Total marks: 80 · Duration: 3 hours
Instructions to candidates
- This paper consists of SIX questions arranged in THREE sections, corresponding to the three Modules of Unit 1.
- Answer THREE questions — ONE from EACH section.
- Each question carries a total that is shown at the head of the question. Marks for each part are shown in brackets.
- All workings must be shown. Marks are awarded for method and for correct treatment of individual items even where the final total is wrong.
- Present all financial statements in good form, with a proper heading stating the name of the entity, the title of the statement, and the date or period covered. Marks are reserved for presentation.
- Where a question asks for a diagram or chart, you must draw it. No figures, charts or pre-printed pro-formas are supplied with this paper — all data you need is given in the tables within each question.
- Silent, non-programmable calculators are permitted.
- Unit 1 covers Module 1 (Accounting Theory, Recording and Control Systems), Module 2 (Preparation of Financial Statements) and Module 3 (Financial Reporting and Interpretation).
Paper
Section A — Module 1: Accounting Theory, Recording and Control Systems (answer ONE) — 25 marks
1. (a) Explain FOUR accounting concepts or conventions, and for each state one consequence of failing to apply it. (12 marks)
(b) Distinguish between capital expenditure and revenue expenditure, and state the effect on both the statement of profit or loss and the statement of financial position if capital expenditure is incorrectly treated as revenue expenditure. (8 marks)
(c) Identify THREE users of published financial statements and state, for each, one decision the statements assist them in making. (5 marks)
2. (a) Explain the purpose of a bank reconciliation statement. (4 marks)
(b) On 31 May the cash book of Grenada Traders Ltd showed a debit balance of $8,450. The bank statement on the same date showed a credit balance of $11,270. Investigation revealed the following.
| Item | $ |
|---|---|
| Cheques issued but not yet presented | 3,860 |
| Deposits made but not yet credited by the bank | 1,940 |
| Bank charges not recorded in the cash book | 210 |
| Standing order for insurance not recorded in the cash book | 450 |
| Direct credit from a customer not recorded in the cash book | 1,300 |
| Cheque for $720 entered in the cash book as $270 | 450 |
(i) Prepare the updated cash book as at 31 May. (ii) Prepare a bank reconciliation statement as at 31 May starting with the balance per the bank statement. (16 marks)
(c) State TWO internal control benefits of preparing regular bank reconciliations. (5 marks)
Section B — Module 2: Preparation of Financial Statements (answer ONE) — 30 marks
3. The following trial balance was extracted from the books of Caribbean Crafts Ltd at 31 December 2025.
| Account | Dr ($) | Cr ($) |
|---|---|---|
| Ordinary share capital ($1 shares) | 200,000 | |
| Retained earnings at 1 January 2025 | 46,000 | |
| Revenue | 618,000 | |
| Purchases | 341,000 | |
| Inventory at 1 January 2025 | 52,000 | |
| Wages and salaries | 96,000 | |
| Administrative expenses | 41,000 | |
| Distribution costs | 33,000 | |
| Directors' remuneration | 38,000 | |
| Premises at cost | 320,000 | |
| Equipment at cost | 90,000 | |
| Accumulated depreciation — equipment | 27,000 | |
| Trade receivables | 58,000 | |
| Allowance for doubtful debts | 2,400 | |
| Trade payables | 39,000 | |
| Bank | 14,400 | |
| 6% debentures (repayable 2032) | 100,000 | |
| Debenture interest paid | 3,000 | |
| Totals | 1,086,400 | 1,032,400 |
Note: the trial balance does not agree. The difference is due to a suspense account, which you should determine.
Additional information at 31 December 2025:
- Inventory was valued at $61,000.
- Wages accrued amounted to $4,000; administrative expenses prepaid amounted to $2,500.
- Equipment is depreciated at 20% per annum on the reducing balance basis. Premises are not depreciated.
- The allowance for doubtful debts is to be adjusted to 5% of trade receivables.
- The remaining debenture interest for the year is outstanding.
(a) Calculate the suspense account balance and state where it should be presented. (3 marks) (b) Prepare the statement of profit or loss for the year ended 31 December 2025. (15 marks) (c) Prepare the statement of financial position as at 31 December 2025. (12 marks)
4. (a) Antigua Marine Services is a partnership between Rose and Singh, who share profits and losses 3:2. The partnership profit for the year ended 31 December 2025 before appropriation was $180,000.
| Rose ($) | Singh ($) | |
|---|---|---|
| Capital account balances | 200,000 | 120,000 |
| Current account balances at 1 Jan (credit) | 14,000 | 9,000 |
| Drawings during the year | 46,000 | 38,000 |
| Salary entitlement | 30,000 | — |
Interest on capital is allowed at 5% per annum. Interest on drawings is charged at 2% of drawings.
(i) Prepare the appropriation account for the year ended 31 December 2025. (ii) Prepare the partners' current accounts in columnar form. (18 marks)
(b) Explain THREE advantages and TWO disadvantages of operating as a partnership rather than as a sole trader. (7 marks)
(c) Explain the accounting treatment where a partnership has no partnership agreement. (5 marks)
Section C — Module 3: Financial Reporting and Interpretation (answer ONE) — 25 marks
5. The summarised financial information of two companies in the same industry is given below for the year ended 31 December 2025.
| Alpha Ltd ($000) | Beta Ltd ($000) | |
|---|---|---|
| Revenue | 900 | 1,400 |
| Cost of sales | 585 | 1,036 |
| Profit for the year | 108 | 112 |
| Inventory | 90 | 210 |
| Trade receivables | 120 | 250 |
| Cash and equivalents | 45 | 12 |
| Current liabilities | 130 | 320 |
| Non-current liabilities | 100 | 400 |
| Equity | 500 | 480 |
(a) Calculate, for each company, the following ratios, showing your workings: gross profit margin; net profit margin; current ratio; acid-test ratio; inventory turnover (times per year); and gearing (non-current liabilities ÷ (equity + non-current liabilities)). (12 marks)
(b) Using your calculations, compare the profitability, liquidity and financial risk of the two companies, and advise a prospective long-term investor which company represents the better investment. (10 marks)
(c) State THREE limitations of using ratio analysis to compare two companies. (3 marks)
6. (a) Explain the difference between profit and cash flow, and state TWO reasons why a profitable business may nonetheless fail. (7 marks)
(b) Classify each of the following into operating, investing or financing activities for the purposes of a statement of cash flows, giving a brief reason for each: purchase of a delivery van; issue of ordinary shares; payment of a trade payable; receipt of interest on a deposit; repayment of a bank loan; depreciation charge for the year. (9 marks)
(c) Discuss THREE limitations of published financial statements as a basis for decision-making. (9 marks)