Answer to Homework Questions

8/10/2019 Answer to Homework Questions

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PRINCIPLES OF ACCOUNTINGAnswers to Homework questions - TOTAL 102 PAGES

Lecture 1

Q1(a)10,700 (b) 23,100 (c) 4,300 (d) 3,150 (e) 25,500 (f) 51,400

Q2Wrong Assets : Loan from C Smith, Creditors;Wrong Liabilities: Stock of goods, Debtors.

Q3Assets : Motor 2,000; Premises 5,000; Stock 1,000; Bank 700; Cash 100 = total8,800.

Liabilities: Loan from Bevan 3,000; Creditors 400 = total 3,400.Capital : 8,800 3,400 = 5,400.

Q4A Foster

Statement of Financial Position as at 31 December 20X8

Non-current assetsFixtures 5,500Motor vehicles 5,700

Total non-current assets 11,200Current assetsStock of goods 8,800Debtors 4,950Cash at bank 1,250Total Current Assets 15,000Total Assets 26,200Current liabilitiesCreditors 2,450

Equity 23,750

Total Liability & Equity 26,200


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Q5C Sangster

Statement of Financial Position as at 7 May 20X8

Non-current assets

Fixtures 4,500Motor vehicles 4,200Total non-current Assets 8,700Current assetsStock 5,720Debtors 3,000Bank 5,450Cash 400Total Current assets 14,570Total Assets 23,270

Current liabilitiesCreditors 2,370

Equity 20,900Total Liability & Equity 23,270

Q6

General Journal

Details Debit Credit$ $

1 Wages Expense 7,800

Cash 7,800

2 Accounts Receivable 15,000Sales 15,000

Electricity Expense 4,5003 Cash 4,500

4 Stationary Expense 100Cash 100

5 Office Supplies 1.000Accounts Payable 1,000

6 Cash 5,000Accounts Receivable 5,000


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Q7

Details Debit Credit$ $

1 Purchases 10,000

Accounts Payable 10,000

2 Accounts Payable 1,000Cash 1,000

3 Cash 500Accounts Receivable 500

4 Drawings 700Cash 700

5 Cash 2,000Sales 2,000

6 Furniture 1,800Bank 1,800

7 Wages 900Cash 900

8 Cash 3,000Loan 3,000

9 Motor Vehicle 10,000Capital 10,000

Question 8

It is generally accepted that accounting should serve the following functions:

I. Recording and Classification: accounting systems supply a means of

recording and classifying data so as to enable the production of summarizedfinancial statements relating to the entitys results and current state of affairs.Records also enable one-off requests for data to be complied with.

2. Measuring: accounting tries to assist in the measurement of theeconomic results of the entitys activities, usually with a view to sharing out theresults among the various interested parties (e.g. government (taxes),employees (wages), shareholders (dividends).

3. Stewardship: accounting provides a record of how the funds entrustedto managers have been used by them, and to what ends.


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4. Monitoring, planning and control: accounting should provide sufficientinformation on the results of past activities to enable management to monitorthe results and take action if necessary, and to formulate plans for the future.

5. Performance evaluation and compensation: accounting systems

provide information on the performance of different individuals and parts of thebusiness in order to determine how much managers and employees should berewarded.

6. Information For Decisions: accounting should assist investors, forexample, in deciding how to allocate their limited resources.

7. Communication: accounting should communicate information to bothinternal and external users. (Financial statements are the main tools used toachieve this function for external users.)


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Answer to Homework Questions Lecture 2

Q1 (a) Collected amount due from a customer (increase cash,decrease receivables). Purchased land for cash (increase landand decrease cash).

(b) Paid amount due a creditor (decrease cash, decrease accountspayable).

(c) Owner withdrew cash (decrease cash, decrease owner'scapital). Paid rent (decrease cash, decrease owner's capital).Reflected supplies expense (decrease supplies on hand,decrease owner's capital).

(d) Borrowed money from a bank (increase cash, increase notespayable).

Q2 (a) No effect (e) Increase

(b) Decrease (f) Increase

(c) Decrease (g) Increase

(d) No effect

Q3 $400,000 Assets - $160,000 Liabilities

= $240,000 Owners' Equit

Less : 200,000 (Capital)

= $40,000 (Retained Earnings)

Answer : Retained Earning = $40,000


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!"a) Increase assets (Office

Equipment)Decrease assets (Cash)

b) Increase assets (Accounts

Receivable)Increase owners equity

(Capital)

c) Decrease assets (Cash)Decrease owners equity( Capital)

d) Increase assets(Cash)Increase owners equity

( Capital)

e) Increase Assets( Cash),Decrease Assets( Debtors)

f) Increase assets (SuppliesIncrease liabilities (Accountspayable)

g) Decrease assets (Cash)Decrease owners equity( Capital)

h) Decrease liabilities (AccountsPayable)Decrease assets (Cash)

i) Decrease owners equity( Capital)

Decrease Assets(Cash)


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5 (a)Blaney Painters

Statement of Financial PositionAs at End of Current Year

Non-current assetsEquipment 8,500

$%&&'() *++')+

Stock 12,000Accounts Receivable 6,500Total current assets 18,500Total Assets 27,000Current LiabilitiesAccounts payable 500Capital 26,500Total Liability & Equity 27,000

Use the concept of the capital accountto answer parts b), c).

Capital at the end of year = capital at the beginning of year + additionalCapital contributed + net profit Drawings

5b)

26,500 = 18,000 + 0 + net profit 17,000

Net Profit = 26,500 18000 + 17000 = 25,500

Answer : 25,500

5c)

26,500 = 18,000 + 4,000 + net profit 17000

Net profit = 26,500 18,000 4,000 + 17,000 = 21,500

Answer : 21,500


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Q6

a) Sunshine Delivery ServiceIncome Statement

for the month ended March l9XXRevenue : Delivery Fees $16 200

Less : Expenses

Rent Expense $1 800Advertising Expense 300Supplies Expense 2 700Salaries Expense 5 600Insurance Expense 100Miscellaneous Expense 200

Net Profit10 700$ 5 500

b)

Sunshine Delivery ServiceStatement of Financial PositionAs at End of March 19XX

$%&&'() *++')+Cash 14,600Accounts Receivable 11,300Supplies on Hand 6,500Prepaid Insurance 1,100Total Assets assets 33,500Less current LiabilitiesAccounts payable 4,000Note payable 10,000Total Current Liabilities 14,000

Capital* 19,500Total Liability & Equity 33,500

*Note: This could be reconciled as: capital at beginning + Net profit lessdrawings

= 15,000 + 5,500 1,000 = 19,500


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Q7 Entry

to

Account Type Increase

Professional Fees Revenue Credit

Accounts

Receivable Asset Debit

Accounts Payable Liability Credit

Cash Asset Debit

Adams, Capital Owners CreditEquity

AdvertisingExpense Expanse Debit

Supplies on Hand Asset Debit

Adams, Drawing Owners Debit

Equity

Question 8These refer to the systems and procedures that ensure the accuracy and

reliability of the accounting records and to safeguard the assets of thebusiness.

A good system of internal control will have the following objectives:

The business receives the revenues it is entitled to.

All transactions are properly recorded in the appropriate period.

All expenditure properly authorised

All assets properly recorded and safeguarded.

The accounting records provide a reliable basis for the preparation offinancial statements.

Error and fraud are detected and dealt with promptly.


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Answer to Homework Questions Lecture 3Question 1

Debit CreditCash +12000+20000-10000

-100+7000-200+6500-2000-500-800

Furniture +2000Capital +12000+20000Creditors +2000-2000Drawings +800Sales +7000+6500Purchases +10000Electricity +500Wages +200

Advertising +100

Frank- Second Hand Car DealerTrial BalanceAs at 30 April 2013

Account $ $Cash 31,900Furniture 2,000Capital 32,000Drawings 800

Sales 13,500Purchases 10,000Electricity 500Wages 200Advertising 100

$45,500 $45,500


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Question Two

Account $ $Cash +50000-15000

-600+8000+500

-5000Accounts Receivable +2000-500Purchases +30000Computer +5000Accounts Payable +15000+5000-5000Capital +50000Sales +8000+2000Wages +600

Kelly Venice

Trial BalanceAs At 30 June 2013Account $ $

Cash 37,900Accounts Receivable 1,500Purchases 30,000Computer 5,000Accounts Payable 15,000Capital 50,000Sales 10,000Wages 600

$75,000 $75,000

Question 3

,

Opening Capital = 2800

Closing capital = 4000

Use equation:

1) Capital = Assets less liabilities

2) Opening capital + additional capital + revenue expenses drawings = closing capital

2800+ 600 + a 3200-400 = 4000.

Solving for a

A= 4000-2800-600 +3200+ 400

Therefore a = 4200


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-

Opening Capital = 6000

Opening capital + additional capital + revenue expenses drawings =closing capital

6000 + 1500 + 5200 3600 500 = Closing capital

Closing capital = 8600

./'&'01&' 231+4(5 34*6434)4'+ 7 89999 : ;


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Question 4Parker Packaging Service

Parker Packaging ServiceFinancial Position as at

31 DecemberThis Year

31 DecemberLast Year

Non-current assetsEquipment 24 000 28 000Buildings 32 000 35 000Land 10 000 10 000Total 66 000 73 000

"#$$%&' ())%')

Cash 18 000 12 000Accounts Receivable 56 000 48 000Supplies on Hand 2 400 2 600Prepaid Insurance 600 400Total Current assets 77,000 63,000Total Assets $143 000 $136 000

Current LiabilitiesAccounts Payable 2 000 2 400

Non-current liability

Mortgage Payable 52 000 55 000

Owner's EquityParker, Capital 89 000 78 600Total Liability & Equity $143, 000 $136,000

(b)Parker, Ending Capital $89 000Parker, Beginning Capital 78 600Increase 10 400Add: Drawings 9 000

19 400Less: Contributions 6 000Net Profit, This Year $13 400


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Question 5

Original bank balance 2,600Less: Dishonoured cheque (70)Corrected bank balance 2,530

Corrected bank balance 2,530Add: Unpresented cheques 395Less: Uncleared receipts (230)

Balance per bank statement 2,695

Question 6

The three main books of prime entry:

Cash bookUsed to record every cash payment that the business makes and every cash receipt.

Sales day bookUsed to record every credit sale that the business makes.

Purchases day bookUsed to record every credit purchase of stocks.

Control Accounts are found in the general ledger and contains the summary totals of the balances in thesubsidiary ledgers.

Example of control accounts are debtors and creditors control accounts.

On a monthly basis, the closing balance carried forward on the control accounts are checked against theseparate totals for all the individual customers and suppliers from the debtors and creditors ledgers.

This reconciliation process will identify differences between the information in the books of prime entry andthe balances in the debtors and creditors ledgers. This will enable a business to identify and investigate

some possible errors.


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Question 7

(a)

Original creditors ledger control account 321,700Credit note for purchase return not accounted for (3,600)Error in returns outwards day book 3,000Corrected creditors ledger control account 321,000


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(b)List of individual creditors' balances 330,800Debit balance wrongly listed as Cr balance (3,400)Credit note for purchase return not accounted for (3,600)Cash payment wrongly recorded 270Purchase omitted 600

Payment omitted Balancing figure (3,570)Corrected creditors ledger control account 321,100


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Question 8

Accounting Bases refer to the various possible methods of applying accountingconcepts in preparing financial statements.

Accounting policies refer to the specific methods chosen to account for thevarious transactions.

For example, to account for depreciation the possible bases may be the straight line orline or the reducing balance method, but the firm may choose to use thereducing balance method as the selected accounting policy.


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Answer To Homework Questions Lecture 4

Question 1

Annual Depreciation:

$Machinery:100,000 X 20% 20,000

Vehicles(300,000 153,000) X30% 44,100Total 64,100

Question 2

ACCOUNTS

1) Land Account 10/15 X $12 million = $ 8 million

2) Building Account 5/15 X 12 million =$ 4 million

3) Parking Lot = $2 million + $150,000 = $2,150,000

4) Store Equipment = $21,000 + $1,000+ $1,000 = $23,000

Notes

1) The $12 Million paid for land & building has to be split separately to theland & building account as the land is not depreciated but the buildingis subject to depreciation. The relative valuation is used to split the totalcost of $12 million to the land & building account.

2) The parking lot should be shown as a separate account and not part ofthe building.

3) The store equipment account should include all incidental cost such asdelivery and installation.

Question 3

Situation 1Net Book Value = $15,000$20,000 less $5,000Cash proceeds = $18,000Gain on disposal = $ 3,000


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Situation 2

a) Balance at 30 June 2013

Cost = $110,000Accumulated depreciation = $ 82,500( $110,000 X0.25) X 3 yearsNet Book Value $27,500Cash Proceeds $20,000Loss on disposal $ 7,500

b) Balance at 30 June 2013

Cost = $110,000Accumulated depreciation = $ 96,250

( $110,000 X0.25) X 3.5 yearsNet Book Value $13,750Cash Proceeds $20,000Gain on disposal $ 6,250

Situation 3

Cost of New machine 100,000

Consideration given upOld Machine NBV 40,000Cash 15,000Total 55,000Gain on disposal 45,000(100,000-55000)


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Question 4Cost of vehicle = $20,000Accumulated Depreciation = $7,20020,000 (20,000X0.8X0.8)

Net Book Value =$12,800Cash $ 5,000Loss on disposal $ 7,800

Non- current assets $Motor Vehicles at cost 100,000($120,000-$20,000)

Accumulated depreciation 48,640(43,000 7,200 + 12,840* )Net book Value 51,360

* This represents the depreciation expense on the remaining vehicles for thecurrent year.Cost of remaining vehicles = $100,000120,000-20,000Accumulated depreciation = $35,800(43,000-7,200)Net book Value = $64,200X Rate X 20%Depreciation $12,840

Question 5

1) Polishing Machine

Cost as at 1/1/11 100,000Residual Value 5,000Depreciable Amount 95,000Depreciation each year (1/10 X95000) 9,500

New Polishing Machine

Cost as at 1/1/13 120,000Residual Value 6,000Depreciable Amount 114,000Depreciation each year (1/10 X114,000) 11,400


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2) Grinding machine

Cost 30,0002011 Depreciation 30% 9,000

21,0002012 Depreciation 30% 6,300

14,7002013 Depreciation 30% 4,410

10,290

3) Sale of polishing machine 1 January 2013

Cost 100,000 Acc depn 19,000 = 81,000 NBV

Sold For 45,000

Loss on sale 36,000

Extracts from the Income Statement for the year ended 21/12/13

Depreciation of equipment 25,310(Polishing machine 9,500 + 11,400+Grinding machine 4,410)

Loss on sale of equipment 36,000

Extracts from the Statement of Financial Position as at 21/12/13

Non Current AssetsCOST ACC DEPN NET BOOK

VALUEPolishing machine 220,000 39,900 180,100Grinding Machine 30,000 19,710 10,290

250,000 59610 190,310

b) The following 4 points are relevant to the question:

I. Depreciation is an allocation of cost ( matching concept) less expectedresidual value over the assets useful life (it is like a prepayment)

II. Because the process of depreciation is based on cost, the amount in theAccumulated balance does not accumulate to a figure needed to replacethe fixed assets in the future as the future price of the asset mayincrease

III. The amount of depreciation expense is considered a non cashexpense. Therefore depreciation does not effect cash flows.


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IV. The choice of the method for depreciation depends on:

a)Ease of Use

b) The method chosen should reflect the benefit pattern from the use ofthe asset. For example, of more benefits are expected from use of theassets in its earlier years, then the reducing balance method should beused.

Gain/ Loss arises because the residual and useful life are onlyestimates and as long as these do not equal the actual amounts, again/loss may arise.


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Question 6

(a) Entries in the Income Statementaccounts:

2004 2005Depreciation

Fixtures and fittings 2,900(25k-1.8k)/8 4,800 2.9k+(15.2/8)

Motor vehicle 4,000 (0.25*16k) 4,625 (0.25*18.5k)

6,900 9,425

Loss on disposal of motorvehicle 0 8,800

(3200-12000)

NBV@disposal= 16k-4k

=12k

(b) Extracts of financialPosition:

Cost Accm depn NBVFixtures and fittings 25,000 2,900 22,100Motor vehicle 16,000 4,000 12,000

41,000 6,900 34,100

Cost Accm depn NBVFixtures and fittings 40,200 7,700 32,500Motor vehicle 18,500 4,625 13,875

58,700 12,325 46,375


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Question 7

Galleon Ltd Income Statement account for years ended 30th September (Extract)

Depreciation expense

2007: 6,900 [(25,000 1800) + (16,000 x 25%)]8

Depreciation expense 2008: 9,425(4,800 + 4,625)

Plant: (25,000 1800) + (15,200) = 4,8008 8

Vehicle: (18,500 x 25%) = 4.625

Loss on disposal of vehicle 2008: 8,800

Sales Proceeds NBV of asset sold= 3,200 (16,000 x (1-0.25)] = - 8,800 (loss)

Galleon Ltd

Statement of Financial Position as at 30th September (Extract)

Cost Acc Depn NBV

2007

Non-current assets

Plant and equipment 25,000 2,900 22,100Motor vehicles 16,000 4,000 12,000

41,000 6,900 34,100

2008

Non-current assets

Plant and equipment 40,200 7,700 32,500Motor vehicles 18,500 4,625 13,875

58,700 12,325 46,375


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Answers to Homework Question Lecture 5

Question 1

A) a) FIFO = (4000 X $6) + (16000 X $8) = $152,000b) LIFO = ( 4000 X $5) + (16000 X $6) =$116,000

B) $7 is the net reliasable value(NRV) of the stock . Need to apply theprudence rule of the lower of cost and NRV and there new ending stockvaluation:

a) FIFO = (4000 X 6) + (16000 X $7)= $136,000b) LIFO no change as cost is below the NRV

Question 2

Closing stock is the latest stock values for FIFO method.Units of closing stock = Purchases sales = (20+40+20+10+10) (25 + 40)

= 35 units

Thus value = (10 x 1200) + (10 x 700) + (15 x 1,100) + Transport $2500 (additionalcost of November items not sold yet) = 38,000

Cost of sales is based on earliest cost multiplied by sales units; Thus value = (20 x1000) + (40 x 900) + (5 x 1100) = 61,500.

The closing stock figure should be written down by 6,000 to net realisable value.However, this amount should not be included as cost of sales but reflected in the

profit and loss account as an exceptional charge. This is because the event that causedthe value to erode is an exceptional event. Under normal circumstances, reduction invalue due to the lower of cost and NRV rule should be taken to Cost of Sales.

Question 3

A B C

Profit after customer costs 73,000 51,000 63,000Net profit margin 11.4% 12.75% 19.7%

Workings

ABC

Profit for A = [(80000 x 8 x (100% - 5% - 20%)] (80000 x 5) 7000Net profit margin = 73000 / (80000 x 8)Same principle applies to Products B and C

Commentary from Examiner:


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The gross profit figures simply show that the largest sales produce the highest grossprofit, but the picture becomes more complex when the customer related expenses areincluded. A, the largest customer, still produces the highest profit, but not the bestmargin, as B and C are higher. In fact, C the smallest customer produces the highestmargin

Question 4

Closing stock units for both FIFO & LIFO:

20 + 40 -25 +20+10 +10 -40 = 35 Units

FIFO

Closing stocks =( 10 X 1,200)+ (10 X 700) + (15 X 1,100) = 35,500

Cost of sales(20 X 1,000) + (40 X 900 )+ (5 X1,100) = 61,500

LIFO

Closing stock =(10 X1,200)+ (5 X900) + (20 X 1,000)= 36,500

Cost of sales =( 25 X 900) + (10 X700) + (20 X1,100) + (10 X900)= 60,500

Question 5

Situation 1

Damage goods:Cost : $5,000

NRV : $5,500

Stock loss = $0Hence closing stock at original $300,000

Situation 2

Damage goods:Cost : $10,000

NRV : $7,000Stock loss = $3,000

Hence closing stock at original $500,000 - $3,000 = $497,000


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Situation 3

Stock at cost = $400,000

$800,000/2

Damage goods:

Cost : $4,000NRV : $1,500 - $500 = $1,000Stock loss = $4,000 -$1,000 = $3,000

Hence closing stock at cost $400,000 - $3,000 = $397,000

Situation 4

Wheels : 5,000 Units X $5(lower cost) = $25,000

Barrels: 1,000 Units X $4(Lower NRV*) = $ 4,000

Total stock value = $29,000

* NRV = $6 - $2 = $4

Situation 5

Original stock Valuation at cost 810,000

Stock destroyed by fire: Lower NRV 0**Cost : 40,000

NRV: 0(Not expected to any compensationfrom insurance co.)

Damaged stockCost : 30,000

NRV: 12,000Stock loss 18,000 (18,000)Closing stock valuation 792,000

**Why 0?The stock was completely destroyed by fire, hence not counted in theoriginal value of 810,00. Its NRV is 0 also as no compensation expected.(Interesting question!)


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Answers to Homework Question Lecture 6

QUESTION 1Burt Inc

Income Statement for the year ending 30 June 2001

Sales 89,000Less Sales returns 11,000

78,000Less Cost of SalesOpening Inventory 24,000Purchases 45,000

69,000Less Closing Inventory 30,000

39,000Gross Profit 39,000Add Interest received onInvestment

1,500

40,500Less ExpensesAdvertising 9,000Rent Expense 90,000Telephone expense 800Wages 25,000 124,800

Net Loss 84,300

Burt IncStatement of Financial Position as at 30 June 2001

$ $Non Current AssetDelivery Vehicle 25,000

Current AssetsCash at Bank 78,000Debtors 10,000Inventory 30,000

Stationary 400Total Current Assets 118,400Total Assets 143,400Current LiabilityTrade Creditors 9,000

Owners equity :Closing Capital 134,400Total Liabilities and equity 143,400


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Question 2a)Universal Retailers

Income Statement

For the year ended 30 June 2006

Sales 205,000

Less: Cost of Sales

Opening stock 22,000

Add Purchases 119,000

Less: Closing Stocks (25,000)

Cost Of Sales 116,000

Gross Profit 89,000

Less: expenses

Bad Debts expense 1,245

Office Expense 3,975

Office Salary 28,000

Rent 18,000

Utilities(3,400+200) 3,600

Depreciation 1,000

Advertising 3,469

Wages 10,500

Insurance(428 X 12 months) 5,136

Total Expenses 74,925

Net profit 14,075


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b)Universal Retailers

Statement of Financial Position $ $

Non-current Assets

Fixtures & Fittings Net 93,000

Current Assets

Bank 6,750

Trade Debtors 21,054

Inventory 25,000

Prepaid Insurance 856

Total Current Assets 53,660

Total Assets 146,660

Current Liabilities

Trade Creditors 12,000

Utilities Payable 200

Total Current Liabilities 12,200

Owners equity

Opening Capital 120,385

Add:Net Profit 14,075

Closing Capital 134,460

Total liability and equity 146,660c)

1) Income statement shows the performance of the company, can judgethe effectiveness of management strategy.

2) Statement of Financial Position reflect the financial position, liquidity,solvency of the company.


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Question 3

Amir & Daughters

Income Statement

For the year ended 31 December 2006

Sales 129,000Less: Cost of Sales 39,000

Gross Profit 90,000

Less: Expenses

Rent ( 16,500+1,500) 18,000

Stationary 700

Telephone 500

Wages 15,000

Insurance Expense 2,400

Depreciation 3,000


Net profit 50,400

Part c)

Amir & Daughters

Statement of Financial PositionAs at 31 December 2006

Non current Assets

Motor Car 30,000

Less: Acc Depn(3,000+3,000) 6,000

Net Book value 24,000

Current Assets

Bank 82,000

Trade Debtors 8,000

Inventory 32,000

Prepaid Insurance (2,600-2,400) 200


Total assets 146,200

Current Liabilities


Rent payable 1,500


Owners equity


Add Net Profit 50,400


Total liability and equity 146,200

Part a & dOpening capital 87,300

Part d

Adjustments are necessary due to the accrual accounting principle

which requires that revenues earned be matched with expenses

incurred in the same period.


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Question 4a)Kiasu & Company

Income StatementFor the year ended 30 June

2008$

Sales 420,000

Less: Cost of Sales

Cost Of Sales 149,000

Gross Profit 271,000

Less: Expenses

Salary 37,000

Rent 22,000

Utilities 5,600

Repairs 3,000

Depreciation 22,000

Insurance Expense 2,400

Interest Expense 1,500


Net profit 177,500

b)Kiasu & Company $ $

Statement of Financial PositionAs at 30 June 2008

Non-current Assets

Equipment 220,000Less: Accumulated Depreciation 44,000

Net Book Value 176,000

Current Assets

Bank 10,000

Debtors 58,000

Inventory 32,000

Prepaid Insurance 2,400



Current Liabilities

Creditors 15,000

Loan Payable 30,000

Interest payable 1,500







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Question 5a)Forest Trees

Income StatementFor the year ended 31 December 2008

$

Sales 1,420,740

Less: Cost of Sales 1,014,380


Less: Expenses

Rent 33,000

Wages 85,000

Utility(7000+300) 7,300

Advertising 125,200

Depreciation 19,000


Net profit 136,860

b)

Forest Trees $ $

Balance Sheet

As at 31 December 2008

Non-current assets

Equipment 190,000

Less: Acc Depn(76000+19000)) 95,000

Net Book value 95,000

Current Assets

Bank 43,150

Trade Debtors 230,720

Stocks 127,920



Current Liabilities


Utility payable 300

Total Current Liabilities 120,490Opening Capital 239,440



Total Liabilities & Equity 496,790


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Question 6

Accounting Equation

Assets = Liability Plus Equity

OrAssets less Liability = Equity

Assets are valuable resources controlled by the businessWhich yield economic benefits. Example, debtors of cash.

Liabilities are potential sacrifice of economic benefits that the firmis presently obliged to make. Example, creditors.

Owners equity refers to the residual interest in the assets afterthe claims the creditors have been met.

Link Between Income Statement and TheStatement of Financial PositionAn increase in profits will lead to an increase in equity. To balance theaccounting equation, this will lead to either an increase in assets or areduction in liabilities.


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Answer to Homework Question Lecture 7

Question 1

Bank : 50,000(1) 20,000(2) 1,500(3) +1,000(5) -1,200(6) 890(8) 2,000 (9)Ending Total = 25,410

Motor Vehicle : 45,000(1)

Capital : 95,000(1)

Plant & Equipment: 60,000(2)

Long Term Bank Loan: 40,000(2) 490(8) = 39,510

Prepaid Rent : 1,500 (3)

Debtors: 6,000 (4)

Sales : 6,000 (4)

Unearned Revenue: 1,000(5)

Wages & Salary : 1,200(6)

Supplies: 1,300(7)

Creditors: 1,300(7)

Interest expense : 400 (8)

Drawings: 2,000(9)


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Part 1

George Business

Unadjusted Trial Balance

As at end of transaction 9

Accounts Debit Credit

Bank 25,410

Motor Vehicle 45,000

Capital 95,000

Plant & Equipment 60,000

Long Term Bank Loan 39,510

Prepaid Rent 1,500

Debtors 6,000

Sales 6,000Unearned Revenue 1,000

Wages & Salary 1,200

Supplies 1,300

Creditors 1,300

Interest expense 400

Drawings 2,000

Total 142,810 142,810

Part 2

Accounts Debit Credit Adjustment

Bank 25,410Motor Vehicle 45,000

Capital 95,000



Prepaid Rent 1,500 -500

Debtors 6,000

Sales 6,000 +1000

Unearned Revenue 1,000 -1000

Wages & Salary 1,200 +800

Supplies 1,300 -800Creditors 1,300

Interest expense 400

Drawings 400

Total 142,810 142,810

Rent Expense 500

Salary payable 800

Supplies Expense 800

Electricity & Telephone Expense 150

Electricity & Telephone Payable 150


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George Business

Income Statement

For the year ended 31 March 2010$ $

Sales 7,000

Less: Operating Expenses

Wages & Salary 2,000

Rent Expense 500

Supplies Expense 800

Electricity & Telephone Expense 150

Total Operating Expense 3,450

Profit Before Interest Expense 3,550

Less: Interest Expense 400Net Profit 3,150

George Business

Statement of financial position

As at 31 March 2010

$ $

Non-current Assets

Motor Vehicle 45,000


Total non-current assets 105,000

Current Assets

Cash at Bank 25,410

Debtors 6,000

Prepaid Rent 1,000

Supplies On Hand 500


Total assets 137,910

Current Liabilities

Creditors 1,300Salary payable 800

Electricity & Telephone Payable 150


Long Term Liabilities


Equity


Add:Net Profit 3,150

Less: Drawings 2,000

96,150



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Question 2

Neon Lights Inc

Income Statement

As at 30/4/02

$000 $000

Sales 13,500.00

Less: Cost Of Sales

Opening Stock 700.00

Add: Purchases 9,500.00

Less:Purchase Returns 3.00

Less: Closing Stocks 797.00

Cost Of Goods Sold 9,400.00

Gross Profit 4,100.00

Add: Gain On Disposal 19.00

Other Income 32.35

4,151.35

Less: Expenses

Depreciation Expense(106+127.9) 233.90

Interest Expense 280.00

Salary & Wages 1,715.00Light & Power 210.00

Insurance 60.00

Administration & Distribution 390.00

Bad Debts 150.00

Total Expenses 3,038.90

Net profit for the year 1,112.45


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Neon Lights Inc

Statement of Financial Position

As at 30/4/02 $000 $000 $000

Non-Current Assets Cost Acc Depn Net Book Value

Freehold Land 2,000.00 2,000.00

Building 5,300.00 1,166.00 4,134.00Fixtures & Fittings 2,170.00 1,018.90 1,151.10

Total 9,470.00 2,184.90 7,285.10

Current Assets

Trade Debtors 1,590.00

Less:Prov For Doubtful Debts 55.65

Net Debtors 1,534.35

Stocks 797.00

Prepaid Insurance 8.00

Total Current Assets 2,339.35

Total Assets 9,624.45

Current Liabilities

Bank Overdraft 365.00

Trade Creditors 1,097.00

Interest Payable 280.00

Wages payable 25.00

Total Current Liabilities 1,767.00

Non-current Liabilities

7% Loan 4,000.00

EquityCapital 2,700.00

Retained Profit 1,157.45

(195+1,112.45-150)Total Equity 3,857.45

Total Liabilities & Equity 9,624.45


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Question 3

Tip Interior

Income Statement

For the year ended 31 March 2006$ $

Sales 1,420,740

Less: Cost Of Sales

Opening stocks 144,600

Add: Purchases 997,700

Less: Closing Stocks 127,420

Cost of Goods Sales 1,014,880


Less: Expenses

Rent & Rates(54440+3000) 57,440

Wages & salary 85,000

Electricity 17,510

Transport 30,060

Sundry 60,190

Audit fees 5,000

Bonus 20,000

Advertising 12,000

Bad Debts 5,000

Doubtful Debts 6,772

Depreciation(4000+3000+32000) 39,000

Total Operating Expense 337,972

Profit Before Interest & tax 67,888

Less: Interest expense 2,400

Profit before tax 65,488

Less: Tax Expense 40,000

Net Profit for the year 25,488


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Tip Interior


As at 31 March 2006

Cost

Acc

Depn NBVNon Current assets $ $ $

Premises 200,000 4,000 196,000

Delivery Vans 160,000 96,000 64,000

Shop Fittings 30,000 15,000 15,000

Total 390,000 115,000 275,000

Current Assets

Bank 43,150

Debtors (230720 -5000) 225,720

Less: Provision For DD(3 % X 225720) 6,772 218,948

Stocks(127920-500) 127,420



Current Liabilities


Tax Payable 40,000

Unearned Fees 2,000

Audit fees Payable 5,000

Interest payable(40000X 12% X0.5) 2,400


Non-current liabilities

Long Term Loan 40,000

Total Liabilities 209,590

Shareholders Equity

Share Capital 180,000

Reserves:

Share Premium(40-20+160) 180,000

Retained profits(59440+25,488-10,000) 74,928

General Reserves 20,000

Total Shareholders equity 454,928

Total Liabilities & Equity 664,518


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Tip Interior

Statement of Changes In Equity

For the year ended 31 March 2006

ShareCapital

SharePremium

GeneralReserve

RetainedProfit

$ $ $ $Balance as at 1/4/05 100,000 40,000 10,000 59,440

Add/ (Less) :Shares Issued 80,000 160,000Cost of shares issued (20,000)Transfer to General Reserves 10,000 (10,000)Net Profit for the year 25,488Balance as at 31/03/06 180,000 180,000 20,000 74,928


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Question 4

Shakespeare Ltd

Income Statement

For the year ended 30 June 2006

All figures in thousands of pound sterling

Sales 18,900.00

Less: Cost Of Sales

Opening Stocks 1,206.00

Add: Purchases 11,160.00

Less: Closing Stocks -1,395.00

Cost Of Sales 10,971.00

Gross Profit 7,929.00

Add: Other IncomeIncome From Investment 30.00

Total 7,959.00

Less: Operating Expenses

Distribution Cost 441.00

Bad Debts 72.00

Directors Remuneration 495.00

Heating & Lighting 252.00

Administration expenses 153.00

Marketing & Selling Expense 270.00

Rent 675.00

Wages & salaries 3,150.00

Loss On Disposal 9.00

Depreciation(756+175) 931.00

Doubtful Debts Expense 63.00

Audit Fees 26.00

Total Operating Expense 6,537.00

Profit Before Interest & tax 1,422.00

Less: Interest Expense 75.60

Profit Before Tax 1,346.40

Less: Tax Expense 540.00

Net Profit 806.40


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Shakespeare Ltd


As at 30 June 2006

All figures in thousands of pound sterling

Non-Current Assets Cost Acc Depn NBV

Equipment 3,780.00 2,124.00 1,656.00Vehicles 700.00 530.00 170.00

Total 4,480.00 2,654.00 1,826.00

Long Term Investments 252.00

Total Non current Assets 2,078.00

Current Assets

Bank 63.00

Trade Debtors 2,700.00Less: Provision For Doubtful

Debts(72+63) -135.00

Net Debtors 2,565.00

Stocks 1,395.00

Total Current Assets 4,023.00

Total Assets 6,101.00

Current Liabilities

Trade Creditor 621.00

Audit fees Payable 26.00

Interest payable 75.60

Tax Payable 540.00

Total Current Liabilities 1,262.60

Non Current Liability

Long Term Loan @ 12% 630.00

Share capital

Share Capital 2,250.00

Reserves

Retained Profit(1188+806.40-36) 1,958.40

Total Shareholder's Equity 4,208.40

Total Liability & Equity 6,101.00


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Part (b)

1) Straight Line depreciation is a depreciation method that allocates and

equal amount of depreciation expense to each period of benefit.

2) It assumes that equal amounts of benefit are received from the useof the non-current assets over the useful life of the asset.

3) The alternative to straight line depreciation will be the reducing balance

method.

4) The choice of the method will depend on the pattern of benefit expected.

5) If more benefits are expected to be received when the assets is new,

Then the reducing balance method should be used.

6) On the other hand, for simplicity and if equal benefits expected, then straight

line should be used.


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Answer to Homework questions lecture 8

Question 1

Estimated Retained profits For the year ending 31 December 2006

Profit Before Interest & tax 200,000

Less: Interest Expense

220,000 X 0.03 6,600

Net Profit 193,400

Less: Dividends Proposed

Preference shares 35,200

440000 X 2 X0.04

Ordinary Shares

1,000,000 X 0.05 50,000

Retained Profits at 31/12/06 108,200

Share capital & Reserves Section

as at 31 December 2006

Share capital

Ordinary shares

1,000,000X0.5 500,000

ReservesShare Premium

0.4 X1,000,000 400,000

Retained Profits at 31/12/06 108,200

Total Shareholder's equity 1,008,200

Workings

Amount of Loan Stock

Amount needed 2,000,000

Less: Issue of shares

1 Milllion share @0.9 900,000

Preference shares 880,000

440000X 2

Balance 220,000


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Question 2

a) Simplified Financial PositionShare

Issue Loan Issue

Non current Assets 900 900Current Assets 700 700

Total Assets 1,600 1,600

Current Liabilities 300 300

Non Current liability 300

Capital & Reserves

Ordinary shares 1000 800

Share Premium 100 0

Retained Profits 200 200

Total Equity 1300 1000

Total Liability & Equity 1,600 1,600

b.

Annual Earnings 195 195

0.15 X 1300

Less: interest -24

Net Earnings 195 171

No. Of shares 1,000,000 800,000

EPS 0.20 0.21

Gearing ratio 0.00 20.46%

Comments:

Alternative 1 produces a lower EPS but no gearing risk and hence

is a low risk, low return alternative.

Alternative 2, produces a higher EPS because the return on assetsexceeds the borrowing rate, but the risk is higher due to the higher


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Question 3Pelham PLcShareholders EquityAs at 30 April 2006

Ordinary Shares of 1 each [1m+ (1m/5)*1]+[1.2m/3] 1,600,000

Share Premium [(1m/5)*1.5]-300k -

Retained profits [1.5m+500k+600k-100k] 2,500,000

4,100,000


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Answer to Homework Question Lecture 9 & 10Question 1Birds Pte Ltd

Statement of cash flow

For the year ended 31 December 2011$000 $000

Cash Flow from operating activities

Profit before taxation 84

Add: Depreciation expense 64

Interest expense 6

Decrease stocks 10

Increase debtor -23

Increase creditor 15

Cash generated from operations 156

Less; Interest paid -6

Taxes paid (28+21-39) -10

Net cash from operating activities 140

Cash flow from investing activities

Purchase of non-current assets -150

(600+64-514)

Net cash flow from investing activities -150

Cash flow from financing activitiesLoan repaid -20

Share Issue 60

(320-260)

Dividends paid -100

Net cash flow from financing activities -60

Net increase in cash & cash equivalents -70

Cash & cash equivalent at beginning of period 185

Cash & cash equivalent at end of period 115

1 Advantage

1) Cash flow statement can highlight cash flow problems

that may not be apparent from analysing the income

statement or financial position.


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Question 2

Lincoln Plc


For the year ended 31 December 2006$000 $000

Cash Flow from operating activities



Interest expense 8

Interest Income -60

Gain on disposal -30

Increase stocks -25

Decrease debtor 16

Increase prepayment -40

Increase creditor 115



Taxes paid -100



Purchase of non-current assets -230Disposal of non-current assets 100

Purchase of investments -50

Interest received 60


Cash flow from financing activities

Loan repaid -20

Share Issue 100

Dividends paid -80

Net cash flow from financing activities 0

Net increase in cash & cash equivalents 56

Cash & cash equivalent at beginning of period 24

Cash & cash equivalent at end of period 80


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Question 3

Sloop PLc


For the year ended 31 March 2008

$mil $milCash Flow from operating activities



Interest expense 36

Interest Income -30

Gain on disposal -20

Increase stocks -242

increase debtor -18

Increase prepayment -60

Decrease creditor -20



Taxes paid -280



Purchase of non-current assets -324

Disposal of non-current assets 160Purchase of investments -36

Interest received 30


Cash flow from financing activities

Loan repaid -64

Share Issue 76

Dividends paid -160

Net cash flow from financing activities -148

Net increase in cash & cash equivalents -176

Cash & cash equivalent at beginning of period -196

Cash & cash equivalent at end of period -372


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(b)The argument proposed is that cash flow statements are more reliable thanaccruals-based financial statements.

Cash flow statements are more objective as there is no necessity to makesubjective adjustments to the accounts as compared with the profit and lossaccount and the balance sheet. This makes the cash flow statementcomparatively more reliable in terms of accuracy of numbers.

However, it is necessary for information to be relevant as well as reliable. Forrelevance to decision making, information has to have the quality of beingable to be used to project future information. Accruals based profit and otherinformation is more reliable in being able to provide a better indication offuture than cash flow information.


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Answer to Homework questions Lecture 11

Question 1

a) Computation of Purchases

Opening Bal Creditor + Purchases less closing balance of creditors =Payment

7,400 + P 8,900 = 103, 300 ( 101,500 + 1,800)

Therefore Purchases = 103,300 7,400 + 8,900 =104,800

Total Purchases = 104,800

Less : drawings = 600

$%& '()*+,-%- . /012300

b)T lambertIncome StatementYear ended 31 December 2011

$ $Sales 128,000

Less; Cost of salesOpening stocks 8,600Purchases 104,200Less Closing stocks 16,800

Cost of sales (96,000)

Gross Profit 32,000

Less:Labour (1200+ 6620) 7,820Rent(5040+300-420) 4,920Delivery 3,000Electricity(1390+160-210) 1,340Total expenses (17,080)

Net Profit 14,920


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T LambertStatement of Financial PositionAs at 31/12/X1

$ $Current AssetsBank 1,650Cash 330Debtors 4,300Stocks 16,800Prepayments 420Total Assets 23,500

Current LiabilitiesCreditors 8,900Accruals 160

9,060

Opening capital 7,850Add :Net Profit 14,920Less: Drawings* 8,330Total Equity 14,440Total Liability & Equity 23,500

*Cash Drawings = 7730

Goods taken = 600

Total 8,330


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Question 2

Opening stock 5,900+ Purchases 31,760 (0.8*39,700 cash payments)- COS (24,240) W1

= Closing Stock 13,420

W1.Closing debtor 2,000-Opening Debtor (1,550)+ Receipts from debtors 39,950 W2

= Cr Sales 40,400

COS = 60% * Sales 40,400 = 24,240

W2.

Closing Bank balance 750-Opening Bank balance (500)+ Cash paid 39,700

= Receipts from debtors 39,950


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Question 3

Ashton plcIncome Statement for the year ended 31 March 2005

Sales 6,300,000

Less: Cost of salesOpening Stock 402,000Purchases 3,720,000Less: Closing Stock 465,000

Cost of Sales 3,657,000Gross Profit 2,643,000Income from investments 12,000

Less: Operating expenses

Depreciation- Equipment (20%*1,260,000) 252,000- Vehicles [25%*(240,000-120,000)] 30,000

Auditors' remuneration 36,000Administration costs (84,000-9,000) 75,000Heating and lighting (145000+2000) 147,000Increase in prov for doubtful debts (45000-24000) 21,000Distribution costs 90,000Directors' remuneration 165,000Marketing and selling costs 51,000Rent 225,000Wages and salaries 1,074,000 2,166,000

Net profit before interest and tax 489,000Less: Loan interest (10%*210,000) 21,000

Net profit before tax 468,000Less: Taxation expense 180,000

Net profit 288,000


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Wodehouse PlcStatement of Financial Position as at 31 March 2006

Non current Assets CostAccmDep'n NBV

Equipment 1,260,000 708,000 552,000

Vehicles 240,000 150,000 90,000

1,500,000 858,000 642,000

Long-term investments 84,000

Current assets

Bank balance 21,000

Trade debtors 900,000

less: provision for bad debts (5% x 900000) 45,000 855,000

Stock 465,000

Prepaid insurance 9,000

Total Current Assets 1,350,000

Total Assets 2,076,000

Current liabilities

Trade creditors (198,000+9000) 207,000

Audit fee payable 36,000

interest payable (0.1*210000) 21,000Tax payable 180,000


Non current liabilities

10% long term loan 210,000

Share capital and reserves

Share capital: 750,000 shares at 1 each 750,000

Retained profits (396,000 + 288,000-12000) 672,000

1,422,000Total Liabilities & Equity 2,076,000


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Answer to Homework Question- Lecture 12

Question 1(a)

RATIO FORMULA 2000 1999

(i) Return on NetAssets

Operating profit beforeinterest

Net assets

110/520= 21.15%

135/510= 26.47%

(ii) Gross profitratio

Gross profitNet sales

260/650= 40%

285/580= 49.14%

(iii) Operatingprofit ratio

Operating Profit beforeinterest

Net sales

110/650= 16.92%

135/580= 23.28%

(iv) Asset turnover Net salesAverage assets

650/520= 1.25

580/510= 1.14

(b)

Points to consider and discuss.

Rate of return from assets employed has declined from 26.47% in 1999 to

21.15% in 2000. This is not a good sign.

Gross profit margin is declining. This is a not good sign.

Operating profit margin has declined from 23.28% in 1999 to 16.92% in2000.

Asset turnover has increased from 1.14 to 1.25.

This information indicates that the decline in ROA has resulted from a declinein the net profit ratio. The decline has been mitigated by improved utilisationof assets employed to generate sales.


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Question 2

Working capital refers to investment in stock, debtors, creditors and represents thecash tied up in the business.

Working capital from financial statement standpoint may also referTo sum of current assets less current liabilities.

Importance to manage working capital to ensure sufficient liquidity tofund all required short -term obligations such as payment to creditors, workers.

If too much cash is tied up in the business, then firm may not be able toTake advantage of other business opportunities.

Good working capital management calls for appropriate stock control, good creditcontrol over debtors and maintaining good relations with suppliers.


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Question 3

Part A 2005 2004

Ratios

Profitability

Operating Profit Margin

(Operating Profit/Sales)

43813/206470X 100% 21.2%

21220/210619 X 100% 10.1%

Return On Capital Employed

(Operating Profit/Capital Employed)

43813/159783 X100% 27.8%

21220/97070 X100% 21.9%

Working Capital Ratios

Current Ratio

(Current Assets/Current Liabilities)

45763/15470 3.0

44610/16290 2.7

Quick Ratio

(Current Assets- Stocks)/ Current Liabilities

45763-14278/15470 2.0

44610-14550/16290 1.8

Financial Risk

Debt to Equity Ratio

Long Term Debt/ Shareholder's equity

30000/129783 23.1% Nil

Interest Coverage Ratio

Operating Profit/Interest expense

43813/3000 14.6 Nil


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Part b

Comments

Changes In Operations

1) The operating profit margin has improved significantly in 05 as compared to 04.

2) This is probably due to the switch to the high quality products as well as

better control over expenses in 2005.

3) The ROCE has also improved significantly in 2005, hence implying that the new

investment strategy is a success.

4) The success of the investment strategy is also supported by the fact that the

profit before tax has nearly doubled in 2005.

Working Capital

1) Both the current & Quick Ratio have improved in 2005, signalliing lower

solvency risk in 2005.

2) The cash balance has also increased significantly in 2005, highlighting enhanced

liquidity.

3) Directors should consider investing part of this cash or paying it out as dividends.

Financial Risk

1) The financial risk has increased in 2005 as 30 million of loans were raised.

2) This will increased equity risk to shareholders who will require a higher return.

3) This risk is mitigated by the higher growth potential in 2005 as Return on Equity

has improved and lower dividend pay-out.

Conclusion:

Changes have improved profitability and financial position of the company

in 2005.

In light of the higher risk to shareholders, efforts should be taken to enhanceshareholder value for example by share buy backs, etc.


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Question 4

Major LimitedStatement Of Financial

Position

As at 30 April 2007

Non Current Assets 110,000

Current Assets

Cash in hand 5,958

Debtors

1/12 X220000 18,333

Stocks 8,708

0.5/12 X 209000



Current Liabilities


Long Term Debt 41,000

0.5 X 82000

Total Liabilities 61,000

Equity

Ordinary Share capital 30,000

Retained Profits 52,000

45,400+6600)Total Equity 82,000


Workings

Sales 220000

2 X 110,000

COGS 209000

0.95X220000

Gross Profit 11000

5% X 220000

Expenses 4400

2% X 220000

Profit 6600


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Question 5

Reagan Averages

EPS 640.7/2200 0.2912

DPS 360/2200 0.1636Dividend yield 0.1636/7.99 2.05% 3% aDividend cover 640.7/360 1.78 2 bPE ratio 7.99/0.2912 27.44 20 c

a. Reagan's dividend yield is lower due to its higher market price.b. Reagan's dividend cover is lower due to its higher dividend payout.c. Higher PE ratio indicates that the market considers that Reagan's future prospect are expected

to be better than the average for the sector.

Question 6

Cash operating cycle is the length of time that it takes to recover cash that is tied up in working capital.It is equal to stock holding period + debtor payment period - creditor payment period

Example strategies to minimise the cycle:

- Reduce stock holding level through approach such as 'Just-in-time'- tighter credit control such as close monitoring of outstanding balances, increased collection efforts- better stock control eg. better purchasing decision, monitoring of aging stock- reduce credit terms to customer- negotiate for longer credit terms from suppliers


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Answer To Homework Questions Lecture 13

Question 1

Consolidated Financial Statements are statements that incorporate

the assets, liabilities, equity of companies under common control.

Consolidated Financial statements are a required where one company ownsmore than 50% of the issued common shares of the other company.

The Statement of Financial Position and the Income Statements of these companiesunder common control are simply added together on a line to line basis.

There are also adjustments to remove inter-company transactions betweencompanies.

The major purpose of the consolidated financial statements is to reflectthe economic substance of the relationship, that is the fact the twoentities, even though are separate legal entities are actually subject to commoncontrol.


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Question 2

Two different types of external user of financial report present andpotential shareholders and lenders.

Shareholders use the financial reports to make investments decisionsregarding the shares of the company such as whether to hold, buy, orsell the shares. Shareholders also use the report to assess thestewardship of management to determine how well the managers haveperformed in managing their funds.

Lenders use the report to determine the credit worthiness of the company.They need to assess the management ability to meet repay loans andservice interest.

b) Relevance information refers to information that is useful for decisionmaking. It has predictive value, providing feedback about past predictionof performance.

Reliable information refers to verifiable information which is free fromerror and bias and which faithfully represents economic reality.

The two users above need information that is both relevant and reliableas both characteristics impact on the quality of the financial reports.

Question 3

Tangible non-current Asset refer to asset that have physical substance.Intangible assets refer to non current assets which do not have physicalsubstance but are still assets because they fit the definition of assets.

Tangibility is not a necessary criteria under the asset definition.

Examples of intangible assets include patents, trademark, purchasedgoodwill.

The key issue to be dealt with in the recognition of such intangible assetsare that there must be an existence of cost or transactions or economic

benefits that can be measured reliably and that the potential economicbenefits are certain or probable. Otherwise, such items should not berecognised as assets.


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Answer to Homework question- Lecture 14

Question 1

Actual Overhead

Filling Sealing Maintenance Canteen

Allocated 74,260 38,115 25,050 24,375Reallocation:Canteen 14,265 7,800 1,950 (24,375)Maintenance 18,900 7,290 (27,000)Actual Overhead 107,785 54,015 0 0

(a) Predetermined Overhead absorption rates:

Filing Sealing

Budgeted Overheads 110,040 53,300

/Budgeted direct labour cost 13,100 10,250

Overhead rate 8.40 5.20

Overhead absorbed8.40 X 12,840 107,6885.20 X 10,075 53,920

Actual Overhead 107,785 54,015Under absorbed 97 1,625

(b) Product W2

Direct cost 24.00Overhead:Filling 2 X8.40 16.80Sealing 4 X5.20 20.80

61.60

Profit 20% 12.32Selling price 73.91Profit for the year1,500 X 12.32 18,480


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Question 2

ProdnDept 1

ProdnDept 2

ServiceDept

GeneralFactory Total

Allocated 380 465 265 230 1,340

Allocation of general Factory 92 115 23 (230)Share of service department

Labour related cost (60%) 76.8 96.0 (172.80)

Machine related cost(40%) 57.6 57.6 (115.20)

Total 606.40 733.60 1,340

Unit of output 120 120

Overhead rate per unit 5.05 6.11

(a)Calculation of total manufacturing cost per unit

Direct materials 7.00

Direct labour 5.50

Variable overheads 2.00

Fixed overhead: Department 1 5.05

Fixed overhead: Department 2 6.11

Total Manufacturing cost 25.66

(b)Absorption costing profit statement

Sales 114,000 X 36 4,104,000Cost of Sales 114,000 X 25.66 2,925,240

Add: Under-absorption of overheads

Department 1 (20,000+(4000X5.05) 40,200

Department 2 (4,000 units X6.11) 24,440

Total cost of Sales 2,989,880

Gross Profit 1,114,120

Less: Operating expense

Non manufacturing cost 875,000

Net Profit 239,120

Note that the under-recovery of fixed overheads consists of 20,000 arising fromactual overheads exceeding estimated overheads plus 4,000 times the fixed overheadrate because actual volume was 4,000 units less than estimated volume.


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QUESTION 3

a.

Total Fabrication Finishing Canteen Maintenance

Indirect labour 340,000 120,000 140,000 30,000 50,000

Coonsumables 82,000 24,000 32,000 20,000 6,000Heating &Lighting 24,000 8,000 9,600 2,400 4,000

Rent & Rates 36,000 12,000 14,400 3,600 6,000

Depreciation 60,000 30,000 24,000 2,000 4,000

Supervision 48,000 24,000 18,000 3,000 4,000

Power 40,000 18,000 16,000 2,000 4,000

Total 630,000 236,000 254,000 63,000 77,000

Canteen(numberof employees) 33,600 25,200 (63,000) 4,200

Maintenance(mtcehours) 46,400 34,800 (81,200)

Total 630,000 316,000 314,000

b.

Fabrication labour hours = 12,640

Rate = 316,000 /12,640 = 25 per labour hour

Finishing machine hours = 15,700

Rate = 314,000 /1,570 = 200 per machine hour

c.

Batch cost Direct materials 3,000

Direct labour 1,040

Overheads

Fabrication 2,500

Finishing 1,600Total 8,140

Cost per window 8,140/200 units 40.70

Mark up 16.28

Selling price 56.98

d.Direct material cost percentage

This method is best used when the price of materials is constant and there is a directrelationship between the materials and labour costs incurred to manufacture the

product. Consider the following example:


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Job A Job B Budget

Materials 250 100 15,000Labour 100 100 92,000

The overheads charges to a job will be distorted. Job A is charged with a greaterproportion of overheads than Job B even thought the labour costs were the same.In the case of Oriel the production uses a range of materials and this method would beinappropriate.

Direct wages cost percentage

This method is best used when the wages rates are the same throughout the companyand the same for each job.In the case of Oriel the production involves differing hourly rates and this methodwould be inappropriate.

Prime cost percentage rate

This method combines the faults of the direct materials cost percentage and the directlabour cost percentage rates.

Labour hours method could have been used in the Finishing department. But on thebasis of the labour hours and machine hours for this department it is obviouslymachine-intensive and therefore, machine hours should be used.


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Answers tohomework questions Lecture 15

Question 1Cost Volume profit analysis refers to break-even analysis andthe computation of the level of output to achieve target profits.

It is also used to quantify the effects of changing cost and selling priceon the business and for decisionmaking.

Assumptions of cost volume profitanalysis1) Cost and revenues pattern are known with certainty.

2) All cost can be classified as being either fixed orvariable.

3) Both cost and revenues are linear over the relevantrange, that is fixed cost, variable cost and selling price isconstant.

4) Volume is the only factor affectingcost.

Question 2

Proposal 1Workings

Current Contribution per unit= 8 (20-7-4-1)Revised unit contribution = 6 8-(10%*20)Revised break-even point= 83,333 (200,000+300,000)/6

Based on current sales of 50,000 units, sales have to increase by(83,333-50,000)/50,000 = 67%

Proposal 2

Workings

Revised unit contribution = 7 8-1Increased sales=20%*50,000 units= 10,000 unitsAdditional contribution = 70,000Additional fixed cost = 50,000Additional profit 20,000

Proposal 2 will contributes additional profit of 20,000 which will reduce current loss to 80,000.


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Hence, proposal 2 is better provided the additional production capacity canbe achieved.

Question 3

(a)Variable costs per unit= 300000/1m 0.3

Contribution per unit= 0.5-0.3 = 0.2

BEP in units= 100,000/0.2 = 500,000 Units

(b) Margin of safety in units= 1 mil -500,000 units = 500, 000 units

(c) Additional units = 0.6 X 1 mil = 600,000 units

Revised Variable costs per unit = 1.1 X0.3 = 0.33

Revised Contribution per unit =0.5 -0.33 =0.17

Required profit from new investment = 10,000

Total required profit= 100000+10000 =110,000

Total fixed cost = 100,000+50,000 = 150,000

Total contribution required= Fixed cost + profit = 260,000

Total required units to sell=(150000+110000)/0.17= 1,529,412 units

Total capacity with extension= 1.6*1m= 1,600,000 units

The proposed extension provides enough capacity to maintain current profit& earn the additional 10,000.


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Question 4a) Break even Point 22,667

3400/300-110-32-8

b) Break even Point 26,154

3400/280-110-32-8

c) CM Per Unit 130

280-110-32-8

X Units 30,000

Total CM 3,900,000

Less: Fixed Cost 3,400,000

Profit 500,000

d) Break even Point 60,323

7480/280-156

Revised Profit

d) CM Per Unit 124

280-156

X Units 60,000

Total CM 7,440,000

Less: Fixed Cost 7,480,000

Profit -40,000


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Question 5(a) Break even units (BEP) = Fixed costs / Contribution per unit

Fixed costs

Direct labour 30,000 (usually variable but fixed in thisquestion)

Machine lease costs 25,000Other fixed costs 45,000Total 100,000

Variable cost= Materials 60,000/10,000 = 6

Thus contribution = 18 6 = 12

BEP = 100,000/12 = 8,333 units

Margin of safety (MOS) = Expected units BEP = 10,000 8,333 = 1,667units

(b) BEP if new machine is leased

Fixed costsDirect labour 30,000Machine lease costs 55,000Other fixed costs 45,000Total 130,000

Variable cost= Materials 3

Thus contribution = 18 3 = 15

BEP = 130,000/15 = 8,667units

Margin of safety (MOS) = Expected units BEP = 10,000 8,667 = 1,333units

The break-even point is higher (8,661 units) and margin of safety is lower(1,333 units). At 10,000 units the current and proposed machines give thesame total cost and profit figures. Thus, there is no compelling financialsupport for the leasing of the new machine.


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Answer to homework questions lecture 16Question 1

Incremental costs are those which will change with respect to the

decision being made. These will be relevant to the decision and

included in any computations of outcomes. Costs which will notchange whatever decision is made are not incremental and not

relevant.

(b)Sunk costs are costs which have been incurred prior to the decision

being made. They will not change whatever decision is made. They

are therefore not relevant and will not be included in computations of

outcomes

(c)Opportunity costs are defined as the cost of the next best opportunity

foregone. These costs may be incurred if certain decisions are made.

They may be relevant and included in computations of appropriate

outcomes.

Question 2

Hours to satisfy maxdemand 185000

(40000 X 1)+(30000 X 1.5)+(50000 X

2)

Available hours 140,000

Short 45,000

A B C

Selling Price

2

0 30 40

Variable cost 8 20 30

Contribution Margin12 10 10

Hours per unit 1 1.5 2

CM per hour

1

2 6.67 5

Ranking 1 2 3


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Optimal

Mix

Satisfy

Products

Deman

d

Hrs per

unit

Total

Hours

A 40000 1 40000

B 30000 1.5 45000

C 27500 2 55000

Total 140000

Profit

Products Deman

CM Per

unit

Total

CM

A 40000 12 480000

B 30000 10 300000

C 27500 10 275000

Total

105500

0

Less: Fixed Cost

-

500000

Profit5550000

Question 3

A B C

Contribution per unit 30-VC 21 45- VC 34 20- VC 15= 9 11 5

XZ usage per unit 2 3 1Contribution per kg of XZ 4.50 3.67 5.00Ranking 2 3 1

Type No. of units No. of kg of XZ Contribution Totalper kg contribution

C 5,000 5,000 5.00 25,000.00A 2,000 4,000 4.50 18,000.00B 333 999 3.67 3,663.00

Total 9,999 46,663Fixed cost 40000

Net profit 6,663


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Question 4Cost of making 360,000 cartons

Direct materials 84,000Electricity 4,500Variable overhead 3,000Direct labour 18,000Total for 360,000 cartons 109,500

Cost of buying-in the cartons(360000/1000 X325 +9000) 126,000

Differential cost 16,500

Conclusion:Cheaper to make the cartons.

Assumptions- Depreciation is a fixed cost of production- Fixed production overheads remain unchanged regardless of the

decision made-Direct Labour is a variable cost


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Question 5

Accept Reject Net cash FlowInflow

Scrap Value of material 0 1,000 (1,000)Net cash Outflow 1,000

Outflow

Material 4,000 0 4,000Variable Overheads 400 0 400Net cash Outflow 4,400

Net cash Outflow 5,400

Therefore Minimum Price = $5,400

Reasons & assumptions

a. The original historical cost of the material in stock is a sunk cost and not relevant.The relevant is the opportunity cost of the saving foregone on on the other materialswhich now have to be purchased for $4,000. The materials could have been usedelsewhere.

a. The workers would be paid even If the contract is not undertaken. There is thus noopportunity cost as the department is already working below capacity.

a. The variable overhead is assumed to be an incremental cost. They are includedin the minimum price, as it is assumed they are specifically incurred in conversionwork.

a. Depreciation is not a cash flow and is therefore not relevant. Depreciation Apportionsthe original cost of the machine, a cost which was sunk eight ago. There is noindication of the current resale value of the machine and so it is assumed that

there is no intention of selling it. It is also assumed that there is no opportunity costinvolved in its use for this contract, as it would not be needed elsewhere.

a. The foreman is already being paid. Therefore his salary is not an Incremental cost.It is assumed that there is no opportunity cost associated with the use of his timefor this contract.

a. It is assumed that general fixed overhead will not increase a result of this contract,therefore absorbed overhead is not relevant.

a. Scrap revenue foregone will be an opportunity cost, if the product is Converted rather

than sold as scrap.


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Question 6

Calculation of BE pricePer

CopierComponents Y,Z 53(75-22)Component W 34Direct Labour

1.5 X 0.75X 24 271.5 X0.25 X12 4.5

Total Relevant Cost 118.5X 100 Copiers 100

Total 11850Add: Travelling time10 hrs X 24 240Extra Machine 800

Total Relevant Cost 12890

Explanation of the figuresused

Component X is a sunk cost which has already been paid for, isobsolete for future purposes and has no resale value. Component W is an additional cost of this specialorder. The standard cost would have charged for 50 hours but only 10will actually be incurred. The cost per hour is assumed to beunchanged.

Labour costs need to reflect the lower number of hours and theuse of trainees

The overheads are fixed and so not relevant costs. The opportunity cost of using the special machine is the loss ofthe resale value.


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(b)Factors to be considered in setting aprice.

customer. This price gives a contribution of 2,110 which

represents a 16% margin of safety on the estimated costs.

This reduces the financial risk of accepting the order.

The cost estimates on a one-off special order do contain anelement of risk.

With a change in manufacturer would it be a better strategy tocease

Will there be enough staff for the job and the introduction of newcopiers? Is it sensible to have trainees working on old types ofcopier?

If this is a large customer would we lose goodwill if we refusedThe upgrade? Could this damage future relationships and othersales possibilities?


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Answers toHomework Questions Lecture 17

Question 1

Eden Limited

(a) Profit Statements JanMarch(Q1) AprilJune(Q2)

(i) Marginal costing 000 000

Sales revenue 2,700 4,050

Opening stock 1,650

Production costs:variable 1,155 1,650

Closing stock -165 -330

990 1,485

Selling and distribution costs

Variable 90 135

Total marginal cost 1,080 1,620

Contribution 1,620 2,430

Fixed costs

Production -100 -100

Selling and distribution -20 -20

Administration -30 -30

Profit 1,470 2,280

(ii) Absorption costing JanMarch(Q1) AprilJune(Q2)

000 000Sales 2,700.00 4,050.00

Opening stock 177.50

Total production costs 1,242.50 1,775.00

Closings stock(17.75perunit) -177.50 -355.00

1,065.00 1,597.50

Under-absorption of overhead 12.50

Over-absorption of overhead -25.00

1,077.50 1,572.50

Total selling and distribution costs 110.00 155.00

Fixed administration costs 30.00 30.00

Total costs 1,217.50 1,757.50

Profit 1,482.50 2,292.50

(b)The difference in profits of 12,500 for the first quarter is due to the

inclusion in absorption cost of fixed overhead of 1.25 per unit in the

10,000 units in stock at the end of the quarter. These costs have been

carried forward as part of closing stock and not expensed. Under marginal

costing all of the fixed production costs are seen as a periodic cost and as


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an expense of the first quarter.

Question 2

The following factors should be considered when deciding whether touse full (Normal) costing or marginal costing:

1)Full costing involves a greater degree of subjectivity than marginalcosting, and is thus more open to misstatement or manipulation

2)By taking account of all costs involved in production, prices based ona calculation of full cost should enable the business to earn a profit

3)If prices are steady, marginal costing gives an approximate

replacement cost, tying in with the economists concept of short-runmarginal cost. Many would argue that marginal costing is, therefore,more useful for decision-making purposes in the short term

4)Stock valuations and, therefore, also the financial position value ofnet assets are lower with marginal costing than with full costing

5)Because stock valuations also affect reported gross profit, whenstock levels change from year to year, gross profit reported undermarginal costing will be different to that reported under full costing

6)For financial reporting purposes in the UK, companies are requiredto use full costing.


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Question 3

a. 000

2007 2008 2009

Sales 64 64 80

Cost of Sales (40) (40) (50)24 24 30

(under) overabsorption

(4) 4 (8)

20 28 22

Fixed selling andadmin

20 20 20

Profit 0 8 2

b. Contribution = 70 per unit000

2007 2008 2009

Sales 64 64 80

Variable cost 8 8 10

Contribution 56 56 70

Fixed cost 60 60 60

Profit(loss) (4) (4) 10

c. 000

2007 2008 2009

Absorption profit 0 8 2Less: Fixed

productionoverhead inclosing stock

-4 -16 -8

Add: Fixedproductionoverhead inopening stock

0 +4 +16

Marginal costingprofit/loss (4) (4) 10

Fixed overhead absorption rate per unit = 40,000/1,000 units = 40 per unit.


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Question 4

000

Production

Depart 1

Production

Dept 2

Service

Dept

General

Factory

Total

Allocated 380.0 465.0 265 230 1,340

Allocation ofgeneral factory 92.0(40%) 115.0(50%) 23(10%) (230)

Share ofservicedepartment

Labour relatedcost(60%) 76.8 96.0(10/18) (172.8)

Machinerelated cost(40%)

57.6 57.6 (115.2)

Total 606.4 733.6 0 0

Unit of output 120 120

Overhead rateper unit

5.05 6.11

(a)Calculation of total manufacturing cost per unit

Direct materials 7.00Direct Labour 5.50

Variable Overhead 2.00Fixed overhead: Department 1 5.05

Department 2 6.11Manufacturing cost 25.66

(b)Absorption costing profit Statement

Sales:114,000 units x 36 4,104,000

Cost of sales 114,000 units x 25.66 2,925,240Add: Under-absorbed of overhead:

Department 1(20,000 + (4,000 x 5.05) 40,200Department 2 ( 4,000 units x 6.11) 24,440Total cost of sales (2,989,880)

Gross Profit 1,114,120Less: expenses

Non manufacturing cost (875,000)Net Profit 239,120_

Note that the under-recovery of fixed overheads consists of 20,000 arisingfrom actual overheads exceeding estimated overheads plus 4,000 times the

fixed overhead rate because actual volume was 4,000 units less than estimated


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volume.

(c) Marginal costing profit statement

Sales:114,000 units x 36 4,104,000

Variable cost of sales 114,000 units x 14.50 1,653,000Contribution 2,451,000

Less: Fixed CostFixed Manufacturing cost(1,340+20) 1,360,000

Non manufacturing cost (875,000)Net Profit 216,000_


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Answers to homework Questions Lecture 18

Question 1

Cash budget for May, June and July 1999

May June July

Bank-start 5,000 28,225 (13,325)

"#$#%&'(

Debtors (see Debtors schedule below) 223,250 205,000 241,250

Machine sale 500

TOTAL 228,250 233,725 227,925

PAYMENTS

Creditors (see Creditors schedule

below)

125,400 136,800 135,600

Council rates 5,200

Salaries 58,500 75,000 63,000

Loan Interest 12,400

Office expenses 14,625 18,750 15,750

Drawings 1,500 1,500 1,500

Machine-deposit 1,300

Machine-instalment 1,300 1,300

TOTAL 200,025 247,050 222,350

Bank-end 28,225 (13,325) 5575


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?2/'@%3' 10 2133'2)41(+ 10 +*3'+ &'A'(%' 0&1B C'6)1&+

Total Sales May June July

March 200,000

Cash (15%) 30,000

Credit (80% & 5%) 160,000 10,000

April 230,000

Cash (15%) 34,500

Credit (80% & 5%) 184,000 11,500

May 195,000

Cash (15%) 29,250

Credit (80% & 5%) 156,000 9,750

June 250,000

Cash (15%) 37,500

Credit (80% & 5%) 200,000

July 210,000

Cash (15%) 31,500

Credit (80% & 5%)

TOTAL 223,250 205,000 241,250


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Schedule of payment of inventory purchases

Total

Purchases

May June July

April (60% of sales) 138,000

cash (60%) 82,800

credit (40%) 55,200

May (60% of sales) 117,000

cash (60%) 70,200

credit (40%) 46,800

June (60% of sales) 150,000

cash (60%) 90,000

credit (40%) 60,000

July (60% of sales) 126,000

cash (60%) 75,600

credit (40%)

TOTAL 125,400 136,800 135,600


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)*+,-./0 1Prepare for the months of October, November and December 1999:

(a) A schedule of collections from debtorsSALES August Septembe

rOctober November Decembe

rAugust 160,000 112,000 32,000 12,800

September 220,000 154,000 44,000 17,600

October 200,000 140,000 40,000 16,000

November 180,000 126,000 36,000

December 162,000 113,400

196,800 183,600 165,400

(b) A schedule of payments to creditors.PURCHASES October November December

September 132,000 105,600October 120,000 24,000 96,000

November 108,000 21,600 86,400

December 97,200 19,440

129,600 117,600 105,840

(c) A cash budgetOctober November December

Cash at start (13,950) (57,250) (427,700)

Sales Revenues 196,800 183,600 165,400

Courier Revenues 20,000 21,000

TOTAL CASH 182,850 146,350 (241,300)

Purchases 129,600 117,600 105,840

Shop rent 66,000

Staff wages 40,000 36,000 32,400

Tax 110,950

Loan 160,000

Drawings 4,500 4,500 4,500

Insurance 22,000

Courier service start 100,000 100,000

Courier service on-going 45,000 45,000

TOTAL EXPENSES 240,100 574,050 309,740

Cash at End (57,250) (427,700) (551,040)


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(d) In the absence of evidence to the contrary, it is assumed that abusiness will continue to operate indefinitely into the future. Thus itsassets generally are assumed that they are not held for resale, norvalued accordingly, but valued on the historical cost principle. If data

suggests that continued existence will be a problem, then theaccounting record has to indicate this fact. This means that financialreports then are prepared based on expected sales or market valuesof assets. Solvency refers to the capacity of a business to met it sdebts as they become due. Liquidity refers to the speed with which abusinesss assets can be turned into cash, without an appreciableloss of value. The cash budget shows that the firm does not haveenough cash to satisfy its obligations and planned purchases forDecember. As a result, it will not be able to conduct its normaloperations and may be forced into liquidation.


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Question 3Cash Budget for the first 3 months of the 2006/2007 financial year

July 2006 Aug 2006 Sept 2006

Opening cash balance 100,000 230,380 288,580

Cash receiptsReceipts from sales (W1) 510,000 432,000 518,400

Cash paymentsPurchases (W2) 216,000 252,000 360,000Fixed and variable expenses 160,620 118,800 158,400Cash dividends 0 0 40,000

Advertising 0 0 15,000Equipment replacements 3,000 3,000 3,000Tax 0 0 60,000Repayment of bank loan 0 0 280,000

Interest expense (12%*100k*3/12) 0 0 8,400379,620 373,800 924,800

Net cash inflow / (outflow) 130,380 58,200 -406,400

Closing cash balance 230,380 288,580 -117,820

May 2006June

2006July

2006Aug2006

Sept2006

(W1)Sales 600,000 800,000 360,000 420,000 600,000Receipts:

60% of current month 216,000 252,000 36000030% of previous month 240,000 108,000 1260009% of the month before previous 54,000 72,000 32400

Total 510,000 432,000 518,400

(W2) July 2006Aug2006

Sept2006

Oct2006

Cost of sales 216,000 252,000 360,000 324,000 (0.6*540k)+ Closing stock 252,000 360,000 324,000- Opening stock 216,000 252,000 360,000

= Purchases 252,000 360,000 324,000


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Answer to Homework Questions Lecture 19

Question 1

Price Variance 143 (U) (b)(0.4 - 0.42)X 7,150

Usage Variance(6,960 - 7150)X 0.4 76 (U) (b)

Total Material Variance 219 (U) (a)


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Question 2Formula

Price Variance = (Budgeted Price - Actual Price) X actual Quantity Purchased/Used

Efficiency variance = (Budgeted Usage - Actual usage) X Budgeted price

Computation

Price variance -220.00 Adverse

(5- 5.2) X 1,100

Efficiency variance 750 Favourable

(5 X 250 -1,100)X 5

Total variance 530 Favourable

Possible Reasons:1) Price variance- more expensive materials used causing lowerspoilage and hence favourable efficiency variance.

2) Efficiency variance - More experienced workers who areable to reduce spoilage.

Question 3Benefits of budgeting1) Forces planning and improves co-ordination.

2) Improves communication between departments and subordinates.

3) Improves control because highlights problem areas so that correctiveaction can be taken.

4) Enhances motivation and employees are clearly directed to targets andgivenappropriate feedback.

Limitations:Dyfunctional behaviour may result if :1) Budgets may not be taken seriously if they are deemed unrealistic.

2) Responsibility not assign fairly.

3) No timely feedback given to staff.


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Question 4

A limiting factoris a factor or constraint thatprevents indefinite expansionor unlimited profits.

Examples:- labour, material, equipment and factory space may be in short supply.- firms cannot sell unlimited quantities of output without reducing price

Master budgetsare the budgeted profit and loss account, balance sheetand the cash budget.Purposes of budgeting:- Allow regular examination of organisations goals & basic policies- strengthen cohesiveness of management- Forces management to plan ahead

- Optimises utilization of resources

Flexible budgetingis the adjustment of original budgets to reflectfluctuations in activity level.- Provide a yardstick with which the performance can be compared andassessed against- Allow superior to control and monitor the performance of subordinatesthrough the computation of variances such as material, labourand overhead variances.


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Question 5

Operating statement - April 2007 Fav Unfav Budgeted profit (500x36) 18,000Sal

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