(A)List Two Advantages of a Sole Proprietorship Over a Partnership

(A)List Two Advantages of a Sole Proprietorship Over a Partnership

SECTION B(40 marks)

  1. Explain how information management can support a supermarket’s inventory management. Illustrate your answers with an example.

Information management can support a supermarket’s inventory management by helping it collect
data concerning daily purchases and the sales of different products. This enables the supermarket to
monitor the stock on hand on a daily basis.
For example, if it is found that the stock of canned food is dwindling, the supermarket can contact
the supplier to make purchases immediately.

(Total 4 marks)

2.Anthony is a sole trader running a small shop which sells vegetables and fruits in a housing estate. He is now thinking of inviting his uncle, who was once the marketing manager of a food company, to form a partnership together. Recently, Anthony has heard that a large supermarket chain is going to open a branch near his shop. This supermarket will also sell fresh vegetables and fruits.

(a)List two advantages of a sole proprietorship over a partnership.

Setting up a sole proprietorship is easier than setting up a partnership.
A sole proprietor can make decisions quickly. This makes the operation of sole proprietorships
more efficient and flexible. For a partnership, all partners are bound by the decisions made by
other partners.

(b)What advantages are there for Anthony in taking on a partner? List two of them.

Division of labour: Each partner can contribute his expertise and ability to the business. For
example, Anthony’s uncle can help him in marketing and management.
More sources of capital: Anthony’s uncle can bring in more capital, which leads to further and
better business development.
Sharing business risk: The business risk will not be borne only by Anthony himself.

(c)Anthony’s uncle joins the shop as a general partner. Suggest one way which their shop can compete with the large supermarket chain.

Anthony and his uncle should maintain a close relationship with their customers. When a close
relationship is established
Anthony and his uncle should make decisions quickly. This can keep their operation efficient
and flexible in order to cope with rapid changes in the market.
—Anthony and his uncle should think of more innovative ways to market their products. For
example, they may help customers clean and cut the vegetables. They can sell three or four
kinds of vegetables (each in small quantities) in a package so that customers can havemixed

(Total 6 marks)

3.Open a set of accounting books for Kina Wong, a sole trader, to record the assets, liabilities and capital of his business. Then show the journal entries required to record the following items.


Jan1Assets: Buildings $1,420,000; Equipment $385,600; Inventory $279,500; Trade receivables: N Ho $189,750, F Lau $17,600; Cash $23,870.

Liabilities: Trade payables: C Chan $197,030, D Kim $37,100; Bank loan $138,800.

"10Bought furniture on credit from Ace Furniture with a list price of $37,800 and was given a discount of 10%.

"15Kina Wong took goods costing $8,500 from the business for personal use.

"25F Lau was unable to repay her debt and settled the debt by giving us furniture of the same value.

"28Sold surplus equipment at its cost price of $12,700 to M Chiu on credit.

The Journal
Date / Details / Dr / Cr
2012 / $ / $
Jan / 1 / Buildings / 1,420,000
Equipment / 385,600
Inventory / 279,500
Trade receivables:N Ho / 189,750
F Lau / 17,600
Cash / 23,870
Trade payables:C Chan / 197,030
D Kim / 37,100
Bank loan / 138,800
Capital (balancing figure) / 1,943,390
" / 10 / Furniture ($37,800  90%) / 34,020
Ace Furniture (other payables) / 34,020
" / 15 / Drawings / 8,500
Purchases / 8,500
" / 25 / Furniture / 17,600
F Lau (trade receivables) / 17,600
" / 28 / M Chiu (other receivables) / 12,700
Equipment / 12,700

(Total 6 marks)

4.Although big businesses and small businesses are different in many aspects, including managerial functions and financial management, being socially responsible is crucial for both of them.

(a)Explain two differences in managing a small business and a big business in terms of the management function of leading and organising.

Small business / Big business
Leadership style / Autocratic leadership / Participative leadership
Organisations structure / Flat structures / Tall structures
Decision making / Quick / Slow
Communication with staff / Fast / Slow

(b)Big businesses are sometimes multidivisional and thus they find it difficult to find industry average for comparison. Propose one way for this kind of companies to evaluate their performance.

—Produce separate financial statements for each division, calculating accounting ratios and then
compare with the average of industry to which the division belongs
—Compare with past results of the company

(c)Apart from writing code of ethics, suggest two ways that a company can use to encourage ethical behaviour of its employees.

—Education and training
—Enforce with reward and penalty
—Top management's commitment
—Company participation in community service
—Emphasize individual values during recruitment

(Total 6 marks)

5.Forever A Company started business on 1 January 201X. The following are the ratios of Forever A Company for the year ended 31 December 201X.

Current ratio9 : 1

Quick ratio3 : 1

(a)Comment on the liquidity of Forever A Company in 201X.

—Too much capital tied up in stock
—Too much idle capital
—Sufficient liquid assets to meet its immediate debts

(b)Draw up the cash account with the following information of Forever A Company for the year ended 31 December 201X.

Opening cash balance / Nil
Cash deposit into bank account / $118,000
Gross profit ratio / 37.5%
Cash Sales / 1/3 of total sales
Items paid by cash per year:
Drawings / $12,000
Telephone expenses / $3,000
Sundry expenses / $1,440
Heating and lighting / $1,560
Cost of goods sold / $285,000
Amount owed by trade debtors are received through bank account.
$ / $
Sales [285,000/(1 – 37.5%) x 1/3] / 152,000 / Bank / 118,000
Drawings / 12,000
Telephone expenses / 3,000
Sundry expenses / 1,440
Heating and lighting / 1,560
Balance c/d / 16,000
152,000 / 152,000

(Total 5 marks)

6.The following account information relates to Sandy Wong for the year Sandy Wong ended28 February 2010.

Sandy Wong
Trial Balance as at 28 February 2010
Dr / Cr
$ / $
Accounts payable / 14,144
Accounts receivable / 23,103
Bank overdraft / 864
Bank loan (repayable on 28 February 2018) / 28,800
Capital / 130,743
Cash / 68
Drawings / 9,540
Electricity / 3,510
Inventory, 1 March 2009 / 11,340
Motor vehicles / 18,900
Office equipment / 25,200
Premises / 97,600
Purchases / 139,860
Rent and rates / 2,070
Returns inwards / 4,680
Returns outwards / 5,985
Salaries and wages / 43,650
Sales / 199,170
Carriage inwards / 185
379,706 / 379,706

(a)Prepare the statement of comprehensive income for Sandy Wong as at 28 February 2010.

Sandy Wong
the statement of comprehensive income for the year ended 28 February 2010
$ / $ / $
Sales / 199,170
Less: Returns inwards / (4,680)
Less: Cost of goods sold:
Opening inventory / 11,340
Add: Purchases / 139,860
Carriage inwards / 185 / 140,045
Less Returns outwards / (5,985) / 145,400
Gross profit / 49,090
Less Expenses
Electricity / 3,510
Rent and rates / 2,070
Salaries and wages / 43,650 / 49,230
Net Loss / 140

(b)Calculate (to two decimal places) the net profit ratio of Sandy Wong.

Net profit ratio = 140 / 194,490
= 0.07%

(Total 6 marks)

7.You work in a bank as a financial planner. Today, you have three clients, Peter, Dave and Otto, who come to you for financial advice. Their basic information is shown below:

Peter / Dave / Otto
Age / 25 / 45 / 58
Family status / Single / Married with two children aged 3 and 6 / Married with two
children aged 23 and 25
Occupation / Marketing executive / Accounting manager / Chef
Monthly income / $15,000 / $35,000 / $9,500

(a)Refer to the life-cycle approach. Which one has the highest and lowest risk tolerance level? Briefly explain.

Peter is young and single. He has a stable income and he does not need to support his family. His
risk tolerance level should be the highest.
Dave is married with young children. Though he is a professional and he earns a stable income, he
needs to support his family. His risk tolerance is lower than Peter.
Otto is at the pre-retirement stage. He cannot afford a huge financial loss. His risk tolerance level
should be the lowest.

(b)Assume Peter, Dave and Otto want to save for their retirement. Given the following investment plans:

Investment Plan / Investment portfolio components / Risk-return trade-off / Suitable for
Plan A / 50% in stocks,
50% in bonds / High / Medium / Low / Peter / Dave / Otto
Plan B / 20% in stocks,
80% in bonds / High / Medium / Low / Peter / Dave / Otto
Plan C / 80% in stocks,
20% in bonds / High / Medium / Low / Peter / Dave / Otto

(i)Circle the suitable risk-return trade-off of the three plans; and

(ii)Circle a suitable plan each for Peter, Dave and Otto.

(c)Peter plans to get married in two years. He wants to save up for his honeymoon. Would you still recommend the plan you chose for him in question (b)? If not, which plan(s) would you choose? Explain your answers.

Peter has a short investment horizon. He cannot afford a huge financial loss in the next two years.
His risk tolerance level is thus low. Therefore, a low-risk investment plan is more suitable for himto
save for his honeymoon.
I would recommend either Plan A or Plan B to him. The plan that Peter finally chooses depends on
the expected return of the investment plans, the estimated vacation expense and Peter’s investment

(Total 6 marks)


1213 S.6BAFS Paper 1BMock Examination Page 1 By M. C. WONG