Вы находитесь на странице: 1из 26

SURNAME OF CANDIDATE:

FIRST NAME OF CANDIDATE:


STUDENT ID:
SIGNATURE:

Official Use Only


Q

Mark

1
2
SCHOOL OF ACCOUNTING

3
4

ACCT 1511:
Accounting and Financial Management 1B

5
6
Total
(/75)

FINAL EXAMINATION
October/November 2008
Time Allowed:
Reading Time:
Total Number of Questions:

3 Hours
10 minutes
7

Answer ALL questions.


The questions are NOT of equal value.
Answers to Questions 1 to 6 must be written in ink on the lines or in
spaces provided in this Booklet.

Question 7 must be answered on the separate Generalised Answer Sheet


provided using a 2B pencil.
This paper is NOT to be retained by the candidate.
DO NOT OPEN THIS PAPER UNTIL INSTRUCTED BY THE EXAM
SUPERVISOR

QUESTION 1 (15 MARKS): CASH FLOW STATEMENTS


Part A: (10 marks)
NoWhere Community College (NWCC) is a not-for-profit educational organisation
which, like most traditional non-profit organisations, uses cash-based accounting in
preparing its financial statements. Recently, NWCC has been seeking to re-finance a
$250,000 mortgage loan on a property that it owns. To facilitate the loan application,
the accountant of NWCC has prepared the following schedule of sources and uses of
cash for the year ending 30 June 2008.
Sources of cash:
From tuition
From other fees
From bookstore revenue
From interest on investment
From disposal of investment
From issuance of note for equipment
From depreciation
Total sources of cash

$450,000
140,000
220,000
6,000
18,000
50,000
30,000
$914,000

Uses of cash:
For salaries & wages
For utilities expense
For purchase of insurance
For rental payment
For purchase of equipment by issuing note
For purchase of computer system
For purchase of building
For repayment of short-term loan
Total uses of cash

$380,000
85,000
26,000
33,000
50,000
210,000
100,000
40,000
$924,000

Net decrease in cash

$(10,000)

After speaking to four local banks, NWCC was still unable to secure the mortgage.
The banks had doubts about the accuracy of the information regarding cash above and
believe that NWCC might not be able to continue its operations.

Required:
(a) Prepare a correct Statement of Cash Flows using the direct method for NoWhere
Community College (NWCC). (7 marks)

(b) Based on the Statement of Cash Flows in part (a), do you think NWCC now
stands a better chance of obtaining the mortgage from one of the local banks?
Explain your answer. (3 marks)

DO NOT WRITE BEYOND THIS LINE

Part B: (5 marks)
You are working for a brokerage firm as a stock analyst and your boss is asking you
to evaluate and recommend the stocks of Cherry Crumble Ltd. and Violet Ripe Ltd. to
your clients. Since both companies operate in the same industry, earn about the same
net income and have similar financial positions, your final recommendation depends
very much on their statement of cash flows.
Cherry Crumble
Net cash from operations

$130,000

Purchase of plant assets


Sale of land
Net cash from investing activities

$(180,000)
20,000

Issuance of shares
Repayment of long-term loan
Net cash from financing activities

50,000
-

Net increase in cash

Violet Ripe
$110,000
$(20,000)
50,000

(160,000)

30,000
(120,000)

50,000

(120,000)

$20,000

$20,000

Required:
Based on all the cash flow information given, how would you choose between the two
companies? Give your reasons.

DO NOT WRITE BEYOND THIS LINE

QUESTION 2 (10 MARKS): FINANCIAL STATEMENT


ANALYSIS
Part A: (4 marks)
(a) Discuss one reason why financial statement analysis may be conducted. (2 marks)

DO NOT WRITE BEYOND THIS LINE

(b) Discuss one limitation of financial statement analysis. (2 marks)

DO NOT WRITE BEYOND THIS LINE

Part B: (6 marks)
Mr. Tate OStew is a financial consultant who is considering recommending a
catering company, ROAST Ltd, to his clients. However, before he makes any
recommendations, Tate would like to know the answers to several questions. The
financial information for ROAST Ltd for the last three (3) years is summarised in the
table below:

Current ratio
Quick ratio
Debtors turnover
Inventory turnover
Dividends per share
Return on assets (ROA)
Return on equity (ROE)

2008
2.9
0.7
6.9
6.5
$2.20
0.112
0.06

2007
2.4
1.0
8.2
7.7
$2.20
0.131
0.07

2006
1.6
1.5
10.5
8.8
$2.20
0.148
0.09

Industry average ROE

0.08

0.07

0.05

Required:
Support your answers with appropriate ratios (if any).
provided on page 10.

Ratio formulae are

(a) Comment on the liquidity of ROAST Ltd. over the last three (3) years. (1 mark)

This page has intentionally been left blank.


You can use this page for workings.
Please note that any writing on this page will not be marked.

(b) Are customers of ROAST Ltd. paying their invoices faster now than they did in
2006? (1 mark)

(c) ROAST Ltd.s dividend per share has remained the same for the last three (3)
years at $2.20. Do you believe that this is keeping in line with the trend in its
financial performance? (2 marks)

(d) Should Tate recommend investment in ROAST Ltd.? Why? (2 marks)

DO NOT WRITE OUTSIDE THE BOX

Note: Use the following formulae for ratio calculations if required.


Ratio Formulae:
Performance Ratios
Return on Equity (ROE) = Net Profit After Tax / Shareholders EquityReturn on
Assets (ROA) = Earnings before Interest & Tax (EBIT) / Total Assets Profit Margin =
Net Profit After Tax / Sales RevenueGross Margin = Gross Profit / Sales Revenue
Activity Ratios
Asset Turnover = Sales Revenue / Total AssetsInventory Turnover = COGS /
Average InventoryDays Inventory on Hand = 365 / Inventory TurnoverDebtors
(receivables) Turnover = Credit Sales / Average Trade Debtors Days in Debtors = 365
/ Debtors turnover
Creditors Turnover = Purchases (or COGS) / Average Accounts PayableDays in
Creditors = 365 / Creditors TurnoverCash Flow Cycle = Days in Inventory + Days in
Receivables Days in Creditors
Liquidity and Financial Structure Ratios
Current Ratio = Current Assets / Current LiabilitiesQuick Ratio = (Current Assets
Inventories) / Current LiabilitiesInterest Coverage = EBIT / Interest Expense
(net)Debt to Equity Ratio = Total Liabilities / Total EquityDebt to Assets = Total
Liabilities / Total AssetsLeverage = Total Assets / Shareholders Equity [expressed as
a multiple] Leverage Ratio = Shareholders Equity / Total Assets [expressed as a
percentage]

10

QUESTION 3 (10 MARKS): ACCOUNTING POLICY CHOICE


Part A: (3 marks)
Jemaine Bret is the new chief accountant of Plight of the Cormorants Ltd, a company
devoted to environmental issues. For the financial year ending 30 June 2008, he has
made the following recommendations for accounting policy changes. He has been
called upon by the companys chief managing officer to explain the possible effects of
the policy changes on some of the companys accounts.
Accounting policy changes

Accounts

1 Straight line instead of reducing balance depreciation


of the anti-whaling boat bought on 1 January 2008
2 FIFO instead of weighted average for inventory (prices
have been increasing)
3 Capitalising development expenses

Net profit
Assets
Net profit

4 Changing doubtful debt policy from 10% of sales to


5%. Sales remain constant.
5 Using market value instead of historical cost for
buildings (prices have been decreasing)
6 Using market value instead of historical cost for land
(prices have been increasing)

Total assets
Cash flow from
operations (current year)
Net profit

Required:
If the accounting policy changes are accepted, what will be the effect (increase,
decrease, or no effect) on the selected accounts in the table above?
Write your answers in the following table:
Accounts
1

Net profit

Assets

Net profit

Total assets

Effect
(increase, decrease, or no effect)

5 Cash flow from operations (current year)


6

Net profit

11

Part B: (7 marks)
You are assisting in the preparation of the financial statements of Plight of the
Cormorants Ltd., and Jemaine has asked you to expense $50,000 worth of set-up costs
previously capitalised during the current financial year. The company has a 30% tax
rate.
Required:
(a) What journal entries would you use to record this transaction? In your journal
entry, clearly indicate the type of each account (revenue, expense, asset, liability).
(1 mark)

(b) What would be the effect (in dollars) on the companys net assets? (1 mark)

12

This page has intentionally been left blank.


You can use this page for workings.
Please note that any writing on this page will not be marked.

13

(c) What would be the effect (in dollars) on net cash flow this year? (1 mark)

(d) What will be the effect (in dollars) on next years net cash flow? (1 mark)

(e) Give three possible reasons for Jemaines decision to expense previously
capitalised set-up costs. (3 marks)

DO NOT WRITE BEYOND THIS LINE


14

QUESTION 4 (10 MARKS): INTRODUCTION TO MANAGEMENT


ACCOUNTING AND COST CONCEPTS
Note: the cost of goods manufactured is not examinable in 1B for 2015 onwards.

QUESTION 5 (20 MARKS): BUDGETING FOR PLANNING AND


CONTROL
Part A: (15 marks)
SportsKraft Ltd. is one of the oldest wholesale companies in the Asia-Pacific region.
The company specialises in manufacturing and selling top-of-the-line sport goods,
including cricket bats made of willow wood and treated with linseed oil.
While the company performed beyond expectations in the last financial year, Sidney
Greenspan, the managing director of SportsKraft Ltd., is worried about the everincreasing price of raw materials and its effect on the companys profit margin. He
wishes to prepare the companys master budget for the next quarter.
On 30 June 2008, SportsKraft Ltd. had finished goods inventory of 10,000 cricket
bats, $200,000 worth of raw materials (comprising $200,000 willow wood, but no
linseed oil), and Accounts Receivable totalling $2,500,000 (net of bad debts). Gross
profit for the period ending 30 June 2008 was $14,350,000.
The company plans to increase its mark-up policy to 25% in order to cater for the
expected increase in the price of raw materials. The selling price therefore is
expected to be $150 per bat for the next quarter. The sales budget for the next 4
months is as follows:
July
August
September
October
November

45,000 bats @ $150


50,000 bats @ $150
60,000 bats @ $150
65,000 bats @ $150
70,000 bats @ $150

$ 6,750,000
$ 7,500,000
$ 9,000,000
$ 9,750,000
$10,500,000

SportsKraft Ltd. has a policy of setting its finished goods inventory level at the end of
each month to equal 30% of the next months budgeted bat sales.
Each cricket bat requires 2 metres of willow wood planks and 1 litre of linseed oil.
Direct labour is projected to be 3.5 hours per production of each bat, and the company
incurs a cost of $45 per hour for direct labour wages. Willow planks cost $10.50 per
metre, and linseed oil is $20 per litre. The company ends each month with enough
planks to cover 10 per cent of the next months production requirements; linseed oil,
however, is all used up each month.
Currently, SportsKraft Ltd.s customers pay 45% of sales in the month of the sale,
50% in the following month, and any outstanding balance is considered to be not
collectable and written off straight away. The company also has a policy of paying its
supplier in instalments: 55% in the month of purchase and 45% in the following
month.
15

Required:
(a) Prepare a production budget for the quarter ending 30 September 2008. (3 marks)

16

(b) Prepare a raw materials budget for the quarter ending 30 September 2008.
(7 marks)

17

(c) Prepare a schedule of expected cash collections for the quarter ending 30
September 2008. (5 marks) Note: this is no longer examinable in 1B from 2015
onwards.

Part B: (5 marks)
Flexibility has been identified as one of the key features of effective operating
budgets. Identify one of the operating budgets, and explain why flexibility is required
for it to be effective in aiding organisations planning and controlling processes.

DO NOT WRITE BEYOND THIS LINE

18

QUESTION 6 (10 MARKS): CORPORATE GOVERNANCE


NOTE: CORPORATE GOVERNANCE
EXAMINABLE FROM 2015 ONWARDS.

IS

NO

LONGER

QUESTION 7 (25 MARKS): MULTIPLE CHOICE QUESTIONS


There are twenty five (25) Multiple Choice Questions. Choose one (1) best answer
per question. Answers are to be recorded on the separate Generalised Answer
Sheet provided using a 2B pencil by blackening appropriate boxes. You must record
your student number and name on the provided answer sheet.

1.

Which of the following statements about prepaid expenses is NOT true?

They are expenses which should be recognised in the income statement as soon as
they are paid.
They are usually classified as current assets.
They are expenses which have not yet been incurred but have been paid for during
the current period.
They are usually associated with cash outflows.
Both A and C are NOT true.

B
C
D
E

2.
A
B
C
D
E

3.

A
B
C
D
E

Which of the following items would be recognised in the balance sheet as a


liability?
Advances from customers for goods and services to be provided next year.
Payment in advance to suppliers for raw materials to be delivered next year.
Allowances made for potential bad debts in the current period.
Contingent liabilities.
A and D.

ProVice Ltd issued 10,000 ordinary shares for $2.50 each, payable $1 on
application, 50 cents on allotment and $1 in calls as required. The journal entries
to record the allotment of 10,000 shares would include a:
Credit to Cash, $5,000
Credit to Allotment, $10,000
Credit to Share Capital, $25,000
Credit to Share Capital, $5,000
Credit to Allotment, $5,000

19

4.
A
B
C
D
E

5.
A
B
C
D
E

6.
A
B
C
D
E

7.
A
B
C
D
E

Which of the following statements about the general reserve account is NOT true?
A transfer to this account may be used to indicate to shareholders that it is unlikely
to be paid out in dividends.
Funds can be transferred back from it to retained profits.
It provides an indication of where funds are invested.
It appears under shareholders equity in the balance sheet.
Both A and C are NOT true.

Which of the following statements about bonus issues is NOT true?


They can be a useful takeover defence.
They reduce shareholders equity as well as assets.
They do not affect cash.
They are also referred to as share dividends.
Both B and C are not true.

What is the usual journal entry to create a General Reserve account?


Dr Asset Revaluation Reserve
Cr General Reserve
Dr General Expenses
Cr General Reserve
Dr Profit and Loss Summary
Cr General Reserve
Dr Retained Profits
Cr General Reserve
Dr General Reserve
Cr Cash

Which of the following can NOT be an example of an investing cash flow?


Purchase of land.
Payment to acquire shares of other companies.
Sale of shares previously purchased.
Dividend received.
Shares issued.

20

8.
A
B
C
D
E

9.
A
B
C
D
E
10.
A
B
C
D
E

11.
A
B
C
D
E

Which of the following could NOT explain an increase in the Return On Equity
(ROE)?
Creating a general reserve account.
Payment of an interim dividend.
Increase in net profits.
Declaring a final dividend.
Share buyback.

Which of the following ratios may indicate the efficiency with which the resources
of the company are being utilised to generate profit?
Current ratio
Debt to assets ratio
Quick ratio
Return on assets
B and D.
Which of the following statements about the current ratio is true?
It indicates whether the company has enough short-term assets to cover its shortterm liabilities.
An extremely high ratio always is a favourable sign.
A ratio above 1 indicates that working capital is negative.
It will increase when cash is collected from debtors.
A and D.

Which of the following transactions may decrease the current ratio?


Slow cash collection from debtors.
Sale of a major non-current asset.
A large prepayment.
Existence of a large obsolescent inventory stock.
Increasing the allowance for doubtful debts.

12.

Which of the following is NOT an area in which companies typically make


accounting policy choices?

A
B
C
D
E

How to calculate amortisation of development costs.


How to calculate depreciation on land.
How to value inventories.
Whether to capitalise development costs.
None of the above: that is, all are accounting policy choices available to
companies.

21

13.

Which of the following is an accounting method that could be chosen by a


company to decrease reported profits?

A
B

Overstating allowance for doubtful debts


Increasing the useful life of plant and equipment which is being depreciated using
straight line method.
Classifying longer-term debts as current liabilities
Creating a general reserve account using the companys retained profits account.
A and D.

C
D
E

Questions 14 16 are based on the following information.


Turnaround Ltd, which has been in business one year, has an income tax rate of 40%.
The company makes it a practice to capitalise its advertising costs as a deferred asset
and to amortise it at 25% per annum. The accountant has suggested to the general
manager that the policy of capitalising advertising should be ended because the
economic benefit of such expenditure is not clearly determinable. The amount of
advertising capitalised this year was $150,000.
14.
A
B
C
D
E

15.
A
B
C
D
E
16.
A
B
C
D
E

What effect would such a policy change have on Net Profit After Tax this year?
$112,500 reduction
$45,000 reduction
$60,000 reduction
$67,500 reduction
$25,000 reduction

What effect would such a policy change have on total assets this year?
$150,000 reduction
$67,500 reduction
$112,500 reduction
$45,000 reduction
No effect
What effect would such a policy change have on cash flows from operations this
year?
$150,000 reduction
$67,500 reduction
$45,000 increase
$45,000 reduction
No effect

22

17.

Which of the following statements is true regarding manufacturing overhead


costs?

A
B
C
D

They consist of direct material and direct labour costs.


They are easily traced to jobs.
They include all selling costs.
They should not be assigned to individual jobs because they bear no obvious
relationship to them.
They are a heterogeneous pool of indirect production costs that can include
gas and electricity costs and depreciation associated with manufacturing.

18.

Which of the following statements is NOT correct regarding Work In Process?

A
B
C
D
E

Work In Process is partially completed inventory.


Work In Process consists of direct labour, direct material and manufacturing
overhead.
Work In Process is debited as product costs are incurred.
Work In Process is credited when goods are sold.
A and C

19.

Process costing is normally used when:

A
B
C
D
E

Small numbers of distinctly different products are manufactured.


Large numbers of different products are manufactured.
Large numbers of nearly identical products are manufactured.
Small numbers of nearly identical products are manufactured.
The fixed costs of manufacturing exceed the variable cost of manufacturing.

20.

Which of the following statements is true regarding cost?

A
B
C
D
E

A cost is always an expense.


A cost is always an asset.
A cost is something quite different from either an expense or an asset.
It can be either an expense or an asset.
It is always a liability.

23

21.

Which of the following is a manufacturing cost?

A
B
C
D
E

Marketing costs.
Administrative costs.
Research and development costs.
Indirect material costs.
Sales personnel salaries.

22.

Which of the following statements is true?

A
B
C
D

Budgets are usually available as part of the companys annual report.


Budgets are part of the organisations planning and control processes.
Budgets ensure that accounting records comply with GAAP.
Budgets are not always used to aid in setting up of the short-term goals of the
company.
All of the above: that is, all statements are true.

23.

Winter Ltds sales are 30% in cash and 70% on credit. 60% of the credit sales are
collected in the month of sale, 25% in the month following sale, and 12% in the
second month following sale. The remainder is uncollectible. Based on the
following budgeted sales data, what is the total Budgeted Cash Receipts in April?
Total sales

January
$60,000

February
$70,000

March
$50,000

April
$30,000

A
B
C
D
E

$27,230
$36,230
$38,900
$47,900
None of the above.

24.

Cooks Ltd has budgeted $40,000 in sales for the month of December. The
company's cost of goods sold is 30% of sales. If the company has budgeted to
purchase $18,000 in merchandise during December, then the budgeted change in
inventory levels by the end of December is:

A
B
C
D
E

$6,000 increase
$10,000 decrease
$15,000 increase
$22,000 decrease
$45,000 increase

24

25.

Exterminator Ltd. forecasts sales for the second quarter at 5,000 units and for the
third quarter at 10,000 units. The desired ending inventory for the second quarter
is 1,000 units and for the third quarter, 4,000 units. How many units must be
produced in the third quarter?

A
B
C
D
E

5,000 units
11,000 units
12,000 units
13,000 units
15,000 units

---------------------------------END OF PAPER----------------------------------

25