~~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 Friday, 8 May 2015 : 10:00 to 13:15 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 UL15/0172 Page 1 of 16
SECTION A Answer question 1 from this section. 1. (a) Jacob had 100 litres of apple juice in inventory on 1 October 2014, purchased at 2 per litre. During the month of 31 October 2014 the following changes occurred in the inventory position: Quantity Cost per litre Purchases Date 7 October 14 October 21 October 28 October Litres 200 300 50 100 2.50 3.00 4.00 3.50 Sold Required: 4 October 11 October 18 October 25 October 80 70 250 200 i. Calculate the value of the closing inventory of apple juice at 31 October 2014 using each of the following three methods: First in first out (FIFO) Last in first out (LIFO) Weighted average (calculated at the time of each transaction) (5 marks) ii. Briefly describe the relative impact on profit in each of the above situations. (1 mark) (b) Distinction is often made between financial and management accounting. Explain the differences between these two types of accounting. (5 marks) Question continues on next page. UL15/0172 Page 2 of 16
(c) Cotswold Ltd specialises in producing walking poles for use in outdoor activities. The company has two production departments, Machining and Assembly, and two service departments, Administration and Maintenance. The components for the poles are manufactured in the Machining department, and then put together in the Assembly department where they are packed ready for shipping. The overhead costs for the year ended 31 May 2015 were collected as below: Cost Centre Assembly Machining Maintenance Administration Cost of machinery 40,000 30,000 22,000 48,000 Additional information: During the year ended 31 May 2015, total direct labour hours used in the Assembly department were 4,800 hours. The Machining department used 6,000 machine hours. Workers are paid a rate of 15.00 per labour hour. Required: The number of employees in each department was as follows: Assembly 30 Machining 12 Administration 15 Maintenance 6 Total employees 63 The cost of the machinery in the two production departments is as follows: Cost Centre Assembly Machining Allocated overhead costs 70,000 50,000 (1) The Administration department provides services to all other three departments in the company. (2) The Maintenance department serves both production departments. (3) The costs in the service departments should be reapportioned to the production departments on the following bases. Administration department - Number of employees Maintenance department - Cost of machinery (4) Overheads are absorbed using an hourly rate for each production department. (5) Cotswold Ltd has received an order from one of its regular customers who requires 20 special walking poles. Each pole will require 2.5 direct labour hours in the Assembly department and 1.5 hours of machine time from the Machining department. The direct material costs are 42.00 per pole. Calculate the total cost of providing 20 special walking poles for the regular customer. (8 marks) UL15/0172 Page 3 of 16
(d) The following data are available for Texel Ltd for April 2015: Budget Actual Output 6,000 5,500 Sales 120,000 104,500 Materials (54,000) (18,000 kgs) (48,125) (13,750kg) Labour (30,000) (3,000 hrs) (24,750) (2,800 hrs) Fixed overheads (10,500) (12,000) Operating profit 25,500 19,625 Required: Texel Ltd holds no inventories. Give the formula for and compute for Texel Ltd for April 2015 each of the following variances: i. Sales price variance (2 marks) ii. Materials price variance (2 marks) iii. Labour efficiency variance (2 marks) UL15/0172 Page 4 of 16
SECTION B Answer question 2 and not more than one further question from this section. 2. The following is the trial balance of Dorper plc at 31 January 2015: Equity share capital (50p shares) 200,000 5% Redeemable preference share capital ( 1 shares) 125,000 Share Premium 40,340 Retained earnings at 1 February 2014 128,553 Plant and equipment,at cost 491,135 Plant and equipment accumulated depreciation at 1 February 216,875 2014 Motor vehicles,at cost 323,870 Motor vehicles accumulated depreciation at 1 February 2014 92,365 Trade receivables 288,740 Trade payables 286,620 Bank 8,082 Cash 800 Sales 2,479,405 Purchases 1,399,168 Inventories at 1 February 2014 88,805 Rent 112,855 Electricity 49,587 Telephone 8,133 Bad debt expense 6,637 Provision for doubtful debts at 1 February 2014 4,308 Wages and salaries 415,906 Directors remuneration 172,074 Administration expenses 198,638 Final equity dividend paid for year ended 31 January 2014 18,000 Interim equity dividend paid for year ended 31 January 2015 7,200 3,581,548 3,581,548 UL15/0172 Page 5 of 16
The following additional information needs to be dealt with before the financial statements are finalised: (1) Closing inventories are valued at 94,133. (2) Salesmen s commission and bonuses for the year ended 31 January 2015 have been calculated at 5,580 but not yet accounted for. (3) The company pays rent quarterly in advance on 1 st January, April, July and October. The rent paid on the 1 October for the period to 31 March 2015 was 18,750. (4) The company s depreciation policies are as follows: Plant and machinery Straight-line method over 5 years Motor vehicles Reducing balance method at a rate of 40%. The residual value of all non-current assets is estimated as zero. (5) The company has identified further trade receivables of 2,267 as irrecoverable. A specific provision for doubtful debts of 3,406 is required at 31 January 2015 with a general provision of 2% being required against the remainder of the debts. (6) No dividend has been paid on the preference shares for the year ended 31 January 2015. These shares are to be treated as a liability and not as equity. (7) The company has estimated it will be able to claim back corporation tax of 15,000 from the government for the year. (8) The final equity dividend proposed for the year ended 31 January 2015 is 2p per share. Required: Prepare the following financial statements for Dorper plc: (a) Income statement for the year ended 31 January 2015. (12 marks) (b) Statement of financial position at 31 January 2015. (13 marks) UL15/0172 Page 6 of 16
3. Extracts from the statements of financial position of Merino plc at 31 March 2015 and 31 March 2014 are as follows: 2015 2014 000 000 Non-current assets Land and buildings: cost accumulated depreciation Fixtures and fittings: cost accumulated depreciation Current assets Inventories Accounts receivable Prepayments Bank Cash 5,800 4,500 (1,345) (1,250) 2,840 2,670 (1,920) (1,430) 5,375 4,490 1,110 1,850 245 740 _60 1,480 1,670 230 - _50 4,005 3,430 Total Assets 9,380 7,920 Current liabilities Bank overdraft Accounts payable Accruals Interest payable Taxation - 890 1,540 1,290 390 465 30 25 60 75 2,020 2,745 Non-current liabilities 8% debentures 4,500 3,750 Equity 2,860 1,425 Total equity and liabilities 9,380 7,920 Additional information: (1) During the year ended 31 March 2015 fixtures and fittings which had cost 350,000 and which had a net book value of 65,000 at the date of disposal were sold for 80,000. There were no disposals of land and buildings. (2) The company issued further 8% debentures on 1 September 2014 and a cash share issue of 1 million Ordinary 1 shares at a total issue price of 1,305,000. (3) The income tax expense in the company s income statement for the year ended 31 March 2015 was 125,000. (4) Profit after interest before tax for the year ended 31 March 2015 was 555,000. A dividend of 300,000 was paid on 14 January 2015. UL15/0172 Page 7 of 16
Required: (a) Explain why a statement of cash flows is useful to users in addition to the other principal financial statements. (5 marks) (b) Prepare the Statement of cash flows for Merino plc for the year ended 31 March 2015 using only the data shown above. (20 marks) UL15/0172 Page 8 of 16
4. The following are extracts from the financial statements of Cheviot plc: Extracts from the income statements to 30 April 2015 2014 000 000 Sales 11,200 9,750 Cost of sales 8,460 6,825 Net profit before tax 465 320 This is after charging: Depreciation Debenture interest Interest on bank overdraft 360 80 15 280 60 9 Statements of Financial Position at 30 April 2015 2014 000 000 000 000 Assets Non-current assets 1,850 1,430 Current assets Inventory 640 490 Receivables 1,230 1,080 Cash 80 120 1,950 1,690 Total assets 3,800 3,120 Equity and liabilities Equity Ordinary share capital (Nominal value 50p per share) Reserves 800 1,245 2,045 1,675 Non-current liabilities 10% debentures 800 600 Current liabilities Bank overdraft Payables Taxation 110 750 _95 80 690 _75 955 845 Total equity and liabilities 3,800 3,120 800 875 UL15/0172 Page 9 of 16
The following ratios are those calculated for Cheviot plc, based on its published accounts for the previous year, and also the latest industry average ratios: Cheviot 30 April 2014 Industry average ROCE 16.70% 18.50% Net profit margin (before tax) 3.90% 4.73% Asset turnover 4.29 3.91 Current ratio 2.00 1.90 Quick assets ratio 1.42 1.27 Gross profit margin 30.00% 35.23% Accounts receivable collection period 40 days 52 days Accounts payable payment period 37 days 49 days Inventory turnover (times) 13.90 18.30 Gearing 26.37% 32.71% Required: (a) (b) (c) Calculate comparable ratios (to two decimal places where appropriate) for Cheviot for the year ended 30 April 2015. Ratios should be computed using closing balances. All calculations must be clearly shown. (10 marks) Write a report to your board of directors analysing the performance of Cheviot plc, comparing the results against the previous year and against the industry average. (11 marks) If the profit after tax of Cheviot plc for the year ended 30 April 2015 was 370,000 and the share price was 2.80, compute the Price Earnings number (PE) and evaluate this against the industry average PE of 9. (4 marks) UL15/0172 Page 10 of 16
SECTION C Answer one question and no more than one further question from this section. 5. Ronaldsay Ltd is involved in the supply and maintenance of farming equipment. One of its activities is the sale of output monitors. It offers a follow-up service to companies that wish to upgrade their monitors to give a wider range and speed of data output. The work needed to upgrade monitors is carried out at customers premises. The upgrade involves the same work for most monitors and therefore a standard price is used, as follows. Monitor upgrade standard price Components 150 Labour involved in travel to customers: ½ hr at 48 per hour 24 Labour: 2 hours at 48 per hour 96 Overhead: 200% of labour cost 240 Total cost 510 Profit mark-up at 20% on cost 102 Standard price 612 A customer has asked Ronaldsay to quote for a special upgrading for 100 monitors at its farms. Using the standard price gave a total quote of 61,200 which was rejected by the customer. The customer s response was that a price of 30,000 was what it had in mind. Ronaldsay is in the process of changing to a different monitor manufacturer. As this is probably the last major upgrade of the old manufacturer s monitors the sales director of Ronaldsay is keen to accept the order and recommends that a break-even price be calculated in order to provide information for further negotiation. UL15/0172 Page 11 of 16
The following information has been obtained: Required: (1) The standard upgrade requires three components (P,Q and R) with a total cost of 150. Component P has a standard cost of 44 and will not be used when the change of manufacturer occurs. There is no alternative use for this component and it has no realisable value. Ronaldsay has 200 of these in stock. Components Q and R will be compatible with the new manufacturer s monitor. The special nature of the upgrade required by the customer requires a further component, W, which will have to be ordered from the current manufacturer at 68 per upgrade. (2) The estimated total labour time travelling to the customer for the upgrade of all of the monitors is 10 hours. (3) The repetitive nature of the work means that the labour time for upgrading each monitor would be only 1½ hours. The operations manager has suggested that 25% of the work could be carried out by trainees who are charged at half the hourly rate of qualified engineers. (4) The type of monitor in question requires use of a special machine during upgrade. This will not be needed for the monitors from the new manufacturer. An offer to buy the machine for 1,600 has been received from another company; however requires immediate delivery or it will not buy the machine. (5) Overheads are all fixed. Prepare a brief report for the sales director of Ronaldsay Ltd which includes: (a) (b) A calculation of the break-even price for these special job and an explanation of the figures used. (19 marks) Comment on the factors which the sales director should consider when deciding on the price to quote for the special job. (6 marks) UL15/0172 Page 12 of 16
6. Suffolk plc specialises in the manufacture of radios and has just bought the rights to make and sell a solar powered radio, the SPR. A firm of management consultants has carried a feasibility study for the company at a cost of 100,000. The consultants have concluded that the company will have a market for the SPR for 5 years before it becomes technically obsolete. The management consultants have forecast the sales will be: Year 1 2 3 4 5 Sales (units) 8,000 12,000 10,000 6,000 5,000 The SPRs are expected to sell for 70 per unit and the variable cost per unit is expected to be 40. Relevant fixed costs per year (excluding depreciation, machine maintenance and marketing) are expected to be 20,000. If the project goes ahead, maintenance costs would be 32,000 per annum. Additional working capital s of 150,000 would be required at the beginning of the project; this is expected to be recovered at the end of the period. Annual marketing costs would be 60,000 per annum for each of the 5 years. All annual marketing occurs at the beginning of each year. To make the SPR, there will be two requirements for assembly machinery: i. Machinery for stage 1 of the production will be imported at a cost of 160,000. It is expected that at the end of 5 years, it will be sold for 40,000. ii. The company already has suitable machinery for the second stage of the production process. This machinery has a book value of 120,000 while its original cost was 380.000. If not used on this project, this machinery would be sold now for 100,000. If it is used on this project, this machinery will have to be adapted at a cost of 66,000. This adapted machinery would be sold at the end of the project for 70,000. The company s cost of capital is assumed to be 12% per annum. Required: (a) (b) Determine the Net Present Value and Payback Period for the decision to go ahead with the SPR project. (20 marks) Advise the management of Suffolk plc whether, on a purely financial basis, the company should make the SPR. You should explain your reasoning and state any assumptions that you make. (5 marks) UL15/0172 Page 13 of 16
7. Dorset plc is considering undertaking a new project. The project manager has produced a budgeted operating statement which shows that the project will be profitable but acknowledges that there will be significant up-front investment. The Chief Financial Officer is concerned about the level of funding needed for the project and considers that it is essential that a cash budget is prepared. Initial consideration is to be given to the first four months of the project from 1 January 2016. Budgeted Operating Statement to 30 th April 2016 Jan Feb March April 000 000 000 000 Sales, all on credit 120 130 84 132 Materials 40 42 28 46 Labour 34 34 26 36 Production costs 7 8 7 8 Administrative costs 8 8 8 8 Selling and distribution costs 8 97 9 101 6 75 10 108 Net profit 23 29 9 24 The following additional information is available: (1) There are no inventories of finished goods. (2) Cost of materials has been arrived at as follows: Jan Feb March April 000 000 000 000 Opening inventory 0 22 30 42 Purchases 62 50 40 50 Less closing inventory 22 30 42 46 Cost of raw materials 40 42 28 46 (3) The period of credit allowed by suppliers of materials is one month. (4) To encourage early payment of invoices, Dorset plc allows a cash discount of 10% if payment is made within the month of sale. It is estimated that 10% of the debtors of each month will pay in the month of sale and a further 50% of the debtors will pay in the following month. The remaining 40% are expected to pay their invoices in full, two months after the month of sale. Question continues on next page. UL15/0172 Page 14 of 16
(5) The overhead costs include the following items which have been allocated over the year to give an equal monthly charge but which are payable as follows: Costs Monthly charge Amount and date of payment Production 1,000 4,000 in January Administration 800 2,000 in January Selling and distribution 500 1,500 in March (6) Depreciation has been charged and included in production overhead at 1,500 per month. (7) The capital budget indicates that capital payments will be made as follows: January 180,000 March 20,000. (8) Unless stated otherwise all items can be treated on a cash basis. Required: (a) (b) Prepare a monthly cash budget for the four months to 30 April 2016 showing the accumulated cash surplus or deficit from the project at the end of each month to determine the finance required. (19 marks) Explain why the CFO s insistence on a cash budget is justified and explain why the information provided is important to management. (6 marks) END OF PAPER UL15/0172 Page 15 of 16
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 UL15/0172 Page 16 of 16