This paper is not to be removed from the Examination Halls UNIVERSITY OF LONDON AC1025 ZB (279 0025) 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 Monday, 14 May 2012 : 2.30pm to 5.45pm 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. University of London 2012 Page 1 of 14 PLEASE TURN OVER
SECTION A Answer question 1 from this section. 1. (a) Explain the objective of published financial statements and identify the two principal characteristics financial statements which contribute to achieving this objective. (6 marks) (b) The following data show the trading transactions of Othello Ltd for its first six months of trading. The company operates the weighted average assumption for calculation of cost of sales. Closing inventory and the cost of sales is calculated whenever a sale is made. (1) 2011 Purchases Sales July 40 units at 1,000 each August 80 units at 900 each September 50 units at 1,500 October 40 units at 1,100 each November 20 units at 700 each December 20 units at 1,200 each 90 units at 1,700 The December sale occurred before the purchase in that month. (2) The 20 units purchased in November incurred a transport charge of 2,500 to move them to the company premises. This amount is not included in the cost of 700 per unit. (3) The 20 units purchased in December had been made to order for a customer who has now gone into liquidation. Othello Ltd can only sell these for a price of 1,000 per unit after a modification costing 150 per unit. (4) Operating expenses for the six months amounted to 10% of sales revenue. Prepare the Income Statement for Othello Ltd for the six months to 31 st December 2011 from the above information. (6 marks) (c) Outline the main purposes and benefits of budgeting. (6 marks) Question continues on following page. Page 2 of 14
(d) Cordelia plc manufactures three spice mixes for catering firms: Mild, Spicy and Hot. The selling price and the variable costs per unit for each product are as follows: Mild Spicy Hot Selling price 30 40 60 Variable cost Spice A Spice B 10 10 Spice B is in short supply and this year Cordelia is only able to purchase 240,000 kilos at 5 per kilo. Spice A is plentiful. The marketing manager predicts that the maximum demand for each product for the year will be: 23 5 Units Mild 80,000 Spicy 16,000 Hot 30,000 The fixed costs for the year are estimated at 300,000. i. Calculate, using a contribution based approach, the mix of sales which would enable Cordelia to maximise profits and the resulting profit for the year. (6 marks) 25 15 ii. What technique could be used to determine the optimal mix if Spice A was also in short supply? (1 mark) Page 3 of 14
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SECTION B Answer question 2 from this section, and one further question from either Section B or C. 2. Macbeth plc prepares its financial statements for the year ended 31 March. The company has extracted the following trial balance at 31 March 2012: 000 000 6% Loan notes (redeemable 2016) 10,250 Trade payables 8,120 Trade receivables 9,930 Accumulated depreciation at 31 March 2011: Plant & Equipment Vehicles 6,460 1,670 Administrative expenses 16,141 Bank 456 Purchases returns 106 Distribution costs 9,060 Dividends paid 5,800 Dividends received 850 Equity shares, 20p each, fully paid 19,000 Interest paid on 6% loan notes 615 Inventories 4,852 Investments,non-current 15,000 Plant & equipment, at cost 27,315 Proceeds from issue of share capital 1,500 Provision for doubtful debts at 31 March 2011 600 Purchases 94,160 Retained earnings at 31 March 2011 14,677 Sales 124,900 Taxation 4 Vehicles, at cost 5,720 The following further information is available: (1) Non-current assets are to be depreciated as follows: Plant & equipment 20% per annum straight-line Vehicles 25% per annum reducing balance 188,593 188,593 (2) An invoice for telephone charges for the quarter ended 1 May 2012 for 15,000 was received by the company after the above trial balance was extracted. Telephone expenses are included in administrative expenses. (3) The company paid 156,000 insurance premiums for the year 1 November 2011 to 30 October 2012. This amount is included in administrative expenses. Page 5 of 14
(4) The closing inventory at 31 March 2012 was 5,180,000. (5) Subsequent to drawing up the trial balance, the company has been informed that a major customer owing 348,000 has gone into administration, and Macbeth plc will receive only 25% of the amount owing. Macbeth plc has also decided to change its provision for doubtful debts to 5% of the remainder of receivables balances. (6) Tax due for the year to 31 March 2012 is estimated at 30,000. The taxation balance in the trial balance relates to an overestimate of the tax charge in the year ended 31 March 2011. (7) On 1 October 2011, Macbeth plc issued 5,000,000 equity shares at 30p each. The proceeds were credited to the Proceeds from the issue of share capital account. (8) The final dividend for the year ended 31 March 2011 of 4p per share was paid in August 2011 and an interim dividend for the year ended 31 March 2012 of 2p per share was paid in November 2011. The final 2012 dividend is proposed at 5p per share. Macbeth plc shows dividends paid in the Statement of Changes in Equity and does not provide for final dividends. (a) Prepare Macbeth plc s ( 000s to one place of decimals): i. Income Statement for the year ended 31 March 2012. (10 marks) ii. Statement of Changes in Equity for the year ended 31 March 2012. (4 marks) iii. Statement of Financial Position at 31 March 2012. (8 marks) (b) Mrs MacDuff has owned 1,000 Ordinary Shares in Macbeth plc for a number of years. She has asked you to clarify the following in respect of the dividend income on her shares: What was the amount of dividends she should have received in the year ended 31 March 2012? If the share price is 200p what was the dividend yield for the year ended 31 March 2012? Prepare a note which answers her questions. (3 marks) Page 6 of 14
3. Falstaff plc s statements of financial position for the years ended 31 December 2011 and 2010 are shown below: Statements of financial position at 31 December Non-current assets Property Cost Accumulated depreciation Fixtures and fittings Cost Accumulated depreciation Current assets Inventory Accounts receivable 2011 2010 000 000 000 000 2,100 700 1,900 1,060 1,725 555 1,400 1,170 1,493 840 840 653 2,240 1,823 620 290 435 255 910 690 Total assets 3,150 2,513 Equity Ordinary share capital Share premium Accumulated profits 1,800 250 282 1,500-187 2,332 1,687 Non-current liabilities 8% debentures 450 360 Current liabilities Bank Accounts payable Taxation 70 248 50 222 176 68 368 466 Total equity and liabilities 3,150 2,513 Income Statement extract for the year ended 31 December 2011 000 Profit before tax 265 Tax 90 Profit for the year 175 Page 7 of 14
The following information is also relevant: (1) During 2011 the company sold fixtures and fittings, which had originally cost 250,000, for 30,000. At the date of sale these assets had accumulated depreciation of 204,000. (2) Further 8% debentures were issued on 1 October 2011. All interest due on the debentures had been paid up to 31 December 2011. (a) (b) Using three examples to illustrate your answer, discuss the difference between a statement of cash flows and an income statement. (7 marks) Calculate the following figures, and explain in which part of the statement of cash flows they would appear: i. Interest paid ii. Profit or loss on the disposal of non-current assets iii. Taxation paid iv. Payments to acquire non-current assets v. Change in accounts receivable vi. Dividends paid (18 marks) Page 8 of 14
4. Duncan plc operates a mobile phone network for personal and business customers. The latest annual report has just been released on the company s website. The annual report includes the following: Duncan plc Extract from the Financial Review for the year ended 31 December 2011. Highlights for the year: A review of operating and administrative systems resulted in investment in non-current assets with a significant reduction in staffing levels. Growth has been offset by competitive pricing due to strong competition. Average revenue per personal customer per month (2011= 10.56, 2010= 11.20) has been affected by increased regulatory pressures on the pricing of mobile phone tariffs. Customers registered during 2011 have increased by 7% (2010: 3%). 10 million has been spent in 2011 on new advertising and sports sponsorship to boost brand awareness. Duncan plc Income Statement for the year ended 31 December 2011 2011 2010 m m Revenue 2,695 2,610 Cost of sales (1,295) (1,495) Gross profit 1,400 1,115 Selling and distribution costs (190) (215) Administrative expenses (150) (145) Profit from operations 1,060 755 Finance costs (75) (80) Profit before taxation 985 675 Tax (395) (230) Profit for the year 590 445 Page 9 of 14
Duncan plc Statement of Financial Position at 31 December 2011 ASSETS Non-current assets Property, plant and equipment Intangibles Current assets Inventories Trade receivables Cash and cash equivalents 2011 2010 m m m m 2,500 1,530 4,615 5,390 7,115 6,920 15 460 620 95 450 190 1,095 735 Total assets 8,210 7,655 EQUITY & LIABILITIES Equity Issued capital 50p ordinary shares Share premium Other reserves Retained earnings 1,335 2,600 270 1,015 1,330 2,590 235 790 Equity 5,220 4,945 Non-current liabilities Borrowings 2,080 2,050 Current liabilities Trade payables Taxation and other liabilities 565 345 350 310 910 660 Total equity and liabilities 8,210 7,655 (a) Compute the following accounting ratios (to one place of decimals) for Duncan plc for 2010 and 2011. Return on Capital Employed Net profit margin Asset Turnover ratio Gross profit margin Current Ratio Quick Ratio Gearing (Debt to Capital Employed) Earnings per share PE Ratio (Assume relevant share prices for 2011 of 3.09 and for 2010 of 2.00) (12 marks) (b) Evaluate, using the ratios calculated above and the other information provided, the financial performance and financial position of Duncan plc. (13 marks) Page 10 of 14
SECTION C Answer one question from this section, and one further question from either Section B or C 5. Ophelia plc operates a chain of furniture stores and is considering its strategy on distribution and transport. The present position is that distribution is out-sourced to a transport company. The expected cost for the year ended 30 June 2013 is 250,000. This cost, it is projected, will rise by 10% per annum over the next five years. The Directors of Ophelia plc are considering an alternative strategy of acquiring a company owned and managed transport fleet. The initial cost of the transport fleet on 1 July 2012 would be 750,000 and it is estimated that the fleet would be sold at the end of year 2017 for 150,000. It is estimated that the following costs would be incurred over the next five years: Year ended Drivers Costs Repairs and Maintenance Other Costs 30 th June 2013 33,000 8,000 230,000 2014 35,000 13,000 235,000 2015 36,000 15,000 240,000 2016 38,000 16,000 236,000 2017 40,000 18,000 242,000 The figure for Other Costs includes depreciation on the fleet on the straight-line basis. The head office administration costs of Ophelia plc are expected to be 300,000 per annum and the running of the fleet would take up approximately 10% of the administrative time. However, the finance director believes that there is sufficient spare capacity in the head office to carry out the additional work. You can assume that the fleet will be paid for at the beginning of the project and all income and expenditure would be incurred at the end of each relevant year. The project manager for the new fleet also believes that the vehicles will not be fully utilised on company business and she estimates that the spare capacity could be used for sub-contract work which would generate 50,000 per annum. To raise funds for the project the company proposes to raise a loan at 12% interest rate per annum. You are told that there is an alternative project that could be invested in using the fund raised. The projected results of the alternative project are: Payback = 3 years Net Present Value = 140,000 As funds are limited, investment can only be made in one project. (a) (b) (c) (d) Prepare a table showing the incremental cash flows to Ophelia plc for each year over the life of the transport fleet. (10 marks) Calculate the following for the transport fleet project: i. Payback period ii. Net Present Value (6 marks) State and explain your recommendations to Ophelia plc in respect of the Transport fleet project. (5 marks) Explain the term Internal Rate of Return and why it would not be appropriate to use it as a decision model in the above example. (4 marks) Page 11 of 14
6. Portia Ltd is a specialist manufacturer of components for luxury yachts. A contract has been offered to Portia by Nerrisa Supermarine plc for the supply over the next twelve months of 400 identical components, ZK44. The data relating to the production of each component ZK44 is as follows: (1) Material requirements: 3 kg material M1 see note (i) below. 2 kg material P2 see note (ii) below 1 part No. 678 see note (iii) below. Note (i) Material M1 is in continuous use by the company. 1,000 kg are currently held in stock at a book value of 4.70 per kg but it is known that future purchases will cost 5.50 per kg. Note (ii) 1,200 kg of material P2 are held in stock. The original cost of this material was 4.30 per kg but, as the material has not been required for the last two years, it has been written down to 1.50 per kg scrap value. The only foreseeable alternative use is as a substitute for material P4 (in current use) but this would involve further processing costs of 1.60 per kg. The current cost of material P4 is 3.60 per kg. Note (iii) It is estimated that Part No. 678 could be bought for 50 each. (2) Labour requirements: Each component would require five hours of skilled labour and five hours of semi-skilled. An employee possessing the necessary skills is available and is currently paid 5 per hour. A replacement would, however, have to be obtained at a rate of 4 per hour for the work which would otherwise be done by the skilled employee. The current rate for semi-skilled work is 3 per hour and an additional employee could be appointed for this work. (3) Overhead: Portia Ltd absorbs overhead by a machine hour rate, currently 20 per hour of which 7 is for variable overhead and 13 for fixed overhead. If this contract is undertaken it is estimated that fixed costs will increase for the duration of the contract by 3,200. Spare machine capacity is available and each component would require four machine hours. Nerrisa Supermarine plc, one of a small number of companies who manufacture luxury yachts, has offered a price of 145 per component ZK44. The global recession has particularly affected the luxury yacht market. (a) (b) State whether or not the contract should be accepted and support your conclusion with appropriate figures for presentation to management. Your analysis should explain in full the figures you have used. (16 marks) Comment briefly on three factors which management should consider before making a final decision on the contract. (9 marks) Page 12 of 14
7. Cymbeline Ltd manufactures a single product. The company has two production departments, 1 and 2, and a service department. The following are the variable costs per product unit for April: Direct materials 7.00 Direct labour 5.50 Manufacturing overhead 2.00 The selling price of the product is 36.00 per unit. Fixed manufacturing costs are budgeted to be 1,340,000 for April. Fixed selling costs are budgeted to be 875,000. Fixed manufacturing costs can be analysed between the departments as follows: Production 1 380,000 Production 2 465,000 Service Department 265,000 In addition there are budgeted general factory fixed costs of 230,000, these represent space costs, for example, lighting and heating. Space utilization is as follows: Production department 1 40% Production department 2 50% Service department 10% In allocating the service department costs it is assumed that 60% of service department costs are labour related and the remaining 40% machine related. Normal production department activity is: Direct labour hours Machine hours Production units Department 1 80,000 2,400 120,000 Department 2 100,000 2,400 120,000 Fixed manufacturing overheads are absorbed at a predetermined rate per unit of production for each production department, based upon normal activity. Costs for the period were as per budget, except for additional expenditure of 20,000 on fixed manufacturing overhead in Production Department 1. Production and sales were 116,000 and 114,000 units respectively for the period. (a) (b) Calculate the budgeted fixed overhead absorption rate per unit and the budgeted total manufacturing cost per unit for April. (8 marks) Prepare a profit statement for April using the full absorption costing system described above and showing each element of cost separately. (10 marks) (c) Prepare a profit statement for April using marginal costing principles. (7 marks) Page 13 of 14
Present value of 1 P R% 1 2 3 4 5 6 7 8 9 10 Period 1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826 3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751 4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683 5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 "% 11 12 13 14 15 16 17 18 19 20 Period 1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 Annuity of 1 % 1 2 3 4 5 6 7 8 9 10 Period 1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791 % 11 12 13 14 15 16 17 18 19 20 Period 1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528 3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106 4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589 5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991 END OF PAPER Page 14 of 14