Accounting 0452 · IGCSE · Correction of errors

Correction of errors — practice question

Nazim runs a wholesale business and has drawn up draft financial statements for the year ended 30 June 2020, which was his first year of trading. Once these financial statements had been prepared, several mistakes were found. After the errors had been corrected, Nazim compared his results with those of his brother Aziz, whose business is similar.
(a)[8]

Complete the table to show the effect of each error on the profit for the year and on working capital at 30 June 2020. Enter ‘understated’, ‘overstated’ or ‘no effect’.

(b(i))[2]

Suggest two explanations for the variation in the current ratio.

(b(ii))[2]

Suggest two explanations for the variation in the liquid (acid test) ratio.

(b(iii))[2]

Suggest two reasons for the variation in return on capital employed (ROCE).

(c)[1]

Suggest one reason for the variation in the rate of inventory turnover.

(d)[5]

Advise Nazim whether or not he should introduce this strict credit control policy. Support your answer with two advantages and two disadvantages.

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