______________________________________________________________________________ Part A
Please circle the correct answer on the question sheet below and hand in with your exam booklet
(Questions 1 7 are based on the following transactions recorded by MN Company:)0...0
MN Company closed its books on October 31 st , 20XX
20XX March 1 st Purchased equipment for $72,000. Estimated useful life: 5 years, Residual value: $6000 April 1 st Paid $1000 for five advertisements, with one advertisement scheduled to appear every two months. The first advertisement appeared on June 1 st , and the remaining advertisements were each slated to appear every two months, thereafter. September 1 st MN Company rented out excess office space, charging $500 per month. Its tenant paid six months rental in advance on September1 st . October 31 st The inventory recorded in MNs books amounted to $47,000. A physical stock count revealed inventory of $46,750.
2
Question 1 Which of the following correctly records the depreciation expense for MN Company for the fiscal year ended 20XX? a. Depreciation Expense Accumulated Depreciation
6600 6600 b.
Depreciation Expense Accumulated Depreciation
8800 8800 c.
Depreciation Expense Accumulated Depreciation
11000 11000 d.
Depreciation Expense Accumulated Depreciation 13200 13200 Question 2 Assume that MN Company uses the EXPENSE method to record its advertising expenses. Which of the following is the correct balance day adjustment for the advertising expenses incurred on April 1 st ? a. Advertising Expense Prepaid Advertisement
Question 3 Assume that MN Company uses the ASSET method to record its advertising expenses. Which of the following is the correct balance day adjustment for the advertising expenses incurred on April 1 st ? a. Advertising Expense Prepaid Advertisement
600 600 b.
Prepaid Advertisement Advertising Expense
600 600 c.
Advertising Expense Prepaid Advertisement
400 400 d.
Prepaid Advertisement Advertising Expense
400 400
4
Question 4 Assume that MN Company uses the REVENUE method to record its rental revenues. Which of the following is the correct balance day adjustment for the rental revenues recorded on September 1st? a. Rental Revenues Rental paid in advance
1000 1000 b.
Rental paid in advance Rental Revenues
1000 1000 c.
Rental Revenues Rental paid in advance
2000 2000 d.
Rental paid in advance Rental Revenues
2000 2000
5
Question 5 Assume that MN Company uses the LIABILITY method to record its rental revenues. Which of the following is the correct balance day adjustment for the rental revenues recorded on September 1st? a. Rental Revenues Rental paid in advance
1000 1000 b.
Rental paid in advance Rental Revenues
1000 1000 c.
Rental Revenues Rental paid in advance
2000 2000 d.
Rental paid in advance Rental Revenues
2000 2000
Question 6: Which of the following is the correct adjustment for MNs inventory? a. Inventory 250 Inventory loss 250
b. Inventory loss 250 Inventory 250
c. Inventory 250 Cost of Goods Sold 250
d. Cost of Goods Sold 250 Inventory 250
6
Question 7
While completing the worksheet, the accountant extended an amount from the adjusted trial balance to the wrong set of financial statement columns. After the error the Balance Sheet columns balanced, but net profit was wrong. Which of the following errors was made?
a An expense was extended to the Balance Sheet credit column b A revenue was extended to the Balance Sheet debit column c A liability was extended to the Profit and Loss Statement credit column d An asset was placed in the Balance Sheet credit column e A liability was placed in the Balance Sheet debit column
Question 8
.The four perspectives taken by the Balanced Scorecard are: a. ROI, RI, EPS and EVA b. Financial, Customer, Process, Learning & growth c. Customer, Process, Technology, People d. Cost, Profit, Revenue, Volume
7
Part B Question 1 6 marks
Large amounts were spent on acquiring new non-current assets ($259m + $491 + $815m).Namely amounts spent on obtaining child care licences, other child care centres and PP&E (2 marks) Most of this spending was financed by borrowings (financing activities $1,629m). Looking at the Balance Sheet, a large proportion of the borrowings were short-term (2 marks)
Short term borrowings e.g. Bank overdraft should be used for short term expenditure. Long term borrowings (Debt and Equity) should be used for purchase of non-current assets which may not generate immediate cash flows.(2 marks)
Question 2 14 marks (10 +4)
(a) Perpetual Inventory Account
1/4/13 Balance 60,000 Accounts Payable 1,500 Accounts Payable 30,000 Cost of Goods Sold 33,000 COGS 4,500 Stock Loss 3,000 Balance 57,000
30/4/13 OB Inventory 60,000 Purchase Returns 1,500 Purchases 30,000 Inventory on Hand 57,000 Balance to P/L 31,500 90,000 90,000
-1 for any error either amount or name
9
(b) Income Statement Perpetual Physical
Sales 54,000 54, 000 Less sales returns 6,000 6, 000
Net Sales 48,000 48,000
Less COGS 28,500 31,500* Breakdown acceptable
Gross Profit 19,500 16,500 Minus Stock Loss 3,000
Adj Gross Profit 16,500
Less Finance Expenses Discount allowed 900 900 Discount received ( 600) ( 600) (or after adjusted GP as other rev)
Profit $16,200 $16,200
-1 for any error either amount or name up to -4
10
Question 3 6 marks Solution Need to discuss whether the contract satisfies the element definition and recognition criteria associated with a liability Definition Criteria 4 marks Present obligation-This is where discussion should centre! Assuming the contract is one which is non cancellable a present obligation is owed by the airline company once the contract has been signed by both parties If the contract is cancellable by either one or both parties then par 91 may apply ie (equally proportionally unperformed ) which will generally not be recognised as a liability Outflow of an economic benefit Once the aeroplane is delivered company must pay cash to the creditor Past event- signing the contract Therefore likely to meet the element definition of a Liability Recognition Criteria 2 marks 1 Reliably Measured? Assumed agreed contract price 2 Probable? Assuming non cancellable and contract agreed on by both parties Note if cancellable then par 91 may apply and not recognised
Students need to discuss both recognition and element definitions Minus 1 if dont mention cancellable or non cancellable or words to that affect
11
Question 4 (5+6+5=16 marks)
(a) Given the above ratios, comment on the movement in liquidity and profitability of Mattys Fitness HQ in its first two years of operation. Include a discussion of why return on assets has changed. The current ratio represents the proportion of current assets to current liabilities. Higher is generally a good indicator, as it implies that an entity would have sufficient current assets to pay off current liabilities. However, an excessive current ratio might indicate that an entity would be better off investing rather than holding large amounts of cash on hand, inventory or prepayments. It may also suggest obsolete inventory is being carried that has not been written down and/or there are significant debts that are unlikely to be collected. . The current ratio has improved over the two years, with both appearing to be at comfortable levels with a likely ability to repay its short term obligations. Information regarding the timing of the inflows and outflows needs to be known before a proper assessment can be made 2 marks
The acid test ratio also measures liquidity, but excludes inventory and prepayments from the calculation as they are not liquid assets. As a result, this ratio will be lower than the current ratio. There is no ideal quick asset ratio,it will depend on the organisations ability to convert its immediate current assets Interestingly, the acid-test ratio is not much lower for this business, indicating that inventory and/or prepayments are not a large portion of current assets. In both years, the acid-test ratio is at a very comfortable level. 1.5 marks
The creditors turnover indicates the frequency in which the business pays its creditors All things being equal the more times per annum the better in terms of an insight into the entities ability to repay its pressing obligations. A lengthening of this period may be a result of the entitys deliberate intention of availing itself to interest free credit 1.5 marks (Max 5 marks)
b) The return on assets ratio reveals how efficiently assets were used to generate profit. A higher ratio is better, and this entity has shown a positive increase over the two years. This would indicate that the entity is more profitable 1 mark
The asset turnover ratio indicates the efficiency with which assets were used to generate revenue. Higher is better, and there has been a good improvement over the two years. In 2013, the entity is generating revenue almost equal to half the value of assets. 1 mark
12
The profit margin ratio indicates the proportion of each dollar of revenue that is earned as profit. Higher is better, The ratio has only slightly improved over the two years. The business may have charged more (increased SP) to customers or may have reduced expenses 2 marks maximum 4
The movement in return on assets can be explained by examining the asset turnover and profit margin ratios, as the three are inter-related. The slight increase in profit margin contributed, but the main reason is that the asset turnover increased. The entity was able to generate much more income in its second year of operations. 2 marks Max 6 Marks
c) Limitations include Limited time series analysis CA ratio and QAR are static measures they gives no insight into the timing of the cash flows ie need a cash budget No Stock or debtors T/O figures to aid point above No industry or competitors benchmarks Limitations of financial data-subjective Need to look at non financial data also eg BSCard Need to know creditors terms Ignores price level changes eg using HC in periods of increasing prices overstates the return on assets ratio
Part A (i) Determine how many spa treatments would need to be sold per year for Mattys Fitness HQ to break even from this area of the business. Breakeven = fixed costs / contribution margin per unit Contribution margin per unit = selling price less variable costs ($2.50 $0.80) = $1.70 Break even = $14,500 / $1.70 = 8,529.4 = 8,530 treatments (2 marks) (ii) Determine how many spa treatments the break-even point would equate to per day (assuming Mattys Fitness HQ is open every day of the year), and comment on the feasibility of this number.
8,530 / 365 days = 23.37 Approximately 24 spa treatments per day x15 per treatment = min 360 people (1 mark)
Whether this is feasible or not depends on the number of gym members that do a workout at the gym each day on average. Not all members would have the time or money to do the spa treatment every day. (1 mark)
(iii) Another option Matt Blake is considering involves a hot/cold spa combination. It would be more expensive lease and operate annually ($23,000), but cheaper to run (at $0.70 per person using the spa). Matt could charge up to $4.50 per visit for this extra service. Determine how many spa treatments would be needed each year to break even. Breakeven = fixed costs / contribution margin per unit Contribution margin per unit = selling price less variable costs ($4.50 $0.70) = $3.80 Break even = $23,000 / $3.80 = 6,052.6 = 6,053 treatments (2 marks) 14
(iv) Explain how and why the break-even point you calculated in part (c) differs from the break-even point you calculated in part (a). Even though fixed costs increased, there has been a greater increase in the contribution margin to help cover those fixed costs. As a result, fewer treatments are required each year to reach the break-even point. (2 marks)
Part B Outline the implications, both positive and negative, of following the Accountants recommendation. Students could provide any valid implication and gain the four marks. Examples include: Positive implications: - A higher price being charged means more income being earned - A more accurate pricing policy should result in better management of expenses - A pay for what you use policy would better suit some gym members so they dont pay for facilities they dont use
Negative implications: - Some members might not be happy with the new pricing structure, particularly those charged more as a result of wanting access to all facilities - Some members may be lost to competing gyms - More detailed recording keeping may be involved
4 marks, 1 for each valid point (2 positive, 2 negative) Total marks for Question 5 = 12 _
(i) Explain the benefit of preparing budgets in an organisation.
Budgets assist management to plan and control for the future and formalise their goals. They enable actual results to be compared against expected results, to assist in performance evaluation. They provide early warnings of potential problems, and enable activities within a business to be co-ordinated. They can also assist with employee motivation. 3 marks
(ii) Identify which of the items Matt Blake has listed above would appear in the cash budget, and which would appear in the budgeted income statement.
The cash budget would include:
The budgeted income statement would include: Wages to be paid Wages expense Purchase of equipment Depreciation expense Loan repayment Interest expense incurred Cash drawings Prepaid advertising
mark for each correct classification = 4 marks
16
Part B
(i) Explain how Matt Blake can determine which investment is likely to generate more interest on his investment. Provide the formulas he would use to assist in making the decision.
The interest rates cannot be compared as they are written, as one is compounding annually and the other daily. The rate compounding daily will more frequently add interest to the account, potentially increasing the return. 2 marks The formulas would be:
Future value = present value of investment x (1.053)^1 1 mark And Future value = present value of investment x (1+(0.051/365))^(365) 1 mark 0r Effective annual interest rate i = (1 +j/m) m -1 = (1 + .051/365) 365 -1 =.0523 which is a lower annual effective interest rate therefore choose 5.3% compounded annually 2 marks
(ii) Apart from investing in banks, identify three (3) other investment options Matt Blake could consider. Investments could include: - Shares - Property - Debt securities - Antiques 1 mark for each example, maximum 3 Total marks for Question 7 = 14
(b) Based on your answer to part (a), comment on the feasibility of expanding the gym business to a second location. Justify your answer. The proposal to open a second location for the gym is not favourable, as a negative NPV is estimated. If the cash flow estimates are correct, Matt will lose money on the expansion, which is detrimental to his business. 2 marks
(c) Identify some general risks associated with going ahead with such an expansion.
18
An expansion like this is risky due to the uncertainty associated with it. There is a chance the business may not attract as many members as expected. Costs might be higher or lower than estimates. There is a problem of what to do in 5 years when the lease is ended etc. 2 marks for any valid risks identified
(d) To acquire equipment for the new location, Matt Blake can pay $350,000 cash immediately, or pay $185,000 in two equal instalments at the end of year 1 and year 2. Calculate the present value of the instalment option assuming a discount rate of 6% per annum to determine which is the cheaper payment alternative.
$350,000 cash immediately is already at present value
The cheaper alternative is to pay in two instalments. 1 mark
19
Question 8 (12 marks)
Answer a Financial accounting Management accounting Users External Internal Frequency Annual Monthly Orientation Past Current & future Content Business as a whole Each business unit Aggregated Detailed Financial Financial & non-financial Regulation IFRS/Companies Act None needs of business Verification External audit None 3 marks Answer b (i) The Balanced Scorecard establishes performance measures and targets for four aspects of business performance: financial, customer, process, and learning/growth. These are related such that learning contributes to improved business processes which in turn leads to improved customer satisfaction and ultimately to financial performance.
3 marks (ii) Financial measures alone are necessary but not sufficient to reflect the performance of a business. Non-financial measures are leading indicators of business performance which provide early warning, compared with financial measures which are lagging, i.e. they are only known after financial reports are produced. Leading indicators can more readily result in early corrective action where targets are not being achieved.
20
3 marks Answer c The overhead allocation problem arises because overhead has increased in proportion to total business costs. Overhead by definition cannot easily be traced to products/services and is often arbitrarily allocated across multiple products/ services for example on the basis of direct labour hours even when labour hours do not reflect the incurrence of overhead costs. Overheads can comprise a substantial part of product/service costs and can result in prices that are either too high or too low. This affects the volume of sales and perceived product/service profitability. The extent to which products/services actually consume overhead may therefore be spread throughout the product/service range inequitably without reflecting the real demand made by those product/services on the resources of the business. 3 marks