Cambridge Ordinary Level 7707 Accounting November 2020 Principal Examiner Report for Teachers

Paper 7707/12 Multiple Choice Question Question Key Key Number Number 1 D 21 C 2 C 22 C 3 B 23 D 4 B 24 C 5 C 25 B 6 A 26 D 7 B 27 D 8 D 28 C 9 A 29 D 10 A 30 C 11 D 31 A 12 A 32 D 13 B 33 C 14 A 34 B 15 A 35 B 16 B 17 B 18 A 19 A 20 C Key messages Candidates must have a thorough knowledge and understanding of double entry book-keeping and be familiar with all the topics on the syllabus. It is important that candidates recognise the importance of reading an item very carefully and making sure they know exactly what is required before attempting to select the Key. General comments Those candidates who possessed a good understanding of double entry book-keeping were able to perform well. Two items proved to be more difficult for some candidates. Comments on specific questions Question 4 Owner’s equity may be referred to as the owner’s capital. It represents the amount owed by the business to the owner. A number of candidates selected Option D which refers to working capital. Question 8 The majority of candidates understood that the transaction related to sales returns rather than purchases returns. Many did not appreciate that if cash discount is to be allowed it is only recorded when payment is made not when goods are sold or returned. Question 11 Many candidates did not fully appreciate how the two errors affected the profit for the year. If rent prepaid is understated then the amount charged as an expense is overstated, so the profit was understated. If closing inventory is understated then the cost of sales is overstated which results in the gross profit and the profit for the year being understated. Question 12 Most candidates had difficulty with this item. The bank statement showed a positive balance. The two items not entered in the cash book both involved money going into the trader’s bank account. Before updating, the cash book would show a smaller balance than that on the bank statement. Question 13 The majority of candidates understood that the purpose of a sales ledger control account is not to identify irrecoverable debts and not to provide the total owed to trade payables. A sales ledger control account does not show the total of the cash and credit sales. Question 14 This proved to be challenging for some candidates. Information about returns to credit suppliers would be obtained from the purchases returns journal. Information about refunds from credit suppliers would be obtained from the cash book. Irrecoverable debts written off do not affect the purchases ledger. Contra entries with the sales ledger would not appear in any of the other books of prime entry so would be recorded in the general journal. Question 16 Machinery repairs had been entered in the asset account which resulted in the depreciation for the year being $400 (20 per cent × $2000) more than it should have been. The provision for depreciation account would also show a balance of $400 more than it should have been. The Key was B. Question 19 It was anticipated that candidates would know that inventory is always valued at the lower of cost and net realisable value. Product H should be valued at 800 units at $1.20 each and Product G should have been valued at 900 units at $2 each. Question 21 The majority of candidates correctly calculated that there was a prepayment of $400. Many did not appreciate that this was rent receivable paid in advance and not rent payable. Where a tenant pays rent in advance it is a current liability as the business has received money for which a service has not yet been provided. Question 25 The opening and closing cash balances were known and the trader wished to calculate his cash sales. To do this he would need to include in the calculation any items which affected the cash. In this case it was cash banked, the cash drawings and the cash expenses. Cash discount would not affect the amount of cash. Question 26 There was uncertainty on how to answer this question. The preparation of a ‘T’ account for the total trade receivables would have shown that the opening balance and the credit sales appear on the debit side and the receipts from credit customers and the discount allowed appear on the credit side. The correct calculation for the missing figure of credit sales was Option D. Question 27 The statistics indicate that candidates were very unsure on how to make the necessary calculations. The rate of inventory turnover equals the cost of sales divided by the average inventory. In this case the cost of sales was not known but could be calculated by changing the formula round. The cost of sales was $480 000 (6 × $80 000). The mark-up was 25 per cent so the sales were $600 000 ($480 000 + 25 per cent). Question 29 The incorrect selection of Options A and C by a significant number of candidates indicates that they did not appreciate the significance of the gross margin. The gross margin represents the gross profit as a percentage of the revenue. Changes to items appearing in the profit and loss section of an income statemen