Inventory has been stolendamaged 1 due to little control 1 Inventory is

Inventory has been stolendamaged 1 due to little

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Inventory has been stolen/damaged (1) due to little control. (1) Inventory is obsolete, (1) so has no value in reality but might in the inventory records. (1) Sales have been omitted in the records, (1) i.e. Inventory has been sent out on consignment or a sale or return basis, so not yet sold. (1) Purchases of inventory have been recorded twice, (1) or not all inventory was counted. (1) Sales returns were amended in the records (1) but the purchases returns were not. (1) 2 marks Max 3 points (1 mark for stating and 1 mark for developing) 6 3(e) If book value is used, profit and current assets would be overstated (1OF) which is against the prudence concept (1) and does not give a true and fair view. (1) Inventory should be recorded at the lower of cost and net realisable value, (1) in line with IAS2 (1). Therefore the warehouse inventory valuation should be used. (1) 1 for decision + max 3 for comments 4
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9706/32 Cambridge International AS/A Level – Mark Scheme PUBLISHED October/November 2017 © UCLES 2017 Page 6 of 11 Question Answer Marks 4(a)(i)(ii) (iii)(iv) Income gearing 235 000 / 1 580 000 or 234 800 / 1 580 000 14.87% 14.86% (1) Gearing ratio 2 935 000 / (2 935 000 + 4 540 000) 39.26% (1) Dividend cover 1 345 000 / 325 000 4.14 times (1) Price earnings ratio* 3.44(times) (2) *EPS = 1345 / 3000 = 0.45 (1) PE ratio = 1.55 / 0.45 = 3.44 (1OF) 5 4(b)(i) $000 Profit from operations 1600 Finance costs (200 000 + 235 000) (435) (1) Profit for the year 1165 (1) OF 2 4(b)(ii) Equity and liabilities $000 Ordinary share capital 1500 Share premium 500 Retained earnings 3430 Total equity 5430 (1) Non-current liabilities 8% debentures 2020 2935 } (1) both 10% debentures 2026 2000 4935 *Retained earnings = 2 540 000 + (1 600 000 – [435 000 + 275 000]) = 3 430 000 or (2 540 000 + 1 165 000 – 275 000) = 3 430 000 2 4(c)(i) Workings Income gearing 27.19% 27.18% (1 OF) 435 000 / 1 600 000 or 434 800 / 1 600 000 Gearing ratio 47.61% (1 OF) 4 935 000 / 10 365 000 Dividend cover 4.24 times (1 OF) 1 165 000 / 275 000 Price earnings ratio 3.33 times (1 OF) 1 165 000 / 3 000 000 = 0.39 1.30 / 0.39 = 3.33 4
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9706/32 Cambridge International AS/A Level – Mark Scheme PUBLISHED October/November 2017 © UCLES 2017 Page 7 of 11 Question Answer Marks 4(c)(ii) Income gearing has increased (1) significantly from 2016 because of extra interest payable on debentures. This is worse (1) for a shareholder. This will reduce profit available to equity holders and therefore also impact other investment ratios. (1) (Max 2) The gearing ratio has also increased (1) because of the debenture issue being a greater increase than the increase in retained earnings. (1) This increases the risk (1) of the company because of the need to pay interest and repay debt. (1) (Max 2) Dividend cover has stayed reasonably stable/increased (1) over the two years – as the profit available for distribution has decreased (1) , so have the dividends. (Max 2) The price earnings ratio has decreased (1) . This is also a reflection of the market price of a share and the risk attached to it, depending on the market confidence. (1) (Max 2) 8 4(d) The issue of the debentures had an adverse (1) effect on the income gearing and gearing ratios. The company is now seen to be more risky. (1) The company may be perceived as being less attractive to investors. (1) The company has had to pay additional finance costs. (1) This has reduced profits available to distribute to shareholders.
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