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General Paper comments

As at recent sittings, the paper comprised three sections:
Section A - 20 compulsory multiple choice questions of two marks each
Sections B and C - 3 questions of 20 marks each in each section. Candidates were required to answer a total of three questions from these sections, with at least one question from each section.
The total marks available were divided reasonably evenly between narrative and computational questions.

Overall candidate performance was similar to the previous sitting. Nevertheless, the pass rate remains below that of earlier sittings. The main reason for this is the same as in the June 2004 sitting, i.e. candidates did not appear to have developed a clear understanding of a range key issues drawn from across the syllabus.

It is encouraging to note that, once again, all of the questions were attempted by some candidates, and that few candidates attempted less than the required number of questions.

As noted in June 2004, candidates are strongly advised to refer to the study guide when preparing for the exam as the requirements of the questions set can be directly traced to the outcomes in the study guide.

It remains the case that those candidates whose scripts demonstrate evidence of clear thought and planning, tend to score higher marks. This is equally true of discursive questions (through the preparation of an answer plan) and computational questions (through workings).

Question comments

Section A

The 20 multiple choice questions in this section were equally divided between both subject areas. They were also roughly equally divided between questions which tested candidates’ knowledge and questions which required the application of knowledge.

Candidate performance in this section of the paper continues to range from very strong to very weak. Those candidates who have ensured that their preparation includes broad coverage of the syllabus continue to score good marks. However those candidates who are attempting to rely on a few ‘favourite’ topics, perform poorly. Candidates need to recognise that the number of questions in this section mean that each paper will have a broad coverage of the syllabus.

It is surprising that only a few candidates present workings for their answers in this section. This may be a misguided attempt to save time. As noted in previous reports, the exam is drafted to ensure that those candidates who have prepared adequately across the syllabus will not experience time pressure.

Section B

Question 1

This question considered the usefulness and relevance of the information provided in the Operating and Financial Review and the Five Year Summary. To obtain good marks on this question, candidates were required to demonstrate knowledge of the reasons for, and contents, of these disclosures, and to critically examine whether they were useful. There were some very good answers presented which indicated that the candidates had not only studied the area, but could apply critical thought to assess whether the disclosures fulfilled their purpose.

Those candidates who merely described the disclosures did not gain many marks. Part c which required a degree of creative thinking produced the lowest marks. This fact, when considered with the comments above, suggests that too many candidates consider the exam to be a test of memory, rather an opportunity to apply knowledge.

Question 2

The preparation and interpretation of the cash flow statement was examined in this question. While the ability to prepare such a statement might be considered to be ‘technical’ there can be no doubt that all managers - not just accountants - need to appreciate the need to manage the organisation’s cash flow. An understanding of the main areas of cash generation and consumption is therefore critical.

A number of candidates produced very good answers to part (a). Those candidates who did not score good marks tended to confuse the charges in the profit and loss statement with the cash flow. In particular, a number of candidates did not calculate the correct cash flow for taxation, but simply included the current year charge.

In part (b), some candidates produced answers which demonstrated analytical thinking. Such answers focussed attention on the key issues apparent from the cash flow statement, and made valid and practical suggestions. Those candidates who merely translated the figures in the statement into narrative form did not score good marks.

Question 3

The difference between an associated company and a subsidiary, and the respective accounting treatment was examined in this question. This has been examined in the past, and will continue to be examined in the future. Many companies will regularly deal with the decision to invest in another company and the impact of such an investment on the financial statements.

Those candidates who were able to apply the facts given in the question to the accepted accounting practice scored good marks. Such candidates were able to clearly differentiate between the accounting treatment in the books of the investing company and the consolidated accounts and provided a clear discussion of the difference between the accounting treatment of a subsidiary and an associate.

Unfortunately, a number of candidates were not able to demonstrate clear understanding and clear thinking. Not surprisingly, these candidates did not score high marks. In particular, candidates did not obtain marks due to:

• incorrect calculation of goodwill on acquisition
• lack of clarity regarding he calculation of the amortisation of goodwill
• confusion between equity accounting and acquisition accounting

Section C

Question 4

This question required candidates to discuss the suitability of profit as the basis of a bonus scheme, and the wider implications of incentive schemes. It was set in the context of a specific company which was intended to allow candidates to apply theory to a given circumstance.

The general standard of answers was good, presumably because candidates were able to judge whether they had a sufficient understanding of the issues to produce an appropriate answer. However, there was some variability in the quality of answers. Those candidates who used the context as a basis for their answers and demonstrated an understanding of theory scored high marks. Those candidates who did not apply their knowledge to the scenario were able to gain a reasonable, but limited, number of marks.

Once again, part (c), which required a degree of creative thinking, produced answers which were less strong than parts (a) and (b).

Question 5

Activity based costing is an important area of the syllabus. In general, candidates who attempted this question produced good answers to part (a) which required the computation of product costs.

Where candidates did not score high marks, this tended to be because the volume of the activity for the cost drivers was not correctly calculated.

Answers to part (b) were not of the same standard as answers to part (a). While most candidates were able to demonstrate an awareness of how to use the results calculated in part (a) to identify the product which should no longer be manufactured, a disappointingly high number of candidates were unable to develop their answer in part (ii) by discussing other factors which managers should consider. It is important that candidates recognise that accounting information does not provide a clear cut decision, but must be considered in the context of other factors when making decisions. In future questions, there will invariably be marks allocated to such a discussion.

Question 6

This question required a cash flow forecast to be prepared and used to make planning decisions. In essence, it required candidates to manipulate information which was provided in narrative form and to present this in an acceptable format.

For part (a), there were some very good answers which were clearly set out, with clear workings. Such answers obtained full, or almost full, marks.

The main reason that some candidates did not obtain high marks was that they did not adopt a structured approach to the manipulation of the information. This led to confusion abut calculations and how to use the results of such calculations. In particular, workings were incorporated into the final cash budget and the balance at the end of each month was not calculated. In some cases, calculations yielded valid results, but the final figure was not identified by a brief narrative, or was not incorporated into the final budget. This made it difficult to ascertain whether the figure had been calculated as part of a structured attempt to complete the question, or was a matter of luck.

As noted in previous questions, answers to part (b) were of a lower standard with some candidates apparently unable to make use of the information they had calculated in part (a) to make meaningful recommendations. However those candidates who identified key issues from the budget and made realistic recommendations scored very high marks.

With regard to the latter parts of such questions, there is some evidence that candidates are unclear about how much discussion they should include in their answers. This leads to some answers including very few comments, and others containing too much discussion. It might be helpful to remember that typically the marking scheme provides one mark for each valid statement. This provides a benchmark for the likely length of answers.

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