prepared at historical cost, so in inflationary conditions asset values and profits are distorted and comparisons across years are not like-for-like; they omit non-financial and intangible factors — internally generated brands, staff expertise, customer loyalty and environmental impact — that may be the entity's most valuable resources; they involve substantial judgement and estimation (useful lives, allowances for doubtful debts, provisions), so different preparers could report materially different profits from identical transactions; they are aggregated and summarised, concealing the performance of individual segments or products; they may be subject to window dressing around the year end; published statements are often delayed by several months by the audit process.

Level descriptors (extended-response parts)

• Level 4 (top band): Financial statements in good form with proper headings and correctly classified sections; all adjustments correctly treated and workings clearly shown; discursive answers use figures from the data to support argument rather than restating it, and reach a justified recommendation where one is asked for.
• Level 3: Statements largely correct with most adjustments applied; some classification or presentation errors; discussion sound but figures cited only in general terms.
• Level 2: Statements attempted with several adjustments omitted or misapplied; workings unclear; discussion descriptive.
• Level 1: Fragmentary figures with little correct treatment.

Sample Answers with Examiner Commentary

Question 5(b) — Sample Answers

Grade I (Distinction) answer (extract)

"On profitability Alpha is the stronger business by a wide margin, and the more striking point is that it achieves this on two-thirds of Beta's turnover. Alpha's gross margin of 35.0% against Beta's 26.0% suggests either better buying terms, a more differentiated product commanding a premium, or tighter control of direct costs. That advantage is not eroded lower down: at the net level Alpha earns 12.0% against Beta's 8.0%, so Alpha also controls its overheads better. In absolute terms the two report almost identical profits — $108,000 and $112,000 — but Beta must generate $1.4m of revenue to match what Alpha earns on $900,000, which is a materially less efficient use of the sales base.

On liquidity the gap is more serious. Alpha's current ratio of 1.96 is comfortable, but the acid-test of 1.27 is the more revealing figure: Alpha can settle its current liabilities without selling a single unit of inventory. Beta's acid-test of 0.82 is below unity, so Beta cannot. It depends on converting inventory to meet obligations already falling due, and its inventory turnover of 4.9 times against Alpha's 6.5 shows that inventory is moving more slowly. A cash balance of $12,000 against current liabilities of $320,000 leaves almost no margin for a delayed receipt.

Financial risk reinforces the same conclusion. Beta is geared at 45.5% against Alpha's 16.7%. Beta's fixed interest obligation on $400,000 of non-current liabilities must be met whether or not it trades profitably, and high gearing magnifies the effect of a fall in operating profit on the return to equity. Combined with a sub-1 acid-test, this is the specific combination that precipitates insolvency in a downturn: the obligations are fixed, and the liquid resources to meet them are not there.

I would advise the investor to choose Alpha. It is more profitable at every level, liquid enough to absorb a period of poor trading, and its low gearing leaves substantial headroom to borrow should it wish to expand — an option Beta has largely exhausted. The case for Beta rests on the possibility that its volume strategy will deliver growth, but on this data that growth is being funded by debt and by stretching working capital, and the investor would be accepting materially higher risk for no additional current return."

Mark: 10/10. Examiner commentary: All three required areas are covered and every assertion is anchored to a specific figure, which is the requirement for Level 4. The candidate does more than recite ratios: the observation that Alpha earns comparable absolute profit on two-thirds of the revenue is genuine interpretation, as is the point that Beta's weak acid-test and high gearing are dangerous in combination rather than as separate weaknesses. The recommendation follows from the analysis rather than being appended to it, and the candidate fairly states the counter-case for Beta before rejecting it on evidence. Full marks.

Grade III (Pass) answer (extract)

"Alpha has a gross profit margin of 35% and Beta has 26%, so Alpha is more profitable. Alpha's net profit margin is 12% and Beta's is 8%, so again Alpha is better. Alpha's current ratio is 1.96 and Beta's is 1.48, so Alpha has better liquidity. Alpha's acid test is 1.27 and Beta's is 0.82. Alpha's gearing is 16.7% and Beta's is 45.5% so Beta has more debt. Overall Alpha is doing better than Beta so the investor should invest in Alpha."

Mark: 4/10. Examiner commentary: The response is accurate throughout and reaches the right recommendation, and it does quote figures, so it earns solid Level 2 credit. What holds it well below the top band is that it interprets almost nothing. Each sentence restates a ratio already calculated in part (a) and appends "so X is better" — but the question asks the candidate to compare profitability, liquidity and financial risk, and that requires saying what the numbers mean. Why does a gross margin gap of nine points matter, and what might cause it? What is the significance of an acid-test below 1, as against merely being lower than the competitor's? Why does high gearing constitute risk? None of these is addressed, and the recommendation is asserted rather than argued. The candidate has done the hard arithmetic in part (a) and then declined to use it. Roughly three additional sentences, each explaining the implication of one figure already on the page, would have doubled this mark.

Question 3(b) — Sample Answer extract (depreciation and interest)

Grade I (Distinction) answer (extract)

"Depreciation — equipment: the reducing balance basis applies the rate to the carrying amount, not to cost. Carrying amount = $90,000 − $27,000 = $63,000. Charge = 20% × $63,000 = $12,600.

Debenture interest: the debentures are $100,000 at 6%, so the charge for the year is $6,000 regardless of what has been paid. Only $3,000 appears in the trial balance as paid, so $6,000 is charged as a finance cost in profit or loss and the unpaid $3,000 is carried as an accrual within current liabilities."

Mark: 4/4 for these items. Examiner commentary: Both of the question's principal traps are handled correctly and, importantly, the candidate states the reasoning rather than only the figure — the examiner can see that the reducing balance treatment is understood rather than guessed. The debenture treatment shows the candidate has recognised that the trial balance figure is the amount paid, not the amount charged, and has correctly followed the accrual through to the statement of financial position. Candidates who charge only the $3,000 paid overstate profit by $3,000 and omit a liability, losing marks in both statements.

Grade III (Pass) answer (extract)

"Depreciation = 20% × 90,000 = $18,000 Debenture interest = $3,000 as per trial balance"

Mark: 0/4 for these items. Examiner commentary: Both errors are conceptual rather than arithmetic. Applying the rate to cost is the straight-line method, and the question specifies reducing balance — the accumulated depreciation figure of $27,000 is supplied precisely so that the carrying amount can be derived. Taking the interest from the trial balance treats a cash payment as the expense, which contradicts the accruals concept that Question 1 examines directly. Together these overstate expenses by $5,400 on one item, understate them by $3,000 on the other, and leave the statement of financial position missing an accrual. Note that error carried forward still protects most of the marks in part (c), so a candidate making these errors should press on and prepare a statement of financial position that balances on their own figures.

How Unit 1 is assessed

Paper 02 carries 80 marks and contributes 50% of the Unit 1 external assessment mark, alongside Paper 01 (multiple choice, 30%) and the Internal Assessment (20%). One question must be answered from each of the three sections, so no Module can be neglected. Grades are reported Grade I – Grade VII, with Grade I the highest.

Four habits separate the top band. First, show every working, ideally in a labelled note beside the statement: adjustments such as depreciation, allowances and accruals each carry their own mark, and a figure appearing in a statement without a visible computation may earn only one mark where the working would have earned two. Second, use good form — a heading naming the entity, the statement and the period or date, with correctly captioned sections — since presentation marks are awarded on every financial statement question and are among the easiest on the paper. Third, press on after an error: error carried forward operates throughout this paper, so a candidate whose profit figure is wrong can still earn nearly all the marks in the statement of financial position provided it balances on their own figures. Fourth, in interpretation questions, explain what the ratio means rather than repeating its value; the calculation marks were awarded in the earlier part, and the discussion marks are reserved for implication, comparison and a justified recommendation.