~~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, 6 May 2014 : 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 UL14/0002 Page 1 of 1
Questions start on page 3 UL14/0002 Page 2 of 2
SECTION A Answer question 1 from this section. 1. (a) The following information has been extracted from the Statement of Financial Position of Shelley plc as at 1 January 2013: Issued equity shares of 50p each 2,000 Retained earnings 950 There were no other reserves in the Statement of Financial Position as at 1 January 2013. You are given the following additional information relating to the year ended 31 December 2013: 1. The company issued one million equity shares at a price of 75p per share on 1 January 2013. 2. The company made a bonus issue of 1 for 5 ordinary shares on 30 September 2013 utilising any available share premium. 3. At 31 December 2013, the management have decided to revalue land and buildings that had a net book value of 400,000 to a value of 600,000. 4. The profit after tax for the year ended 31 December 2013 was 280,000. 5. On 12 February 2013 the company paid the previous year s final equity dividend of 9p per share and on 31 July 2013 paid an interim dividend of 2p per equity share. The directors have proposed a final dividend of 10p on each equity share. Show the Statement of Financial Position of Shelley plc as at 31 December 2013 which shows the composition of the equity. (6 marks) UL14/0002 Page 3 of 3
(b) Compliance with Accounting Standards, such as International Financial Reporting Standards, is now required for companies by regulators in almost all countries. i. Explain the advantages of accounting standards for financial reporting by companies. (4 marks) ii. Identify two possible drawbacks of accounting standardisation (2 marks) (c) Compare and contrast the Accounting Rate of Return and the Internal Rate of Return methods of investment appraisal. (6 marks) (d) Clare Ltd makes two types of chair, Wing and Club. There are two production departments, Machinery and Assembly. There is also a sales administration office and a storeroom for parts and materials. The following information is available: Machinery Assembly Office Storeroom Floor space (m 2 ) 300 150 10 40 Issues of parts from stores per month 20 5 Direct labour hours per Wing chair 30 40 Direct labour hours per Club chair 40 30 The following are the budgeted output and cost for a month: Output of Wing chairs 20 Output of Club chairs 80 Factory rent 1,000 Salary of storeman (all storeroom costs) 1,300 Salary of office clerk (all administration costs). 1,500 The factory rent is to be allocated on the basis of floor space and the storeroom costs (inclusive of allocated rent) reallocated on the basis of issues of parts. These are the only indirect costs of production and a direct labour hour basis of absorption should be used for the two production departments. Administration costs are all post production. Calculate the indirect cost of producing a Wing chair and a Club chair. (7 marks) UL14/0002 Page 4 of 4
SECTION B Answer question 2 and not more than one further question from this section. 2. The trial balance of Byron plc at 31 December 2013 appeared as follows: Debit Credit Equity shares of 1 fully paid 50,000 Purchases 220,000 Retained earnings 30,000 Freehold property cost 80,000 Fixtures cost 15,000 Fixtures accumulated depreciation 9,000 Data services rental 3,000 Motor vehicles cost 28,000 Motor vehicles accumulated depreciation 14,000 Insurance 2,000 Inventories at 1 January 2013 40,000 Trade receivables 30,000 Trade payables 24,000 Sales revenue 310,000 Bank 12,100 12% debentures 40,000 Debenture interest 2,400 Wages and salaries 34,000 Heat and light 4,100 Directors fees 1,400 Motor expenses 3,200 Provision for doubtful debts at 1 January 2013 1,000 Bad debts written off 300 Dividend paid 2,500 478,000 478,000 UL14/0002 Page 5 of 5
Additional information: 1. During the year a motor vehicle purchased on 31 March 2010 for 8,000 was sold for 3,000. The sale proceeds were debited to the bank account and credited to the sales account, and no other entries have been made in the financial statements relating to this transaction. 2. Depreciation has not yet been provided for the year. Depreciation is on the straight line basis, with the assumption of no residual value based on the following useful lives: Fixtures and fittings Motor vehicles 10 years 5 years The company s policy is to provide a full year s depreciation in the year of acquisition and no depreciation in the year of disposal. 3. Inventory at 31 December 2013 amounted to 45,000. Some goods sent out on a sale or return basis have been treated as credit sales. These goods cost 3,000 and had been invoiced to the customer for 4,000. The customer has informed the company that it now intend to return these goods. 4. Data services rental paid in advance amounts to 400. Insurance includes 200 paid in advance. An electricity bill covering the quarter to 31 December 2013 and amounting to 320 was not received until February 2014. It is estimated that the audit fee for 2013 will be 1,500. An accrual also needs to be made for debenture interest. 5. A general provision for doubtful debts of 4 per cent of trade receivables is to be carried forward. 6. Taxation for the year is estimated as 6,500. 7. The directors propose a dividend of 10,000. (a) Prepare for Byron plc for the year ended 31 December 2013: i. Income statement for the year (11 marks) ii. Statement of changes in equity for the year (2 marks) iii. Statement of financial position at the year end. (8 marks) (b) Explain the meaning of the terms provision and reserve, giving one example of each. (4 marks) UL14/0002 Page 6 of 6
3. Keats plc is a company which wholesales non-electrical office equipment from pens and paper to filing cabinets. The company has just one warehouse and, during 2013, replaced much of its shelving as well as investing in new computer equipment, to maintain its inventory and other records. In April 2013, the company tendered for, and obtained, a significant contract to supply goods to a high street office supplies and stationery chain. Keats plc Income statements for the years ended 31 December 2013 2012 Revenue 3,000 2,500 Cost of sales 1,800 1,425 Gross profit 1,200 1,075 Administrative expenses (544) (453) Distribution costs (250) (245) Profit from operations 406 377 Finance costs (66) (60) Profit before tax 340 317 Taxation (180) (122) Profit for the year 160 195 Statement of changes in equity for the years ended 31 December Equity share capital Retained earnings Total Balance at 1 January 2012 1,200 640 1,840 Profit for the year 195 195 Dividends paid (95) (95) Balance at 31 December 2012 1,200 740 1,940 Profit for the year 160 160 Dividends paid (100) (100) Balance at 31 December 2013 1,200 800 2,000 UL14/0002 Page 7 of 7
Statements of financial position at 31 December 2013 2012 Non-current assets 2,320 2,080 Current assets Inventory Receivables Cash at bank 400 290 450 350 50 200 900 840 Total assets 3,220 2,920 Equity Equity shares ( 1 each) Retained earnings 1,200 1,200 800 740 2,000 1,940 Non-current liabilities 10% debentures 720 600 Current liabilities Payables Tax 400 300 100 80 500 380 Total equity and liabilities 3,220 2,920 The value of a share of Keats plc at 31 December 2013 was 1.80 and at 31 December 2012 1.65. (a) Calculate the following accounting ratios (to one decimal place) for Keats plc for 2013 and 2012: i. Profitability ratios Return on Capital Employed Operating profit margin Asset turnover ii. Liquidity and Working capital control ratios Quick assets ratio Inventory turnover Receivables collection period (Days) Payables payment period (Days) iii. Gearing and financial risk ratios Debt to capital employed Interest cover Investor ratio Price Earnings ratio N.B.You should use closing balances rather than averages for computing the ratios. (13 marks) (b) Evaluate, using the ratios calculated above and the other information provided, the financial position and financial performance of Keats plc. (12 marks) UL14/0002 Page 8 of 8
4. The following information relates to the activities of Wordsworth plc: Statements of financial position at 31 March 2014 2013 Non-current assets Freehold land at cost Plant and equipment cost Less: Accumulated depreciation 660 296 780 700 560 230 364 330 1,144 1,030 Current assets Inventory Receivables Bank 498 304-356 330 30 802 716 Total assets 1,946 1,746 Equity Ordinary 1 shares Share premium Retained earnings 550 210 490 400 160 376 1,250 936 Non-current liabilities 6% debentures Current liabilities Trade payables Tax Bank overdraft 230 90 126 250 240 120-446 360 Total equity and liabilities 1,946 1,746 450 UL14/0002 Page 9 of 9
Income statement for the year ended 31 March 2014 Sales 4,520 Cost of sales 3,420 Gross profit 1,100 Expenses 766 Profit before tax 334 Tax 150 Profit after tax 184 Statement of changes in equity for the year ended 31 March 2014 Share Share Retained Total Capital Premium Earnings Balance at 1 April 2013 400 160 376 936 Issue of share capital 150 50 200 Profit for the year 184 184 Dividends paid (70) (70) Balance at 31 March 2014 550 210 490 1,250 You are informed that: 1. Plant which originally cost 80,000 was sold for cash of 14,000. The profit/loss on disposal is included in expenses. Accumulated depreciation relating to the plant sold amounted to 58,000. 2. The debentures were repaid on 30 September 2013. Interest for the year was fully paid by 31 March 2014 and is included in expenses. (a) (b) Prepare the Statement of Cash Flows for Wordsworth plc for the year ended 31 March 2014. (18 marks) Explain how a statement of Cash Flows provides information about a company s financial performance in addition to that provided by the other financial statements. Use the answer to (a) to illustrate your answer. (7 marks) UL14/0002 Page 10 of 10
SECTION C Answer one question and no more than one further question from this section. 5. Longfellow Security Ltd is a small company that installs alarm systems into commercial properties. The company sells a standard system which is its main activity but can modify this if necessary. The equipment for the standard system is purchased from an alarm manufacturer. The budget for the quarter ended 31 December 2013 based on installing 50 systems was as follows: Sales (50 systems at 1,260) 63,000 Equipment 20,000 Labour ( 8 per hour) 8,000 Variable Overhead ( 5 per hour) 5,000 Fixed overhead 12,000 45,000 Budgeted Profit 18,000 The actual number of units sold for the quarter was 54 and the results for the quarter were as follows: Sales 64,800 Equipment 20,900 Labour (1,100 hours) 9,200 Variable Overhead 5,100 Fixed overhead 14,000 49,200 Actual Profit 15,600 Additional information: The company had purchased 55 alarm systems from the manufacturer but one had been damaged during installation. The partial installation and removal of the damaged system and the installation of the new system had taken an additional 20 hours of labour. An allowance of 200 against the normal sales price had been given to the customer for the inconvenience caused by the removal and reinstallation of the system. Except for the reinstalled system all sales were invoiced at the budgeted price but. allowances against sales price had been given to a few customers for delays caused by bad weather conditions. This information has been reflected already in the actual results as reduced sales and increased costs. (a) Prepare an operating statement for Longfellow Security Ltd for the quarter ended 31 December 2013 which reconciles budgeted and actual profit. You should show two variances for each cost. (20 marks) (b) Calculate the effect on the profits for the quarter of: i. the damaged alarm and reinstallation. ii. the bad weather. (5 marks) UL14/0002 Page 11 of 11
6. Lewis Outdoors Ltd is a new company which has recently been set up to specialise in manufacturing a new type of tent for sale to youth groups using a recently developed synthetic material. You are the Management Accountant for the company and have been approached by the management team to give some advice. The Sales Manager predicts that the tents can be sold at a price of 80 each. Variable cost estimates for the production of each tent, together with the overhead costs, are set out below: Variable costs of production per tent Cost of synthetic material ( 2 per sq metre). 20 Poles and pegs 5 Cost of labour 20 Overheads: Rent of factory premises Lease of machines Other overheads 20,000 per month payable quarterly in advance commencing January 2013 8,000 per month payable in same month 14,000 per month payable in following month plus 3 per tent payable in the same month The Sales Manager predicts that sales will start in January 2013 with 1,000 units and increase as shown in the table below. By June the monthly sales will have reached 2,000 units per month and will remain at that level for the foreseeable future. Production levels each month would be the same as the sales estimates. Month Planned Sales (units) Jan 1,000 Feb 1,200 Mar 1,400 April 1,600 May 1,800 June 2,000 Labour is paid in the month incurred. An initial purchase of synthetic material is to be made in January sufficient for the first three months production; this initial purchase is to be paid for in January. In March and subsequent months sufficient synthetic material is to be purchased for the following months production; these purchases are paid for in the following month. Poles and pegs are purchased and paid for in the month of production. Sales receipts are all in the month following the sale. The financial accountant informs you that the cash balance at the start of trading on 1 January is expected to be 100,000 and that the company has negotiated an overdraft limit with the bank of 70,000. (a) (b) (c) Calculate the following for the new venture: i. Contribution per tent, (1 mark) ii. The forecast profit for the period Jan-June 2013, (3 marks) iii. The level of monthly sales required to break even, (2 marks) iv. The margin of safety at the planned level of sales in June 2013 (2 marks) Prepare a cash flow forecast for the six months January June 2013 showing the forecast cash flows for each month and the cash balance at the end of each month. (13 marks) Reconcile the forecast profit for the period with the total net cash flow for the period. (4 marks) UL14/0002 Page 12 of 12
7. Hardy Limited has undertaken research into launching a new product which will take it into a new market area. Hardy feels it has expanded its existing operation to its maximum potential, and it is the market leader in its existing field. The proposed new product would offer new opportunities and, although there is strong competition in its field already, the management feel it can use its existing brand name to break into this product line. The new product is in car cleaning accessories, but will offer items in a single package not currently available. The management believe that,although the proposed product may be relatively short lived, the penetration of new markets is worthwhile as long as the product does not make a loss. Details of the project are as follows: Market research costs incurred to date amount to 250,000 Investment in plant at the start: 2,900,000. At the end of the product s life the plant will have a disposal value of 80,000 The project is estimated to have a life of 5 years The sales price of each unit is initially forecast at 25. The production cost is 13 per unit including a depreciation charge of 3 per unit Selling and distribution costs are estimated to be 3 per unit An initial injection of additional working capital of 100,000 will be needed and should be recoverable in full at the end of the product s life. Estimated sales volumes: Year 1 Year 2 Year 3 Year 4 Year 5 Sales volumes (units) 100,000 150,000 200,000 100,000 50,000 To maintain sales, advertising will have to be undertaken throughout the life of the project as follows: Advertising costs: Year 1 200,000 Year 2 250,000 Year 3 100,000 Year 4 150,000 Year 5 100,000 The selling price will be maintained at 25 for the first two years and will decrease to 20 in year 3 and to 18 in year 4 and 15 in year 5. Hardy charges fixed overheads to products at 5% on the production cost. Hardy estimates that, as a result of the project, additional administration costs of 100,000 per annum will be incurred and additional maintenance costs of 150,000 in year 4 and 200,000 in year 5. These are in addition to the costs given above. Hardy Limited currently has a cost of capital of 7%. Assume all cash flows occur at year ends except for the purchase of plant and additional working capital which occur at the start of the project. (a) Calculation of the net present value of the project, presented in columnar form to the nearest. (14 marks) (b) Calculation of the payback period of the project. (3 Marks) (c) Advice on the proposed project. (4 Marks) (d) Two limitations of your analysis above. (4 marks) UL14/0002 Page 13 of 13
Present value 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 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 UL14/0002 Page 14 of 14