This paper is not to be removed from the Examination Halls UNIVERSITY OF LONDON

Transcription

1 ~~AC1025 ZB d0 This paper is not to be removed from the Examination Halls UNIVERSITY OF LONDON AC1025 ZB BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the Social Sciences, the Diplomas in Economics and Social Sciences and Access Route Principles of Accounting Tuesday, 14 May 2013 : 10.00am to 1.15pm Candidates should answer FOUR of the following SEVEN questions: QUESTION 1 of Section A, QUESTION 2 of Section B, ONE question from Section C and ONE further question from either Section B or C. All questions carry equal marks. Workings should be submitted for all questions requiring calculations. Any necessary assumptions introduced in answering a question are to be stated. Extracts from compound interest tables are given after the final question on this paper. 8-column accounting paper is provided at the end of this question paper. If used, it must be detached and fastened securely inside the answer book. A calculator may be used when answering questions on this paper and it must comply in all respects with the specification given with your Admission Notice. The make and type of machine must be clearly stated on the front cover of the answer book. PLEASE TURN OVER UL13/0002 Page 1 of 15

2 SECTION A Answer question 1 from this section. 1. (a) Companies often describe their employees as their greatest asset, but employees do not appear as an asset on the statement of financial position of almost all companies. Required: i. Define assets and explain the difference between current and non-current assets. (4 marks) ii. Briefly explain, using the definition in i., why employees do not usually appear as assets. (2 marks) (b) The following are amounts extracted from the balance sheet of Rudge Ltd as at 30 April Ordinary share capital 30,000 Non-current assets 110,000 Retained Earnings at 1 May ,400 Trade payables 20,000 The following ratios have been calculated from the financial statements of Rudge Ltd for the year ended 30 April Sales (all credit sales) to non-current assets 2:1 Gross profit percentage 5% Expenses percentage of sales 2% Long-term debt to equity 50% Receivables repayment period 1 month Inventory holding period 0.5 months Required: Prepare, as far as the above information allows, the Statement of Financial Position of Rudge Ltd as at 30 April Assume that the balancing figure in the Statement of Financial Position represents cash in hand. (8 marks) (c) Define the term Accounting Rate of Return and explain the advantages and disadvantages of it as a method of investment appraisal. (4 marks) Question continues on next page UL13/0002 Page 2 of 15

3 (d) Barkis Ltd operates a small hotel. The hotel has rooms for 30 guests over an operating season of 40 weeks. The budgets for the year ended 30 June 2014 have been prepared using the following data. Weekly income per guest 2,200 Variable weekly cost per guest 1,200 Fixed costs per annum 400,000 The company has in the past expected an average room occupancy over the season of 60% of total capacity. The directors are concerned that the global recession will reduce the demand for holidays and are considering a price reduction. Required: i. Calculate the budgeted total contribution and net profit for the year to 30 June 2014 if past occupancy rates are maintained. (3 marks) ii. iii. Calculate the break-even point in guest weeks and margin of safety based on i. expressed in percentage terms. (2 marks) Calculate the occupancy level needed to maintain the net profit calculated in i. if the weekly income per guest was reduced to 2,000. (2 marks) UL13/0002 Page 3 of 15

4 SECTION B Answer question 2 and not more than one further question from this section. 2. The following is the trial balance of Pickwick Ltd at 30 September 2012: Authorised, allotted and called-up share capital: 100,000 equity shares of 1 each 100,000 50,000 7% redeemable preference shares of 50p each 25,000 Property cost (buildings cost 160,000) 200,000 Property accumulated depreciation 60,000 Goodwill 20,000 Plant and machinery (cost 80,000) 80,000 Plant and machinery accumulated depreciation 13,100 Loose tools (cost 13,000), at valuation 9,100 Inventories, as at 1 October ,400 Trade receivables 11,200 Trade payables 8,300 Bank 6,050 Sales 135,250 Purchases 49,700 Directors salaries 22,000 Insurances 4,650 Light and heat 3,830 Wages 6,600 Interest on debentures 1,200 Preliminary Expenses 1,270 10% debentures 24,000 Provision for doubtful debts 910 Share premium 35,000 Retained earnings 2,580 General reserve 20,060 Interim dividend on equity shares 3,250 Bad debts written off 700 Investments: non-current 8,000 Investment income , ,900 Question continues on next page UL13/0002 Page 4 of 15

5 Additional information: 1. Inventories at 30 September 2012 are valued at 13, Insurances include a payment of 2,300 for the six months from 1 July The directors wish to provide for the audit fee of 1, The amounts shown in the trial balance for property, plant and machinery and loose tools are balances as at 1 October Depreciation on the buildings is straight-line over 40 years and on plant and machinery is 15% per annum using the straight-line method. The loose tools were valued at 7,800 on 30 September Goodwill did not suffer any diminution in value. 5. The provision for doubtful debts is to be adjusted to 10% of the trade receivables at the end of the year. 6. The preference share dividends are outstanding at the end of the year and the last half year s interest on the debentures has not been paid. 7. The tax on this year s profits is estimated at 6, The directors propose to declare a final dividend on the equity shares of 13 pence per share. 9. The Directors wish to write off preliminary expenses against general reserve and to transfer 2,500 from retained earnings to general reserves. Required: Prepare Pickwick Ltd s: (a) Income statement for the year ended 31 December (12 marks) (b) Statement of changes in equity for the year ended 31 December (4 marks) (c) Statement of financial position as at 31 December (9 marks) UL13/0002 Page 5 of 15

6 3. Copperfield Ltd operates a small chain of retail shops which sell high quality teas and coffees. Its business has expanded rapidly over the last two years. Approximately half of sales are on credit. Abbreviated and unaudited accounts are given below. Copperfield Ltd Income Statements for the years ended 31 March Sales 12,080 7,800 Cost of sales 6,282 4,370 Gross profit 5,798 3,430 Labour costs 2,658 2,106 Depreciation Other operating costs 1, ,286 2,648 Profit from operations 1, Interest 66 - Profit before tax 1, Tax Profit for year 1, Dividends paid were 2013: 300,000 (2012: 250,000). Question continues on next page UL13/0002 Page 6 of 15

7 Copperfield Ltd Statements of financial position at 31 March ASSETS Non-current assets (see note) 2,728 1,536 Current assets Inventories 1, Receivables Bank and cash ,605 1,725 Total assets 5,333 3,261 EQUITY & LIABILITIES Equity Ordinary share capital (50p shares) Share premium Retained earnings 1, ,759 1,872 Non-current liabilities Secured loan Current liabilities Trade payables 1, Other payables Tax Bank overdraft 180-2,274 1,389 Total equity and liabilities 5,333 3,261 Note: Schedule of non-current assets Short Fixtures Motor Total leasehold & fittings vehicles Cost At 1 April ,198 1, ,913 Disposals - - (210) (210) Additions ,847 At 31 March ,145 1, ,550 Depreciation At 1 April ,377 Disposals (180) (180) Charge for year At 31 March ,822 Net book value At 31 March ,269 1, ,728 Question continues on next page UL13/0002 Page 7 of 15

8 Required: You are a shareholder in Copperfield Ltd with a 5% holding. You have been informed that the Company will announce a rights issue in the near future. (a) Calculate and comment on four key changes in the Income Statements between 2012 and (5 marks) (b) Calculate the following ratios for 2013 and 2012: i. Return on capital employed. ii. Asset turnover. iii. Operating profit margin percentage. iv. Gross profit percentage. v. Current ratio. vi. Quick assets ratio vii. Inventory turnover. viii. Receivables collection period. ix. Payables payment period. (9 marks) (c) Comment on what your calculations in (a) and (b) indicate about the financial performance and position of Copperfield Ltd. (11 marks) UL13/0002 Page 8 of 15

9 4. Magwitch Limited is a family owned company. Mrs Pip is a minority shareholder and has recently received the financial statements, shown below, for the year ended 30 April 2013 together with the 2012 comparative figures. She is very confused as the company has made a profit for 2013 but has a large overdraft at the end of the financial year. She is also worried about the Company s financial management. Statement of Financial Position at 30 April Non-current assets Cost Accumulated depreciation Current assets Inventory Receivables Bank ,190 1, , ,500 2,680-4,180 1,450 Total assets 5,475 2,260 Current liabilities Bank overdraft Payables Taxation ,810-1, ,190 1,000 Non-current liabilities Long-term loan Total liabilities 3,250 1,260 Equity Share capital Share premium Retained Earnings , ,225 1,000 Total equity and liabilities 5,475 2,260 Question continues on next page UL13/0002 Page 9 of 15

10 Income Statement for the year ended 30 April Sales 21,000 Opening inventory 500 Purchases 16,400 16,900 Closing inventory 1,500 Cost of sales 15,400 Gross profit 5,600 Expenses 3,370 Profit from operations 2,230 Interest 200 Profit before tax 2,030 Corporation tax 520 Profit for the year 1,510 Statement of changes in Equity for the year ended 30 April 2013 Ordinary Share Retained Total Share Capital Premium earnings Balance at 1/7/ ,000 Issue of share capital Profit for year 1,510 1,510 Dividends paid (500) (500) Balance at 30/6/ ,610 2,225 The following information is available: 1. The additions to non-current assets were purchased for cash of 930,000. Non-Current assets which had originally cost 50,000 were sold for 20,000; the loss on disposal of these assets of 8,000 is included in expenses on the Income Statement. 2. Payables consist of Trade 1, Accrued interest , There was an issue of shares for cash during the year ended 30 April Required: (a) Prepare a Statement of Cash Flows for the year ended 30 April 2013 for Magwitch plc. (17 marks) (b) Prepare an for Mrs Magwitch which, based on the Statement of Cash Flows for 2013, evaluates the Company s financial management. (8 marks) UL13/0002 Page 10 of 15

11 SECTION C Answer one question and no more than one further question from this section. 5. Esther Summerson, Managing Director of Carstone Engineering, was pleased with the summary income statement for Sales targets had been exceeded and the company earned more profit than was planned. This information needed to be presented to the Board. Esther instructed Harold Skimpole, her accounting assistant, to prepare a short report for the Board Meeting the follow week summarising the key factors that accounted for the overall profit variance of 252,000. Harold prepared the following data: Carstone Engineering 2012 Operating Results Manufacturing Costs Budget Actual Sales 10,800 11,466 Manufacturing Costs 4,500 5,014 Contribution 6,300 6,452 Fixed Overheads 3,800 3,700 Profit 2,500 2,752 Budget Actual Material A 180, , , , Material B 180, , Labour 180, , , , Variable overhead 4 per direct labour hour ,500 5,014 Units sold 180, ,000 Required: (a) Prepare an operating statement which shows all appropriate variances and reconciles the budgeted and actual profit for the year. (17 marks) (b) Outline one possible explanation for each of the material and labour variances. (8 marks) UL13/0002 Page 11 of 15

12 6. Scrooge Ltd owns a small chain of shops. At the beginning of June the business had an overdraft of 35,000 and the bank had asked for this to be eliminated by the end of November. As a result, the directors have recently decided to review their plans for the next six months. The following plans were prepared for the business some months earlier: May June July Aug Sept Oct Nov Sales revenue Purchases Administration expenses Selling expenses Taxation payment Finance payments Shop fittings purchased Notes: 1. The inventories level at 1 June was 112,000. Suppliers allow one month s credit. 2. The gross profit margin is 40 per cent. 3. All sales proceeds are received in the month of sale. However 50 per cent of customers pay with a credit card. The charge made by the credit card business to Scrooge Ltd is 3 per cent of the sales revenue value. These charges are in addition to the selling expenses identified above. The credit card business pays Scrooge Ltd in the month of sales. 4. The business has a bank loan, which it is paying off in monthly instalments of 5,000. The interest element represents 20 per cent of each instalment. 5. Administration expenses are paid when incurred. This item includes a charge of 15,000 each month in respect of depreciation. The taxation payment relates to the previous six months. 6. Selling expenses are payable in the following month. Required (working to the nearest 1,000): (a) (b) Prepare an inventories budget for the six months to 30 November based on the plans above. (4 marks) Prepare a cash budget for the six months ending 30 November, showing the cash balances at the end of each month, based on the plans above. (9 marks) (c) Prepare a budgeted income statement for the whole of the six-month period ending 30 November. (A monthly breakdown of profit is not required.) (7 marks) (d) What problems is Scrooge Ltd likely to face in the next six months? Suggest how the business might deal with these problems. (5 marks) UL13/0002 Page 12 of 15

13 7. The accountant of your business has recently been taken ill through overwork. In his absence his assistant has prepared some calculations of the profitability of a project, which are to be discussed at the board meeting of your business. His workings, which are set out below, include some errors of principle. You can assume that the statement below includes no arithmetical errors. Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Sales revenue Less Costs Materials Labour Overheads Depreciation Working capital Interest on working capital Write-off on development costs Total costs Operating profit/(loss) (180) Return on investment Total profit (loss) ( 28,000) Cost of equipment = 600,000 = (4.7%) You ascertain the following additional information: 1. The materials figure is made up as follows: % of total cost Material P 20 Material Q 80 All of material P is currently in stock and has no alternative use. It could have all been sold at the start of Year 1 for 50,000. Material Q all needed to be purchased. 2. The labour cost includes an allocated proportion of a supervisor s wages amounting to 8,000 per annum. 3. The additional working capital will no longer be required at the conclusion of the project. The interest on working capital is a notional charge. 4. The cost of equipment in the assistant s calculation of return on investment includes 100,000, being the carrying amount of an old machine. If it were not used for this project, it would be scrapped with a zero net realisable value. New equipment costing 500,000 will need to be purchased on 31 December Year 0. The development costs of 90,000 have already been spent. 5. Overheads have been costed at 50 per cent of direct labour, which is the business s normal practice. An independent assessment has suggested that incremental overheads are likely to amount to 30,000 a year. 6. The business s cost of capital is 12 per cent. You should assume that all cash flows occur at the end of the year to which they relate unless otherwise stated in the above information. Question continues on next page UL13/0002 Page 13 of 15

14 Required: (a) (b) Prepare a corrected statement of the incremental cash flows arising from the project. Where you have altered the assistant s figures you should attach a brief note explaining your alterations. (12 marks) Calculate: i. The project s payback period. ii. The project s net present value as at 31 December Year 0. (6 marks) (c) Write a memo to the board advising on the acceptance or rejection of the project, you should briefly explain why the assistant s calculation of Return on Investment is not the best basis for the decision. (7 marks) N.B. All figures to be rounded to nearest 000. UL13/0002 Page 14 of 15

15 Extracts from compound interest tables (1) Present value of 1 P %: Period %: Period (2) Annuity of 1 %: Period %: Period END OF PAPER UL13/0002 Page 15 of 15