A. A business has the following balances at year-end: Sales: le 120,000; Purchases: le 70,000; Inventory (Opening): le 10,000; Inventory (Closing): le 15,000; Wages: le 20,000; Rent: le 5,000.

$$\text{Cost of Goods Sold} = \text{Le } 80,000 - \text{Le } 15,000 = \boxed{\text{Le } 65,000}$$

ii) Prepare a simple income statement.

$$\text{Gross Profit} = \text{Sales} - \text{Cost of Goods Sold}$$ $$\text{Gross Profit} = \text{Le } 120,000 - \text{Le } 65,000 = \text{Le } 55,000$$

$$\text{Operating Expenses} = \text{Wages} + \text{Rent}$$ $$\text{Operating Expenses} = \text{Le } 20,000 + \text{Le } 5,000 = \text{Le } 25,000$$ $$\text{Net Profit} = \text{Gross Profit} - \text{Operating Expenses}$$ $$\text{Net Profit} = \text{Le } 55,000 - \text{Le } 25,000 = \boxed{\text{Le } 30,000}$$

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.

$$\text{Contribution per unit} = \boxed{\text{Le } 20}$$

ii) Compute the break-even point in units.

$$\text{Break-even point (units)} = \boxed{500 \text{ units}}$$

iii) What is the profit if 1,000 units are sold?

$$\text{Total Contribution} = \text{Units sold} \times \text{Contribution per unit}$$ $$\text{Total Contribution} = 1,000 \text{ units} \times \text{Le } 20 \text{ per unit} = \text{Le } 20,000$$

$$\text{Profit} = \text{Total Contribution} - \text{Fixed Cost}$$ $$\text{Profit} = \text{Le } 20,000 - \text{Le } 10,000 = \boxed{\text{Le } 10,000}$$

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.