THIS PAPER IS NOT TO BE REMOVED FROM THE EXAMINATION HALLS University of London BSc Examination 2015 BA1020 Business Administration Accounting for Management Date: Wednesday 6 th May 2015 Time: 10.00 13.00 Time allowed: THREE hours DO NOT TURN OVER UNTIL TOLD TO BEGIN You are expected to answer FOUR questions in total You must answer one question from section A You must answer one question from section B You must then answer two further questions from either section A or B Please start each answer to each question on a separate page Electronic calculators may be used. These should be of a hand-held non-programmable (where relevant) type and the name and model should be stated CLEARLY on the front of your answer book. PLEASE TURN OVER University of London 2015 UL15/ Page 1 of 11
SECTION A Answer at least One Question from Section A QUESTION 1 Below is the trial balance of Pammee Distribution Ltd, year ending 31 st May 2015 : Dr Cr Sales 592 000 Purchases 233 000 Stock (01/06/14) 133 000 Salaries 37 000 Administration expenses 24 500 Selling and distribution expenses 11 200 Return Outwards 3 000 Return Inwards 2 000 Bad Debts 3 500 Miscellaneous expenses 2 500 Rent and rates 27 500 Bank 12 300 Discounts Allowed 2 000 Discounts Received 3 000 Provision for Doubtful Debtors 7 000 Debenture Interest 3 500 Interim Dividend 5 000 10 % Debenture 80 000 Investment Income 18 000 Non-current Assets at costs: Motor Vehicles 75 000 Fixtures and Fittings 20 000 Freehold land 250 000 Provision for Depreciation (01/06/14): Motor Vehicles 25 000 Fixtures and Fittings 3 000 Creditors 142 000 Debtors 135 000 Retained profits (31/05/14) 25 000 Capital 79 000 977 000 977 000 Page 2 of 11
Additional Notes : i) Stock (31/05/15) 129 000 ii) Administration expenses prepaid 2 800 iii) Selling and distribution expenses owing 2 600 iv) Provision for doubtful debtors to be 7 % of outstanding debtors (at 31/05/15) v) Depreciation : Motor Vehicles, Reducing Balance Method 25 % Fixtures and Fittings, Straight Line Method 15 % vi) Investment income due 2 000 vii) Auditors fees owing 2 000 viii) ix) Tax on profit after interest 15 000 to be paid in arrears Nominal value per share is 0.50 and the directors of the company have declared a final dividend of 0.06 per share Required : a) Prepare the following statements for the above company : i) Income Statement for the year ending 31 st May 2015 (formerly known as the profit and loss account) (11 marks) ii) Position Statement as at 31 st May 2015 (formerly known as the balance sheet) (11 marks) b) Define and illustrate three (3) accounting concepts that you have used in the preparation of the financial statements for the above company. (3 marks) Page 3 of 11 PLEASE TURN OVER
QUESTION 2 Below are the position statements of Morris s business, year ending 31 st of May : 2014 2015 Non-Current : Cost Cum. NBV Non-Current :Cost Cum. NBV Assets Dep. Assets Dep. Fixtures & Fittings 27 000 5 400 21 600 Fixtures & 45 000 14 400 30600 Fittings Current Assets : Current Assets : Stock 49 500 Stock 81 000 Debtors 6 750 Debtors 13 950 Bank 7 650 63 900 Bank 0 94 950 Current Liabilities : Current Liabilities : Creditors 22 500 Creditors 24 750 Bank 0 22 500 Bank 19 800 44 550 Net Current Assets 41 400 Net Current Assets 50 400 63 000 81 000 less long term loans 0 less long term loans 0 Net Assets 63 000 81 000 Financed By : Financed By : Capital 45 000 Capital 63 000 Net Profit 78 750 Net Profit 99 000 123 750 162 000 less Drawings 60 750 Drawings 81 000 63 000 81 000 QUESTION CONTINUES ON NEXT PAGE Page 4 of 11
Additional Note : i) Interest paid during the year 2 050 Required : a) i) Given the position statements of the business, prepare a statement of cash flows (IAS 7) for year ending 31 st May 2015. Use the indirect approach when deriving net cash flow from operating activities. (13 marks) ii) Comment on why Morris started the year with money in the bank account, however by the end of the year the balance is overdrawn. (4 marks) b) There are two (2) methods or approaches of deriving net cash flow from operating activities, namely the indirect approach and the direct approach. Explain as fully as possible the difference between the two (2) approaches (methods). (4 marks) c) Morris had a profitable year, yet ended up being overdrawn (short of cash in the bank). This implies that because a company may make high profits does not necessarily imply that they will have lots of money in the bank and vice versa. Just because a company is making large losses does not necessarily imply that the company has no cash in the bank Using the statement above, discuss briefly the difference between profit and cash. (4 marks) PLEASE TURN OVER Page 5 of 11
QUESTION 3 Below are the summarised accounts for Jojo s Pizza s plc, year ending 31 st May 2014 and 2015 : 2014 2015 Income Statement Sales 200 000 200 000 Less Cost of Sales 100 000 110 000 Gross Profit 100 000 90 000 Less Expenses 45 000 46 000 Net Profit 55 000 44 000 Less Debenture Interest 5 000 5 000 Net Profit after Interest 50 000 39 000 Less Taxation 10 000 10 000 Net profit after Taxation 40 000 29 000 Less Dividends 20 000 20 000 Retained Profits 20 000 9 000 Position Statement 2014 2015 Non-Current Assets 50 000 75 000 Stock 10 000 12 000 Debtors 8 000 10 000 Bank 1 000 0 Creditors 9 000 9 000 Bank Overdraft 0 2 000 Share Capital and Reserves 40 000 56 000 Less Long Term Loans 20 000 30 000 Additional Notes : All sales are on a credit basis. The stock figures given above are the average stock figures for the year in question. QUESTION CONTUINUES ON NEXT PAGE Page 6 of 11
Required : a) Calculate the following set of accounting ratios for the company for both years : i) Gross profit margin ratio ii) Gross profit mark up iii) Net profit margin ratio iv) Return on capital employed v) Current ratio vi) Acid test vii) Stock turnover viii) Debtors collection period ix) Creditors payment period x) Gearing ratio (1 mark of each set of ratios, total 10 marks) b) Comprehensively comment on the financial performance of the company over the last two years using the ratios you have generated in part 1) and also using the extracts from the financial statements given. (10 marks) c) Briefly discuss the disadvantages of the use of accounting ratios as a means of analysis and interpretation of accounting data. (5 marks) END OF SECTION A Page 7 of 11 PLEASE TURN OVER
SECTION B Answer at least One Question from Section B QUESTION 4 Lambasca Limited are manufacturers of radiators and the following information has become available for the forth coming financial year: Expected demand (units) 20 000 Average selling price per unit 40 Unit Costs : Direct material costs 10 Direct labour costs 6 Variable overheads 4 Fixed overheads 200 000 The company is interested to see how certain changes to the above figures will have an impact on the profits of the firm. The following options are available to the company : 1) Increase selling price by 10 %, expected demand is likely to fall by 10 %. All other variables will remain the same. 2) Decrease selling price by 10 %, expected demand is likely to increase by 20 %. All other variables will remain the same. 3) Improve the quality of the material used by 5 per unit and promote the added feature by way of an advertising campaign costing 100 000, demand is expected to rise by 15 %. All other variables will remain the same. QUESTION CONTUINUES ON NEXT PAGE Page 8 of 11
Required : Given the original data : a) Calculate the following : i) Calculate the break even point (units). (1 mark) ii) Given the expected demand what profit or loss would the company make? (1 mark) iii) Calculate margin of safety (%), given the expected demand. (1 mark) Given the 3 new options available to the firm, for each option : b) Calculate the following : i) Break even point. (3 marks) ii) New profit / loss generated by changes in level of expected output. (6 marks) iii) Margin of safety (%), given the expected output. (3 marks) c) Given the original data and the three new options, which proposal should the company adopt and why? (2 marks) d) There are a number of reservations (limitations) about break even analysis. Explain as fully as possible the limitations behind the use of break even. (8 marks) PLEASE TURN OVER Page 9 of 11
QUESTION 5 The following data relates to SJ Limited, a manufacturer of a range of kitchen component products : A B C D E Selling Price 75 86 75 58 64 / unit Direct Materials 16 12 12 16 16 / unit Direct labour 12 18 12 18 12 / unit Fixed Overheads 20 15 15 20 20 / unit Estimated Demand 100 150 120 180 160 (units) All labour is charged at the same rate of 6 / hour and the cost of each kilogram of material is 4 per kilogram. Required : a) Based on the above information what is the ideal product mix and total contribution given : i) labour is limited to 1 000 labour hours (9 marks) ii) material is limited to 1 590 kilograms (9 marks) b) What other non-financial (qualitative) factors should the company consider before coming to a final decision. (7 marks) Page 10 of 11
QUESTION 6 Dominic Furnishings Plc are investigating two possible frame making machines, the model numbers of each machine being Z20 and Z21. The data regarding the two machines are as follows : Z20 Z21 Initial Investment ( ) 250 000 200 000 Cash Inflows ( ) Year 1 60 000 60 000 Year 2 70 000 80 000 Year 3 80 000 100 000 Year 4 110 000 110 000 Year 5 90 000 70 000 Residual Value 50 000 50 000 Required : a) For both machines calculate the following : i) Payback Period (6 marks) ii) Accounting Rate of Return Hint : The cash inflows need to be converted back to accounting profits (10 marks) b) Under each method which machine should the company adopt and why. (2 marks) c) Fully explain the meaning of : i) time value of money (3 marks) ii) cost of capital (4 marks) End of Paper Page 11 of 11