School of Business & Enterprise. Module Code: ACCT08009 ACCOUNTING & FINANCE. Date: 19 June 2017 Time:

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1 School of Business & Enterprise Paisley Campus Session Resit Paper Module Code: ACCT08009 ACCOUNTING & FINANCE Date: 19 June 2017 Time: EXAM PAPER HAS TWO SECTIONS: A AND B Answer Questions 1 to 25 in Section A, which is COMPULSORY and TWO questions from Section B ANSWER GRID SUPPLIED FOR SECTION A MULTIPLE CHOICE APPENDICES - FORMULA SHEET

2 Answer Grid (please circle): 1 A B C D 2 A B C D 3 A B C D 4 A B C D 5 A B C D 6 A B C D 7 A B C D 8 A B C D 9 A B C D 10 A B C D 11 A B C D 12 A B C D 13 A B C D 14 A B C D 15 A B C D 16 A B C D 17 A B C D 18 A B C D 19 A B C D 20 A B C D 21 A B C D 22 A B C D 23 A B C D 24 A B C D 25 A B C D Page 1 of 14Continued overleaf

3 Section A Q1 Which of the following represents a logical sequence for functional budget preparation? a. Sales budget, Labour budget, Material budget, Production budget b. Labour budget, Sales budget, Material budget, Production budget c. Sales budget, Production budget, Material budget, Labour budget d. Material budget, Sales budget, Production budget, Labour budget Q2 Which of the following statements are true regarding budget preparation? Select one or more: a. Incremental budgets are adjusted for inflation or growth b. Zero based budgets can eliminate the errors from previous budgets c. Zero based budgets are straightforward and low cost to maintain d. Zero based budgets are based on previous year figures but require zero adjustment Q3 Select the false statement regarding activity based costing: a. ABC information allows a business to manage business processes and activities as well as cost its products & services b. ABC approaches usually lead to more accurate product & service costs when compared to Absorption costing c. ABC uses a 2-stage allocation method just like Absorption costing d. ABC will have a similar number of activities as departments (in absorption system) in the first stage of the cost allocation Q4 Which of the following statement is false regarding budgeting? a. Rolling budgets are continuously updated to reflect changes in market conditions b. Fixed budgets are useful for businesses operating in volatile conditions c. Fixed budget data can become obsolete and useless to businesses d. Flexible budgets are useful for making comparisons in a variance analysis Q5 Which of the following statement is false? a. Responsibility centre managers receive detailed reports for their cost centre variances b. Managers are held accountable for variances that they can control Page 2 of 14Continued overleaf

4 c. Managers are held accountable for all variances occurring in their responsibility centre d. Managers are not held accountable for all variances occurring in their responsibility centre Q6 If selling price is 140; material is 32; labour is 28; fixed costs are 16,000, then the break-even point is equal to? a. 200 units b. 148 units c. 115 units d. 267 units Q7 Which of the following are relevant costs for making financial decisions? Select one or more: a. sunk cost b. opportunity cost c. directly attributable cost d. avoidable cost Q8 Product X: selling price 100; variable costs 40; labour hours used = 3 Product Y: selling price 160; variable costs 80; labour hours used = 5 Product Z: selling price 120; variable costs 60; labour hours used = 2 If labour hours are limited, then in what order should the company rank and produce goods? a. X, Z, Y b. X, Y, Z c. Z, X, Y d. Y, X, Z Q9 If quarterly sales and production = 500 units; Kgs required per unit = 2 kgs; Cost per kg = 3; Labour hours per unit = 3 hours; Cost per hour = 6. The material cost budget for the quarter is equal to? a. 1,000 b. 2,000 c. 3,000 d. 1,500 Page 3 of 14Continued overleaf

5 Q10 Consider the following master budget data for month of January: Material 2,000; Labour 4,000; Production overheads 1,500; Head office wages 4,000; Head office utilities 1,200; Sales revenue 18,800. The Cost of Sales is equal to? a. 12,700 b. 7,500 c. 6,000 d. 5,200 Q11 If is received after 2 years at a compound interest rate of 5%, then the present value of the investment is? a. 140 b. 125 c. 150 d. 135 Q12 If 200 is invested today earning 8% simple interest per year for 3 years, then the future value of the investment is? a. 248 b. 252 c. 216 d. 224 Q13 Consider the following Trial Balance information: Sales 2,200, Cost of sales 1,050, Distribution costs 280, Administration costs 370, Interest charges 110, Taxation for year 80, Dividend paid 100. The Profit after tax is equal to? a. 390 b. 310 c. 210 d. 290 Page 4 of 14Continued overleaf

6 Q14 Consider the following Trial Balance information: Assets value 5,460, closing stock 950, Debtors 710, Bank 650, Reserves previous profits 850, Share capital 4,500, Corporate bonds 1,500, Creditors 920. The Enterprise value is equal to? a. 5,460 b. 7,800 c. 5,560 d. 7,770 Q15 Which of the following statements best describes the role of the financial accountant? a. to gather cost information about products & services b. to provide an account of organisational activity to business stakeholders c. to provide accounting information to managers within the organisation d. to prepare budgets and forecasts for the business Q16 Consider the following budget data: selling price = 60; material = 3 per kg; labour = 2 per hour; fixed overhead = 2 per hour; nonproduction overheads = 10,000.Original budget demand = 1,000 units; Actual results demand = 1,100 units Standard cost card contribution per unit is equal to? a. 45 b. 35 c. 25 d. 41 Q17 Which of the following statement is false regarding working capital? a. A business should aim to increase its debtor credit period. b. A company should aim to decrease its stock in days period. c. A business should aim to increase its creditor credit period d. A business should aim to decrease its debtor credit period. Page 5 of 14Continued overleaf

7 Q18 Consider the following budgeted sales data: July August September Total sales 10,000 12,000 15,000 90% of sales are expected to be on credit; 10% of sales are expected to be in cash; the credit period is 1 month. Total cash received in August is equal to? a. 10,200 b. 9,000 c. 12,000 d. 10,800 Q19 Select the true statement(s) from the following: Select one or more: a. Profit is always equal to cash flow for an accounting period. b. Profit is always measured objectively by the accountant. c. Profit is usually different to net cash flow for an accounting period. d. Profit decrease is a direct cause of business bankruptcy. Q20 Which of the following statements are true regarding dividends? Select one or more: a. Dividend payments reduce retained profits b. Zero dividend policy reduces funds available for re-investment c. Generous dividend payments increase reliance on external finance d. Dividends should always be paid to shareholders when the business makes a profit Q21 The following statement is false in relation to the Break-even chart: a. The break-even point occurs where sales revenue = total cost b. Fixed costs are incurred at a zero activity level c. Break-even point occurs where sales revenue = variable costs d. A business will generate profit when it exceeds the break-even point Page 6 of 14Continued overleaf

8 Q22 If selling price = 140; material = 32; labour = 28; Fixed costs 16,000; current sales demand = 400 units. The margin of safety (percent) is equal to? a. 50% b % c % d. 65% Q23 Select the correct description of the following cost graph: a. Step-fixed cost b. Production cost c. Semi-variable cost d. Variable cost Q24 Which of the following statement regarding operating gearing is false? a. Operating gearing measures sensitivity of profits to changes in sales b. Higher operating gearing results in higher business risk c. Higher operating gearing leads to lower break-even point d. Higher operating gearing can result in higher profits Q25 Budgets are useful to organisations because they do which of the following? Select one or more: a. Highlight potential problem areas for forthcoming periods b. Set out resource requirements for future periods c. Give a business a sense of direction d. Summarise past financial performance Page 7 of 14Continued overleaf

9 Section B Q1 VT communications are a UK based company that operate country wide mobile phone and wireless internet networks. In recent times the company has become very aware of its corporate image and reputation with highly visible news pieces alleging various pollutions to be caused by the industry. The directors know that environmental issues are a concern to its customers, investors and other stakeholders. In the first stage of initiatives, the business is contemplating moving to renewable energy sources for its head office buildings. This will involve substantial up-front investment in solar panels and a medium size wind turbine to generate the required energy. As well as the environmental and spin-off reputational advantages, the directors of the company are convinced that the investment will provide the business with significant financial returns. The renewable sources will significantly reduce utilities costs and surplus energy can be sold on to the national grid. The business anticipates, however, that after 5 years the technology will be obsolete and not worth maintaining. The financial manager has been asked to assess this environmental capital investment. Cash flow forecasts are as follows: Details Year Amount Initial investment in solar panels and wind turbine 0 2,000,000 Projected cash savings on utilities and selling to grid: Additional scrap income from the redundant equipment 1 700, , , , , ,000 The financial manager has concluded that the appropriate discount factor for an investment with this type of risk is 12%. Required: a) Calculate and explain the meaning of the payback period for the investment and compare to a company benchmark of 3.5 years. Describe the pros and cons of this technique. (5 marks) b) Calculate and explain the meaning of the project Net Present Value. (10 marks) c) Discuss the use of scenarios and sensitivity analysis as tools for further assessing the risk and returns of investment projects. (10 marks) Page 8 of 14Continued overleaf

10 Q2 EZZETop Ltd is a small privately owned company that manufacture and sell guitars directly to customers and to music shops. The owner of the business has become concerned that with projected market conditions they will be unable to cover their fixed overheads next financial year. Budgeted data has been collected for the forthcoming year in order to undertake a break-even analysis: Data Selling price per unit 560 Anticipated sales demand for year 180 units Variable costs per unit: Material- wood, paint, finishing 140 Labour- skilled and unskilled 120 Fixed costs for year: Workshop supervisor 16,500 Workshop utilities 4,200 Office salary 12,000 Advertising 2,400 Required: a) Prepare a detailed marginal costing statement for the product clearly showing contribution and profit. (9 marks) b) Calculate the number of unit sales required to break-even and the current margin of safety at the anticipated sales level. (4 marks) c) How many units would have to be sold if the business owner has in mind a target profit of 50,000? Show full workings. (4 marks) d) Prepare a break-even chart, clearly showing fixed costs, variable costs, total costs, sales revenue, and indicating the break-even point. (8 marks) Page 9 of 14Continued overleaf

11 Q3 GMP Ltd is a fairly successful medium sized company that has been in existence for the last 10 years. The directors are keen to look over the annual financial statements in order to assess the company s current financial performance and position. The directors are also keen on benchmarking the accounts against the previous year s. The book-keeping procedures have been completed and the final Trial Balance information has been made available in order to prepare and analyse the accounts: (Extended)Trial balance summary from book-keeping records: GMP Ltd Trial Balance for year ended 31 st March 2013 DR CR Sales 482,000 Cost of sales 122,650 Selling & Distribution costs 68,600 Administration costs 89,200 Interest charges 6,300 Taxation (charge for year & liability) 20,340 10,150 Dividend 50,000 Equipment, land, buildings (cost) 856,000 Depreciation total 224,000 Closing Stock 46,100 Trade Debtors 27,900 Bank 163,520 Reserves (previous year profits) 362,400 Share Capital 250,000 Corporate loans 100,000 Creditors 22,060 1,450,610 1,450,610 Page 10 of 14 Continued overleaf

12 Required: a) Prepare the basic company financial statements for the year (Income Statement & Statement of financial position) in a format suitable for publication. (15 marks) b) Calculate the following five ratios for this year and explain whether the company has improved its financial position and performance by comparing to the previous year s results. The answer should include an explanation of what each ratio measures. Ratio Previous year 1. Return on Capital Employed 18% 2. Gross Profit % 64% 3. Debtor days 28 days 4. Creditor days 50 days 5. Gearing ratio 22% (10 marks) Q4 OutdoorPursuits is a charity dedicated to helping troubled teenagers in the west of Scotland. The charity organises weekend trips to the highlands, including confidence building outdoor activities. OutdoorPursuits is entirely dependent on public donations to finance its operations and uses campaigns and advertising to raise funds and public awareness. Based on last years figures the organisation expects 1,200 persons to take up the service this year so sets its original budget based on this figure. The business has also set an income target, based on charitable donations, at a level of 125,000. The board of decision makers have been asked by the various sponsors to present a performance report in which the budget data is compared with actual data for the year. The board set the original budget using the following forecast activity and costs; actual results are also shown for the year: Income data ORIGINAL ACTUAL BUDGET Charitable donations 125, ,000 Persons 1,200 1,400 Cost data Overnight accommodation per person 12 19,600 Free meals per person 8 8,400 Activity costs per person 25 39,200 Fixed administration costs 11,000 12,500 Fixed campaign & advertising cost 5,000 6,200 Page 11 of 14 Continued overleaf

13 Required: a) Prepare the original budget and update/flex this budget to the new activity level of 1,400 persons. Clearly show total budget surplus or deficit. (10 marks) b) Compare the flexible budget with actual results to calculate budget variances. (5 marks) c) Suggest some possible underlying reasons for the variances observed. (5 marks) d) Compare and contrast fixed, flexible and rolling approaches to budget preparation (5 marks) END OF EXAMINATION PAPER PLEASE TURN OVER Page 12 of 14 Continued overleaf

14 Accounting & Finance Formulae list Management accounting topics Semi-variable cost or Total cost = Fixed cost + Variable cost Total variable cost = number of units x cost per unit Simple fixed overhead allocation: Fixed cost per unit = Fixed cost / Total units Absorption costing: Absorption rate per hour = Total department overhead / Total machine or labour hours Sales variable costs = Contribution fixed costs = Profit Breakeven point = fixed costs / contribution per unit Margin of safety % = (current sales break even sales) / current sales Target profit = (number of units x contribution per unit) fixed costs Operating gearing factor = contribution / profit Sales cost of sales = Gross Profit expenses = Net Profit Sales variance = Actual sales revenue Budget sales revenue Cost variance = Budget cost Actual cost Cash cycle in days = debtor days + stock days creditor days Opening cash balance + Net cash flow = Closing cash balance Finance & Investment topics: WACC = (Cost of equity x Weight of equity) + (Cost of debt x Weight of debt) After tax cost of debt = Cost of debt x (1 corporation tax rate) FV = PV x (1 + r) power n years PV = FV / (1 + r) power n years ROCE = Average profit / Investment Payback = number years to recoup investment NPV = Sum of PV cash flows PI = NPV / Investment Page 13 of 14 Continued overleaf

15 Discount factors: Financial accounting topics Sole Trader accounts: Income Expenditure = Profit Fixed Assets + Current Assets = Owner capital + Long term liabilities + Current liabilities Basic Company accounts: Sales - cost of sales = Gross Profit - other costs = Operating profit - interest = Profit before Tax Fixed Assets + Current Assets = Shareholder capital + Long term liabilities + Current liabilities Ratios: ROCE = Operating profit / Total capital ROE = Profit after tax / Equity capital GP% = Gross profit / Sales OP% = Operating profit / Sales Asset turnover = Sales / Assets Gearing = Long term debt / Total capital Interest cover = Operating profit / Interest charges Dividend cover = Profit after tax / Dividend Current ratio = Current assets / Current liabilities Acid test ratio = Current assets - stock / Current liabilities Debtor days = Debtors x 365 / Credit sales Creditor days = Creditors x 365 / Cost of sales Stock days = Stock x 365 / Cost of sales Cash cycle days = debtor days + stock days - creditor days EPS = Profit after tax / No. of shares PER = Market price / EPS Dividend yield = Dividend per share / Market price per share Market to Book ratio = Market value / Balance Sheet Asset value Page 14 of 14