This accounting problem is solved step by step below, with detailed explanations to help you understand the method and arrive at the correct answer.
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Here's the solution for Question 1: Question 1.a i) Calculate the cost of goods sold. Step 1: Identify the formula for Cost of Goods Sold (COGS). Cost of Goods Sold = Opening Inventory + Purchases - Closing Inventory Step 2: Substitute the given values into the formula. Cost of Goods Sold = Le 10,000 + Le 70,000 - Le 15,000 Step 3: Calculate the Cost of Goods Sold. Cost of Goods Sold = Le 80,000 - Le 15,000 = Le 65,000 ii) Prepare a simple income statement. Step 1: Start with Sales Revenue. Sales = Le 120,000 Step 2: Subtract Cost of Goods Sold to find Gross Profit. Gross Profit = Sales - Cost of Goods Sold Gross Profit = Le 120,000 - Le 65,000 = Le 55,000 Step 3: Subtract operating expenses (Wages and Rent) from Gross Profit to find Net Profit. Operating Expenses = Wages + Rent Operating Expenses = Le 20,000 + Le 5,000 = Le 25,000 Net Profit = Gross Profit - Operating Expenses Net Profit = Le 55,000 - Le 25,000 = Le 30,000 iii) Explain the effect of closing inventory on profit. A higher closing inventory reduces the Cost of Goods Sold, which in turn increases the gross profit and ultimately the net profit for the period. Conversely, a lower closing inventory increases the Cost of Goods Sold, leading to a decrease in both gross and net profit. iv) Identify and explain two users of the financial statements. • Investors: They use financial statements to assess the company's profitability and financial health to make decisions about buying, holding, or selling shares. • Creditors: Banks and other lenders use financial statements to evaluate a company's ability to repay loans before granting credit. Question 1.b i) Calculate contribution per unit. Step 1: Identify the formula for contribution per unit. Contribution per unit = Selling price per unit - Variable cost per unit Step 2: Substitute the given values. Contribution per unit = Le 50 - Le 30 Step 3: Calculate the contribution per unit. Contribution per unit = Le 20 ii) Compute the break-even point in units. Step 1: Identify the formula for break-even point in units. Break-even point (units) = Fixed CostContribution per unit Step 2: Substitute the given values. Break-even point (units) = Le 10,000Le 20 per unit Step 3: Calculate the break-even point. Break-even point (units) = 500 units iii) What is the profit if 1,000 units are sold? Step 1: Calculate total contribution. Total Contribution = Units sold × Contribution per unit Total Contribution = 1,000 units × Le 20 per unit = Le 20,000 Step 2: Calculate profit by subtracting fixed costs from total contribution. Profit = Total Contribution - Fixed Cost Profit = Le 20,000 - Le 10,000 = Le 10,000 iv) Explain one advantage and one limitation of marginal costing. • Advantage: Marginal costing is useful for short-term decision-making such as pricing, accepting special orders, or make-or-buy decisions, because it clearly separates fixed and variable costs, highlighting the contribution each unit makes to covering fixed costs. • Limitation: It does not comply with Generally Accepted Accounting Principles (GAAP) for external reporting, as inventory is valued only at variable production costs, which can understate asset values on the balance sheet. Send me the next one 📸