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Monash University
Semester 1 2010 Practice Exam 1 Faculty of Business and Economics Department of Accounting and Finance
EXAM CODES: TITLE OF PAPER: EXAM DURATION: READING TIME: AFW1000 PRINCIPLES OF ACCOUNTING AND FINANCE 3 hours 10 minutes

THIS PAPER IS FOR STUDENTS STUDYING AT: (office use only - tick where applicable) Berwick Learning Caulfield Clayton Gippsland Peninsula Sunway Distance Education Off -Campus Hong Kong Enhancement

During an exam, you must not have in your possession, a book, notes, paper, calculator, pencil case, mobile phone, or other material/item which has not been authorised for the exam or specifically permitted as noted below. Any material or item on your desk, chair or person will be deemed to be in your possession. You are reminded that possession of unauthorised materials in an exam is a discipline offence under Monash Statute 4.1. AUTHORISED MATERIALS CALCULATORS YES NO
(Only calculators with an 'approved for use' Faculty label are permitted) OPEN BOOK YES NO

SPECIFICALLY PERMITTED ITEMS

YES

NO

if yes, items permitted are:

1. This paper consists of nine (9) questions and a multiple choice answer sheet printed on a total of ten (10) pages. 2. 3. Answer ALL questions. THE MULTIPLE-CHOICE ANSWER SHEET (PAGE 10) TOGETHER WITH THIS EXAMINATION PAPER MUST BE INSERTED INTO THE ANSWER BOOK AT THE COMPLETION OF THE PAPER.
PLEASE CHECK THE PAPER BEFORE COMMENCING. THIS IS A FINAL PAPER. THIS EXAMINATION PAPER MUST BE INSERTED INTO THE ANSWER BOOK AT THE COMPLETION OF THE PAPER. NO EXAMINATION PAPERS SHOULD BE REMOVED FROM THE EXAMINATION ROOM

Candidates must complete this section if required to answer in this paper

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STUDENT ID..........................................

DESK NUMBER. .

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Question 1: Multiple Choice Questions Required: There are ten (10) multiple-choice questions and you are to choose the most appropriate answer (only one) and record your choice on the answer sheet provided at the end of the examination paper. 1. Rhina Bar pays wages of $875 per week (five day) to its employees. At balance date three days wages had not been paid. Rhina Bar opens every day for trading. When preparing the financial reports, the accountant needs to: a) b) c) d) 2. Increase Increase Increase Increase expenses expenses expenses expenses and and and and increase liabilities by $525. increase liabilities by $375. increase assets by $375. decrease assets by $525.

Failure to record the unpaid wages on balance day (see Question 1) will have the following effect on the financial statements: a) b) c) d) Assets overstated, equity understated, liabilities understated Profits overstated, equity overstated, assets understated Profits understated, equity overstated, liabilities overstated Profits overstated, equity overstated, liabilities understated

3.

A worksheet should be viewed as: a) A financial statement to be distributed to the bank only b) A financial statement to be distributed to investors only. c) A financial statement to assist managers in making managerial decisions. d) A tool to assist accountants in making end-of-period adjustments and in preparing financial statements

4.

An advantage of the company form of business is that a) b) c) d) it has a limited life. its owners personal resources are at stake. its ownership is transferable through the sale of shares. none of the above.

5. Which of the following will be recorded as income? a) b) c) d) A loan is received from a bank Money is collected from a customer owing from goods sold last week A sale is made on credit Additional capital is contributed by the owner

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6. Which of the following procedures would not be captured by an accounting system? a) Selecting appropriately qualified or experienced staff to prepare accounting reports. b) Performing analyses and interpretations of relevant information. c) Providing reports that users will understand and be able to use for their individual purposes. d) Adopting a set procedure to record information for further analysis. 7. When accounting information is free from material bias or error, it is said to be: a) Comparable. b) Reliable. c) Relevant. d) Understandable 8. The feature of a company that places an upper boundary on the amount of money required to be contributed by shareholders is also known as: a) perpetual succession b) separate legal entity c) limited liability d) retained profits 9. From the following information, determine the amount of cash received from customers during 2009. Sales $370 000 Cost of goods sold $280 000 Accounts receivable (31/12/2009) $ 54 000 Accounts receivable (31/12/2009) $ 63 000 a) b) c) d) $171 $189 $361 $279 000 000 000 000

10. Eric Ltd is considering whether to offer trade credit to Cantona Ltd. Which of the following ratios will be of most interest to Eric Ltd to assess Cantona Ltds ability to repay credit within a 30-day time frame? a) b) c) d) The The The The gearing ratio acid test ratio net profit margin operating cash flow per share

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(Total = 10 marks)

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Question 2 Unadjusted Trial Balance of Ginko Associates as at 31 December 2009 Dr Cr $ $ Cash at bank 5 200 Account Receivable 20 200 Inventory 130 600 Prepaid Insurance 2 600 Premises 120 000 Office Equipment 24 700 Accumulated Depreciation 13 360 Account Payable 8 400 Unearned Fee 2 800 Capital 180 000 Drawings 24 660 Sales 512 000 Cost of Goods Sold 296 400 Salaries and wages 48 000 Rent 33 000 Utilities 6 400 General Expenses 1 800 ------------------716 560 716 560 ====== ====== Additional Information: 1. Depreciation for office equipment is provided at 25% using the straight line method. 2. Drawings of cash by the owner, amounting to $6000, were not recorded in the accounting records. 3. Insurance unexpired amounting to $1,000 as at year end 4. Rental of $3,000 for the month of December 2009 was paid in 1 January 2010. 5. Salaries for the two employees, amounting to $3,680 were owed at balance date and will be paid on the 6 January 2010. 6. Quarter of the unearned fee has been earned as of 31 December 2009. Required: (a) Prepare the necessary adjusting journal entries for the year ended 31 December 2009. (6 marks)

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(b) Prepare an Income Statement for the year ended 31 December 2009. (8 marks) (c) Prepare a Balance Sheet as at 31 December 2009. (7 marks) (Total = 21 marks)

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Question 3 a) A Financial Report Extract of Blackpur Ltd shows: Debt Ratio Interest Cover Required (i) What aspect of the business are these two ratios highlighting? (1 mark) (ii) What major conclusion can be drawn from the above analysis? (2 marks) b) State one advantage and one disadvantage of using ratio analysis for analysing financial statements. (2 marks) From the following data, calculate the estimated cash received from credit sales for December. Credit sales for: October, $10,000; November, $15,000; December, $14,000 Credit sales are normally settled 60% in the month of sale, 25% in the month following the sale, and the balance in the second month following the sale. (3 marks) (Total = 8 marks) Question 4 a) At what rate would $5,000 invested today grow to $10,000 in 5 years time, assuming interest is compounded semi-annually? (2 marks) 2008 2009 Industry 35% 50% 38% 4.5 times 10.2 times 4 times

c)

b)

You have $5,000 now. You will receive $6,000 in 2 years, $8,000 in 3 years and $10,000 in 6 years. i) Assuming you can invest at 12% per year compound, how much money will you have in 7 years time? (4 marks)

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ii) Assuming you can invest at 12% per year compound, what is the present value of the above cash flows? (4 marks) c) A projects initial investment is $4,500. It produces net cash inflows of $4,500, $3,000, $2,500 and $3,000 at the end of years 1, 2, 3 and 4 respectively. Given the discount rate is 8% per annum, what is the NPV? (4 marks) (Total = 14 marks)

Question 5 a) Define the terms revenue and expenses and state how they are recognised according to The Framework. (8 marks) Identify four potential limitations of a Balance Sheet. (4 marks) Discuss briefly the concept of responsibility accounting (3 marks) (Total = 15 marks) Question 6 Sea Ltd Statement of Cash Flows For the year ended 31 December 2008 and 2009 2009 2008 $000 $000 Cash flows from operating activities: Receipts from customers 285 177 Payments to suppliers and employees (143) Interest received Interest paid (4) Income taxes paid (12) Net cash provided from operating activities 18 Cash from investing activities: 55 (19) 1 (7) (205)

b) c)

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Payments for purchase of non-current assets (9) Proceeds from sale of non-current assets 4 Net cash from investing activities Cash from financing activities: Proceeds from ordinary share issue Proceeds from borrowings 9 Repayment of borrowings Dividends paid Net cash flow from financing activities (1) Net increase (decrease) in cash held 12 Cash at beginning of the reporting period Cash at the end of the reporting period 18 Required

(45) (45) 10 22 (18) (17) 7 18 6 25 (10) (3) (5)

a) Sea Ltds net profit for 2008 and 2009 was $25 000 and $23 000, respectively. This is different from its net cash flow from operations. Why? (3 marks) b) The net cash flow from investing activities is negative. Why? (1 mark) c) The net cash flow from financing activities is negative. Why? (1 mark) d) Generally discuss the cash flow movements of Sea Ltd for the year ended 31 December 2009. (3 marks) (Total = 8 marks) Question 7 A division has profit of $120,000, sales revenue of $500,000 and an investment base of $250,000. Determine i) the return on revenue (1 mark) ii) the (1 mark) iii) the (1 mark) return investment on turnover investment

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iv) the relationship (2 marks)

between

(i),

(ii)

and

(iii)

v) the residual income if the required cost of capital is 12% (1 mark) (Total = 6 marks) Question 8 a) Apollo holdings have the following information with respect to year 2010 activities: Sales units Selling Price Variable cost/unit Total fixed costs Required: i) Calculate the break-even point in units and $ (2 marks) ii) Calculate the profit (loss) achieved in the year 2009. (2 marks) iii) Management is concerned about increasing competition for its products and wants to increase its sales to 40,000 units. The initiative would increase annual fixed costs by $50,000 and reduce selling price to $11.50. Based on the available data, would you recommend the initiative? (4 marks) (Total = 8 marks) 25,000 $12 $7

$50,000

Question 9 Jason Builders has overheads of $800,000 per annum and has derived the following cost pools and cost drivers:

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Cost pool Purchasing Storage Despatch Selling Total i)

Total 250,000 250,000 200,000 100,000 $800,0

Cost driver Purchase Stock items Deliveries Sales

Number of 500 1000 2000 5000

A customer contract involves 5 purchase orders, 5 stock items, 4 deliveries and 10 sales enquiries. Calculate the overhead to be allocated to the customer contract using activity-based costing principles. (4 marks) Compare the traditional and activity based costing overhead allocation method and recommend which is generally more accurate. (6 marks) (Total = 10 marks)

ii)

END OF EXAMINATION

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Formulae Sheet
Gross Profit Margin = Gross profit x 100 Net sales revenue Profit Margin = Net profit x 100 Net sales revenue ROA = Net profit x 100 Average total assets ROE = Net profit x 100 Average equity ROI = Net profit Average investment Asset Turnover Ratio = Sales revenue x 100 Average total assets Current Ratio = Current assets Current liabilities Quick asset ratio = Current assets inventory prepayments (acid-test) Current liabilities Cash Flow Ratio = Net cash flow from operating activities Current liabilities Debtors Turnover (days) = Average trade debtors x 365 Net credit sales Inventory Turnover (days) = Average inventory x 365 Cost of goods sold Creditors Turnover (days) = Average trade creditors x 365 Net credit purchases Debt Ratio = Total liabilities x 100 Total assets Debt Coverage Ratio = Net current liabilities x 100 Net cash flow from operating activities Interest Coverage Ratio = Net profit (after interest) x 100 Interest Residual Income = Profit (pre-tax) required rate of return x investment NPV = CF1 /(1 +i) + CF2 /(1 + i)2 + CF3 /(1 + i)3 +..+ CFn /(1 + i)n INV PV = FV/(1 + i)-n Break Even Point (units) = Fixed costs contribution margin per unit Target Sales (units) = Fixed costs + expected profit contribution margin per unit CM% = Contribution margin per unit Selling price per unit

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PLEASE USE THIS PAGE TO INDICATE YOUR MULTIPLE-CHOICE RESPONSES FOR QUESTION 1 BY CIRCLING YOUR SELECTION. Student ID: __________________________

QUESTION 1: MULTIPLE-CHOICE ANSWER SHEET 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. (a) (a) (a) (a) (a) (a) (a) (a) (a) (a) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (c) (c) (c) (c) (c) (c) (c) (c) (c) (c) (d) (d) (d) (d) (d) (d) (d) (d) (d) (d) (e) (e) (e) (e) (e) (e) (e) (e) (e) (e)

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