Mark Scheme

Section A — Structured Questions

1. (a) (up to 2) Returns inwards = goods returned to the business by customers (sales returns); they reduce revenue. [2] (b) (up to 5) Cost of sales = opening inventory + (purchases + carriage inwards) − closing inventory = 14,000 + (96,000 + 2,000) − 18,000 (M1 for adding carriage inwards to purchases, M1 opening, M1 closing) = 14,000 + 98,000 − 18,000 = $94,000 (A2). [5] (c) (up to 2) Net sales = 160,000 − 4,000 (returns inwards) = 156,000; gross profit = net sales − cost of sales = 156,000 − 94,000 = $62,000 (M1 A1). [2] (d) (up to 5) Profit for the year = gross profit − expenses = 62,000 − (11,000 + 22,000 + 7,000) (M1 M1 for totalling expenses) = 62,000 − 40,000 = $22,000 (A1, with 2 further marks for correct method/layout). [5] (e) Income statement (statement of profit or loss) [1]; one other — the statement of financial position (balance sheet) [1]. [2]

2. (a) (up to 8, 2 each) (i) Debit Bank, Credit Capital; (ii) Debit Purchases, Credit T. Roberts (payable); (iii) Debit Wages, Credit Bank; (iv) Debit Bank, Credit L. Baptiste (receivable). [8] (b) (up to 4) Two reasons: to check the double entry is arithmetically correct (total debits = total credits); to help detect errors; to provide the figures used to prepare the financial statements. 1 + 1 each. [4]

3. (a) Gross profit margin = (gross profit ÷ revenue) × 100 = (60,000 ÷ 200,000) × 100 (M1 M1) = 30% (A1). [3] (b) Current ratio = current assets : current liabilities = 45,000 : 30,000 (M1) = 1.5 : 1 (M1 A1). [3] (c) (up to 4) The current ratio has fallen from 2.0 : 1 to 1.5 : 1; the business now has fewer current assets relative to its current liabilities, so its liquidity/ability to pay short-term debts has weakened; while 1.5 : 1 may still be acceptable, a continued fall could mean difficulty paying debts as they fall due. [4]

4. (a) (up to 4) Two reasons: to calculate profit or loss and know how the business is performing; to know what is owed to and by the business; to help make decisions/plan; for tax purposes/legal requirement; to detect fraud/errors. 1 + 1 each. [4] (b) (up to 4) Prudence = accountants should not overstate profits or assets, and should recognise likely losses/expenses as soon as they are foreseen; caution in the face of uncertainty. Example: valuing inventory at the lower of cost and net realisable value; making a provision for doubtful debts. Concept (2) + example (2). [4]

Section B — Extended Response

5. (14 marks) Levels-marked discussion.

• For selling on credit: can increase sales/revenue by attracting more customers; may be necessary to compete if rivals offer credit; can build customer loyalty/larger orders.
• Against: risk of bad debts (customers not paying); a gap before cash is received harms cash flow/liquidity; cost of administering credit and chasing payment.
• Considerations before deciding: the business's own cash-flow position; checking customers' creditworthiness; setting credit limits and terms; what competitors do.
• Level 4 (11–14): developed arguments on both sides, applied to the business, with a justified conclusion/advice; Level 3 (8–10): both sides with some development; Level 2 (4–7): limited/one-sided; Level 1 (1–3): basic. Credit a reasoned recommendation.

Sample Answers with Examiner Commentary

Question 1(b) — Sample Answers

Grade A response. "Cost of sales = opening inventory + purchases + carriage inwards − closing inventory. Carriage inwards is added to purchases because it is the cost of bringing the goods into the business. So: 14,000 + 96,000 + 2,000 − 18,000 = 112,000 − 18,000 = $94,000."

Mark: 5/5. Examiner commentary: A complete, correctly laid-out calculation. The candidate uses the full formula and — the key discriminator on this question — correctly adds carriage inwards to purchases, which many candidates omit or wrongly treat as an expense. Opening inventory is added and closing inventory subtracted in the right places, and the working is shown, so all five marks are secure. Setting out the formula first makes the method transparent.

Grade C response. "96,000 − 18,000 = 78,000. So cost of sales is $78,000."

Mark: 2/5. Examiner commentary: The candidate knows that closing inventory should be subtracted, which earns some method credit, but the calculation omits both the opening inventory ($14,000) and carriage inwards ($2,000), and does not build up the cost of sales properly. The correct figure is $94,000. The reliable approach is to write out the formula — opening inventory + purchases + carriage inwards − closing inventory — and substitute each value, which would have prevented the missing items.

Question 5 — Sample Answers

Grade A response (extract). "Selling on credit has clear advantages. It can increase sales and revenue, because some customers can only buy if they are allowed to pay later, and it may be necessary just to compete if other businesses in the market offer credit terms. Offering credit can also build loyalty and encourage larger orders.

However, there are serious disadvantages. The biggest risk is bad debts — some customers may never pay, so the business loses both the goods and the money. There is also a delay between selling the goods and receiving the cash, which can create cash-flow problems if the business still has to pay its own suppliers and wages in the meantime. Managing credit also costs time and money.

Before deciding, the business should consider its own cash-flow position — whether it can afford to wait for payment — and should check the creditworthiness of customers, perhaps setting credit limits and clear payment terms. In conclusion, selling on credit could raise sales and help the business compete, but only if it manages the risks carefully; if its cash flow is already tight or its customers are unreliable, it may be safer to offer credit only to trusted customers."

Mark: 13/14. Examiner commentary: A Level 4 response. It gives developed arguments on both sides — higher sales and competitiveness against bad debts and cash-flow risk — and, importantly, addresses the second part of the question by advising what the business should consider (its cash flow, customer creditworthiness, credit limits). The conclusion is genuinely justified and conditional ("only if it manages the risks... if its cash flow is tight..."), which shows mature judgement. Accurate use of terms like "bad debts" and "cash flow" and a clear structure complete a strong answer.

Question 3(c) — Sample Answers

Grade A response. "The current ratio has fallen from 2.0 : 1 last year to 1.5 : 1 this year. This means that for every $1 of current liabilities the business now has only $1.50 of current assets, compared with $2.00 last year, so its liquidity has weakened. In other words, the business has fewer short-term assets available to cover the money it owes in the short term. A ratio of 1.5 : 1 is often still considered acceptable, so the business is probably not in immediate danger, but the fall is a warning sign: if the current ratio continues to drop, the business could struggle to pay its debts as they fall due, and it should keep an eye on its cash and short-term borrowing."

Mark: 4/4. Examiner commentary: A full-mark answer. The candidate does more than state that the ratio fell — it interprets what the change means for the business, explaining liquidity in plain terms (assets available to cover short-term debts) and giving a balanced judgement: 1.5 : 1 is still acceptable, but the downward trend is a warning. This combination of accurate interpretation and a reasoned comment on the implications is exactly what a four-mark "comment" question rewards; simply recalculating or saying "it got worse" would score far lower.

Grade C response. "The current ratio has gone down from 2.0 to 1.5 so it is worse than before. This is bad for the business."

Mark: 2/4. Examiner commentary: The candidate correctly identifies that the ratio has fallen and recognises this is generally unfavourable, earning two marks. However, the comment is undeveloped. Why does a lower current ratio matter? The answer needs to link it to liquidity — the business now has fewer current assets relative to its current liabilities, so it is less able to pay short-term debts — and ideally to note whether 1.5 : 1 is still acceptable. "Bad for the business" states a judgement without explaining it; developing the meaning and implication would gain the remaining marks.