2022 HKDSE Business, Accounting and Financial Studies Practice Paper with Answers

Statement (1) is correct: Hong Kong adopts the territorial source principle of taxation, meaning profits tax is only levied on profits arising in or derived from Hong Kong.
Statement (2) is correct: Under CEPA, goods of Hong Kong origin that meet CEPA origin rules enjoy zero-tariff treatment upon importation into Mainland China.
Statement (3) is incorrect: Hong Kong is a service-oriented economy; the tertiary industry (service sector) accounts for over 90% of GDP, whereas the primary industry contributes less than 0.1%.

Therefore, (1) and (2) only are correct.

Award 2 marks for selecting the correct option B. No partial marks.

Statement (1) is correct: In Hong Kong, a manufacturing enterprise employing fewer than 100 persons (or a non-manufacturing enterprise employing fewer than 50 persons) is defined as an SME.
Statement (2) is correct: SMEs represent over 98% of total business units and provide nearly half of total private sector employment in Hong Kong.
Statement (3) is incorrect: All business enterprises in Hong Kong, regardless of size, must comply with statutory laws including the Employment Ordinance.

Therefore, (1) and (2) only are correct.

Award 2 marks for selecting the correct option A. No partial marks.

(1) Dr Inventory / Purchases (Assets increase), Cr Trade payables (Liabilities increase) — both total assets and total liabilities increase by the same amount.
(2) Dr Bank (Assets increase), Cr Bank loan (Liabilities increase) — both total assets and total liabilities increase by the same amount.
(3) Dr Trade payables (Liabilities decrease), Cr Bank (Assets decrease) — both total assets and total liabilities decrease.

Therefore, statements (1) and (2) only result in an increase in both total assets and total liabilities.

Award 2 marks for selecting the correct option B. No partial marks.

Periodic interest rate \(r = \frac{6\%}{2} = 3\% = 0.03\).
Number of compounding periods \(n = 2 \times 2 = 4\).

Future Value \(FV = P(1 + r)^n = \$120\,000 \times (1 + 0.03)^4 = \$120\,000 \times 1.12550881 = \$135\,061.06\).

Total compound interest earned \(= FV - P = \$135\,061.06 - \$120\,000 = \$15\,061\) (to the nearest dollar).

Award 2 marks for selecting the correct option C. No partial marks.

(1) Performance appraisal is a core human resources management function to evaluate employee performance.
(2) Setting promotional pricing strategies is the responsibility of the Marketing Department.
(3) Staff training and development falls directly under the Human Resources Department.

Therefore, (1) and (3) only are correct.

Award 2 marks for selecting the correct option B. No partial marks.

The materiality concept states that financial reporting should only be concerned with items that are significant enough to influence the economic decisions of users. Low-value non-current items (such as a $150 calculator) can be charged fully as an expense in the period of purchase because capitalizing and depreciating them would involve administrative costs that outweigh the benefits without providing materially useful information.

Award 2 marks for selecting the correct option A. No partial marks.

1. Inventory turnover \(= \frac{\text{Cost of goods sold}}{\text{Average inventory}} = \frac{\$480\,000}{\$60\,000} = 8\text{ times}\).

2. Gross profit \(= \text{Sales} - \text{Cost of goods sold} = \$800\,000 - \$480\,000 = \$320\,000\).
Net profit \(= \text{Gross profit} - \text{Operating expenses} = \$320\,000 - \$160\,000 = \$160\,000\).

Net profit margin \(= \frac{\text{Net profit}}{\text{Sales}} \times 100\% = \frac{\$160\,000}{\$800\,000} \times 100\% = 20\%\).

Award 2 marks for selecting the correct option A. No partial marks.

Statements (1) and (2) demonstrate corporate social responsibility towards environmental protection and community development.
Statement (3) is an unethical business practice that misleads consumers and violates fair trade practices.

Therefore, (1) and (2) only are correct.

Award 2 marks for selecting the correct option A. No partial marks.

Statement (1) is correct: Hong Kong is a full and separate member of the WTO using the name 'Hong Kong, China'.
Statement (2) is correct: Hong Kong is a service-oriented economy where the tertiary sector contributes over 90% of its GDP.
Statement (3) is incorrect: Hong Kong is a free port and does not levy any general sales tax or value-added tax (VAT) on imported consumer goods.

Award 2 marks for the correct option C. Award 0 marks for incorrect options.

Under the definition adopted by the Hong Kong SAR Government:
- A manufacturing enterprise is classified as an SME if it employs fewer than 100 persons (Statement 1 is correct).
- A non-manufacturing enterprise is classified as an SME if it employs fewer than 50 persons (Statement 2 is correct).
- SMEs make up over 98% of all business establishments in Hong Kong and provide around 45% of total private sector employment (Statement 3 is correct).

Award 2 marks for the correct option D. Award 0 marks for incorrect options.

When paying a trade or sundry creditor (accounts payable) by cheque:
- The liability (Apex Supplies Ltd) decreases, so it is debited.
- The asset (Bank) decreases, so it is credited.

Therefore, the correct double entry is Debit Apex Supplies Ltd $48 000 and Credit Bank $48 000.

Award 2 marks for the correct option A. Award 0 marks for incorrect options.

Given:
- Principal \(P = \$120\ 000\)
- Annual interest rate \(r = 6\% = 0.06\)
- Compounding frequency: half-yearly (\(m = 2\) times per year), so periodic interest rate \(i = 6\% / 2 = 3\% = 0.03\)
- Total time \(t = 2\) years (from 1 Jan 2023 to 31 Dec 2024)
- Number of compounding periods \(n = 2 \times 2 = 4\)

Future Value \(FV = P(1 + i)^n = 120\ 000 \times (1 + 0.03)^4 = 120\ 000 \times 1.12550881 = \$135\ 061.06\)

Total Interest = \(FV - P = \$135\ 061.06 - \$120\ 000 = \$15\ 061\) (to the nearest dollar).

Award 2 marks for the correct option C. Award 0 marks for incorrect options.

Planning is the primary management function that involves setting organizational goals, establishing overall strategies, and developing comprehensive plans to integrate and coordinate activities.

Award 2 marks for the correct option A. Award 0 marks for incorrect options.

Cost of Goods Sold (COGS):
= Opening Inventory + Purchases + Carriage Inwards - Closing Inventory
= $40 000 + $290 000 + $12 000 - $55 000
= $287 000

Gross Profit = Sales - COGS
= $520 000 - $287 000
= $233 000

Note: Carriage outwards is a selling/operating expense and is not included in the calculation of cost of goods sold.

Award 2 marks for the correct option B. Award 0 marks for incorrect options.

Statement (1) is correct: Mandatory contributions are 5% by the employee and 5% by the employer, subject to statutory limits.
Statement (2) is incorrect: Self-employed persons aged between 18 and 64 are also legally required to enroll in an MPF scheme and make mandatory contributions of 5% of their relevant income.
Statement (3) is correct: The statutory retirement age for withdrawing MPF accrued benefits in a lump sum or by installments is 65.

Award 2 marks for the correct option B. Award 0 marks for incorrect options.

Corporate social responsibility (CSR) refers to a company's commitment to operate in an economically, socially, and environmentally sustainable manner beyond mere compliance with legal requirements. Voluntarily reducing pollution beyond statutory standards is a clear example of fulfilling environmental CSR.

Award 2 marks for the correct option A. Award 0 marks for incorrect options.

Statement (1) is correct: Hong Kong adopts a territorial source principle of taxation, levying profits tax on assessable profits originating from HK.
Statement (2) is correct: The four key pillar industries of HK are Financial Services, Tourism, Trading and Logistics, and Professional and Producer Services.
Statement (3) is incorrect: Hong Kong's economy is predominantly service-oriented (tertiary sector accounts for over 90% of GDP), whereas the primary industry accounts for less than 0.1% of GDP.

2 marks for correct answer (B). No partial marks.

In Hong Kong, an SME is defined as:
- A manufacturing business employing fewer than 100 persons in Hong Kong.
- A non-manufacturing business (such as trading, retail, services) employing fewer than 50 persons in Hong Kong.

Therefore:
(1) 80 < 100 (manufacturing) -> Qualifies as an SME.
(2) 60 >= 50 (non-manufacturing) -> Does not qualify as an SME.
(3) 40 < 50 (non-manufacturing) -> Qualifies as an SME.
Thus, (1) and (3) only are correct.

2 marks for correct answer (B). No partial marks.

Under the realisation (revenue recognition) principle, revenue is recognized when goods are delivered to and accepted by the buyer, or when the earning process is substantially complete and title/risks of ownership pass to the customer. Therefore, the sales revenue should be recognized in February 2022 when the goods are delivered and accepted.

2 marks for correct answer (B). No partial marks.

Total debt owed = $12 000
Cash discount received = $12 000 \times 5\% = $600
Amount paid by cheque = $12 000 - $600 = $11 400

Double entry:
Debit: Trade payables $12 000 (eliminating the liability)
Credit: Bank $11 400 (asset decreasing)
Credit: Discounts received $600 (income / gain increasing)

2 marks for correct answer (A). No partial marks.

Principal \(P = \$150\,000\)
Interest rate per half-year \(r = \frac{6\%}{2} = 3\% = 0.03\)
Total number of compounding periods \(n = 2 \times 2 = 4\)

Future Value \(FV = P(1 + r)^n = 150\,000 \times (1.03)^4 = 150\,000 \times 1.12550881 \approx \$168\,826.32\)

Total interest earned = \(FV - P = \$168\,826.32 - \$150\,000 = \$18\,826.32 \approx \$18\,826\).

2 marks for correct answer (C). No partial marks.

Net sales = Sales - Returns inwards = $350 000 - $8 000 = $342 000
Cost of goods sold = Opening inventory + Purchases - Returns outwards + Carriage inwards - Closing inventory
= $45 000 + $220 000 - $5 000 + $6 000 - $38 000 = $228 000

Gross profit = Net sales - Cost of goods sold = $342 000 - $228 000 = $114 000.

Note: Carriage outwards ($4 500) is an operating/selling expense, not part of the cost of goods sold.

2 marks for correct answer (B). No partial marks.

A tall organizational structure has:
- A narrow span of control for managers (Statement 1 is correct).
- More levels in the organizational hierarchy (Statement 3 is correct).
- A longer chain of command / communication channel (Statement 2 is incorrect).
Therefore, only (1) and (3) are correct.

2 marks for correct answer (B). No partial marks.

- Donating surplus food to local food banks addresses poverty and assists disadvantaged groups, reflecting corporate social responsibility towards the community.
- Installing energy-efficient systems to reduce emissions protects ecological sustainability, fulfilling responsibility towards the natural environment.
- These voluntary CSR actions are directly targeted at the community and environment, not at fulfilling statutory/regulatory duties towards the government.
Therefore, (1) and (2) only are correct.

2 marks for correct answer (A). No partial marks.

Statement (1) is incorrect because private limited companies in Hong Kong are not required to file their audited financial statements with the Companies Registry for public inspection; only public companies are required to do so. Statements (2) and (3) are correct: Hong Kong uses a territorial basis of taxation (only profits arising in or derived from Hong Kong are taxable), and CEPA offers preferential market access to qualified Hong Kong service providers.

C (2 marks) - Award 2 marks for selecting the correct option (C). No partial marks.

Calculation of closing bank balance:
- Opening bank balance = +$45 000
- Rent paid by cheque = -$12 000
- Cheque received from debtor = +$18 600 (the $400 difference is discount allowed and does not affect the bank balance)
- Cash drawings by cheque = -$5 000
- Office equipment paid by cheque (40% of $30 000) = -$12 000

Closing bank balance = $45 000 - $12 000 + $18 600 - $5 000 - $12 000 = $34 600.

B (2 marks) - Award 2 marks for selecting the correct option (B). No partial marks.

With semi-annual compounding:
- Interest rate per period \(r = \frac{6\%}{2} = 3\% = 0.03\)
- Number of periods \(n = 4 \times 2 = 8\)

Present Value \(PV = \frac{FV}{(1 + r)^n} = \frac{\$500\,000}{(1 + 0.03)^8}\).

D (2 marks) - Award 2 marks for selecting the correct option (D). No partial marks.

1. Net profit = Gross profit - Operating expenses = $420 000 - $180 000 = $240 000.
2. Sales = Net profit / Net profit ratio = $240 000 / 0.16 = $1 500 000.
3. Cost of goods sold (COGS) = Sales - Gross profit = $1 500 000 - $420 000 = $1 080 000.
4. Average inventory = COGS / Inventory turnover rate = $1 080 000 / 6 = $180 000.
5. Average inventory = (Opening + Closing) / 2 = 180 000 => Opening + Closing = $360 000.
Since Closing = Opening + $5 000, Closing = ($360 000 + $5 000) / 2 = $182 500.

C (2 marks) - Award 2 marks for selecting the correct option (C). No partial marks.

All three statements accurately state Henri Fayol's administrative management principles:
- Statement (1) correctly defines unity of command (one boss per worker).
- Statement (2) correctly defines unity of direction (one head, one plan for a group of activities with the same objective).
- Statement (3) correctly defines scalar chain (formal hierarchy and clear line of authority from top to bottom).

D (2 marks) - Award 2 marks for selecting the correct option (D). No partial marks.

In Hong Kong, an SME is defined by the Government as a manufacturing enterprise employing fewer than 100 persons, or a non-manufacturing enterprise employing fewer than 50 persons. SMEs are also essential in supporting large enterprises through subcontracting, auxiliary services, and parts supplies. Therefore, statements (1), (2), and (3) are all correct.

D (2 marks) - Award 2 marks for selecting the correct option (D). No partial marks.

(a)
Advantages of forming a partnership compared to a sole proprietorship:
1. Wider source of capital: Chloe can contribute additional financial capital and equipment into the business to fund the expansion.
2. Pooling of expertise and skills: Kelvin can combine his management experience with Chloe's specialised pilates instruction skills, improving overall service offerings.
3. Sharing of business risks and financial losses: Risks and operational losses are shared between Kelvin and Chloe rather than borne solely by Kelvin.

(b)
Profitability:
- The return on capital employed of Chloe's studio (14%) is higher than the industry average (9%), indicating that the studio generates a higher return on each dollar of capital invested.
- The net profit margin (18%) is higher than the industry average (11%), showing better operational efficiency and stronger capability in controlling operating expenses.

Liquidity:
- The current ratio (0.8:1) is significantly lower than the industry average (1.6:1) and below the conventional standard (e.g. 1:1 or 2:1), indicating that Chloe's studio may have difficulty meeting short-term financial obligations with its current assets.

(a) 1 mark for each relevant advantage explained (max 2 marks):
- Wider source of capital / more funds raised
- Complementary skills / sharing of managerial workload
- Sharing of financial risks and business losses

(b) Profitability (2 marks):
- 1 mark for stating profitability is superior with reference to ROCE (14% vs 9%) and net profit margin (18% vs 11%).
- 1 mark for explaining that the firm is more efficient in generating returns and controlling overhead expenses.

Liquidity (2 marks):
- 1 mark for stating liquidity is poorer with reference to current ratio (0.8:1 vs 1.6:1).
- 1 mark for explaining that current assets are insufficient to cover short-term debts, posing short-term liquidity risk.

(a)
Consequences of poor credit rating:
1. Higher interest rates: The lender may charge a higher loan interest rate to compensate for higher credit risk.
2. Loan application rejection / less favourable terms: The bank may reject the personal loan application or offer a lower loan amount / require a guarantor.

(b)
Ways to improve credit rating:
1. Pay credit card balances and utility bills on time before the due dates.
2. Avoid applying for multiple new credit cards/loans within a short timeframe.
3. Pay off existing outstanding debts to lower credit utilization.

(c)
Differences between index ETFs and government bonds:
1. Return: Index ETFs provide variable returns (dividend yields and capital gains/losses depending on market fluctuations), whereas government bonds provide predictable/guaranteed coupon interest payments.
2. Risk: Index ETFs carry higher market/price volatility risk, while government bonds have minimal default risk as they are backed by the government.

(d)
Reason to repay debt instead of investing:
- Repaying the loan eliminates high financing interest charges, offering a guaranteed financial saving without taking on investment risk.

(a) 1 mark for each valid consequence (max 2 marks):
- Higher loan interest rate / less favourable borrowing terms
- Rejection of loan application / lower loan amount approved

(b) 1 mark for each valid method (max 2 marks):
- Repay credit debts punctually / settle payments in full before due date
- Reduce total outstanding loan balances / lower credit utilisation
- Avoid applying for too many credit cards simultaneously

(c) 1 mark for each clear point of comparison (max 2 marks):
- Return: ETFs have variable return / potential capital growth vs bonds have steady/fixed interest income
- Risk: ETFs have higher investment risk/volatility vs government bonds have low default risk

(d) 2 marks for a well-justified reason (e.g. saving on interest charges, reducing financial burden/risk of default, improving credit profile).

(a)
Weaknesses in the objective:
1. Not Measurable: The term "significantly boost" has no quantifiable numerical indicator or measurable benchmark to assess whether customer satisfaction has improved.
2. Not Time-bound: There is no clear timeframe or target completion date specified for expanding into the luxury market.
3. Not Specific: The target does not clearly define what specific market share or customer segments are being targeted.

(b)
Human Resources Department:
- Recruitment and Training: HR can recruit experienced beauty advisors with luxury sales backgrounds and provide professional customer service and product knowledge training to project a premium brand image.

Information Management Department:
- Data Analytics and CRM Systems: The department can build and maintain a customer relationship management (CRM) database to analyse customer buying behaviour, preferences, and spending patterns in the luxury segment, facilitating targeted marketing campaigns.

(a) 1 mark for each weakness identified and explained with reference to SMART criteria (max 2 marks):
- Measurable: "significantly boost" is vague and lacks quantifiable criteria/metrics.
- Time-bound: No specific deadline or target period is stated for achievement.
- Specific: Target luxury segment scope is not clearly defined.

(b) 2 marks for each department's contribution (max 4 marks):
- Human Resources Department (2 marks): 1 mark for method (e.g. recruit qualified beauty consultants / conduct service quality training) + 1 mark for linking to the luxury marketing goal.
- Information Management Department (2 marks): 1 mark for method (e.g. establish CRM database / collect and analyse customer purchasing data) + 1 mark for explaining how it aids marketing decision-making.

(a)
Gordon's Firm
Statement of Financial Position as at 31 December 2023

$$\begin{array}{lrr}
\hline
\textbf{Non-current assets} & \$ & \$ \\
\text{Office equipment} & & 150\,000 \\
\text{Motor van} & & 80\,000 \\
\hline
& & 230\,000 \\
\textbf{Current assets} & & \\
\text{Inventory} & 35\,000 & \\
\text{Rental deposit} & 25\,000 & \\
\text{Trade receivables} & 22\,000 & \\
\text{Bank} & 48\,000 & \\
\hline
& 130\,000 & \\
\textbf{Less: Current liabilities} & & \\
\text{Trade payables} & 16\,000 & \\
\hline
\text{Net current assets} & & 114\,000 \\
\hline
& & \mathbf{344\,000} \\
\hline\hline
\textbf{Financed by:} & & \\
\text{Capital, 1 January 2023} & & 200\,000 \\
\text{Add: Net profit (Balancing figure)} & & 126\,000 \\
\hline
& & 326\,000 \\
\text{Less: Drawings (\$3 500} \times 12\text{)} & & 42\,000 \\
\hline
& & 284\,000 \\
\textbf{Non-current liabilities} & & \\
\text{Bank loan} & & 60\,000 \\
\hline
& & \mathbf{344\,000} \\
\hline\hline
\end{array}$$

(b)
Fulfilling corporate social responsibility means a business goes beyond legal and purely profit-maximizing obligations to consider the well-being of its stakeholders and society. Offering free sports workshops and equipment to underprivileged youth directly contributes to community development and supports disadvantaged groups without seeking commercial gains.

(c)
Reasons for fulfilling social responsibilities:
1. Build a good corporate image and reputation: Fulfilling social responsibility enhances goodwill and gains public recognition and support from the community.
2. Enhance customer loyalty and attract new customers: Socially conscious consumers are more inclined to patronize businesses that demonstrate active care for society, leading to higher long-term sales and competitive advantage.

(a) Statement of Financial Position (6 marks in total):
- Non-current assets: Office equipment ($150,000) [0.5 mark], Motor van ($80,000) [0.5 mark]
- Current assets: Inventory ($35,000) [0.5 mark], Rental deposit ($25,000) [0.5 mark], Trade receivables ($22,000) [0.5 mark], Bank ($48,000) [0.5 mark]
- Current liabilities: Trade payables ($16,000) [0.5 mark]
- Capital, 1 January 2023 ($200,000) [0.5 mark]
- Drawings ($42,000) [0.5 mark]
- Net profit balancing figure ($126,000) [0.5 mark]
- Bank loan as non-current liability ($60,000) [0.5 mark]
- Proper format and presentation [0.5 mark]

(b) Reason (2 marks):
- Explanation that the business is actively contributing resources to benefit key stakeholders / the local community / disadvantaged youth beyond mere legal or financial compliance. (2 marks)

(c) Reasons (2 marks):
- 1 mark for each valid reason (max 2 marks):
* Building a positive brand image/reputation in the community.
* Increasing customer loyalty and attracting potential customers.
* Improving employee morale and recruitment.