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Question 1[ 40 marks]

1.A The Balance Sheets for Talbot plc as at 31 March 2008 and 2009 are shown below.

Fixed Assets

2008 2009$ $

Premises 750 000 950 000Machinery 230 000 470 000Vehicles 180 000 163 000

1 160 000 1 583 000

Current AssetsStock 170 000 174 000Debtors 146 000 144 000Bank 123 000 74 000

439 000 392 000

Creditors: amounts due in less than one year

Creditors 60 000 72 000Corporation tax 80 000 86 000Proposed ordinary share dividends 120 000 130 000

260 000 288 000

Net Current Assets 179 000 104 000Total Assets less Current Liabilities 1 339 000 1 687 000

Capital and Reserves$1 Ordinary shares fully paid 900 000 1 000 000Share premium 200 000 225 000Revaluation reserve 200 000General reserve 180 000 230 000Profit and Loss 59 000 32 000

1 339 000 1 687 000

Additional information.

(i) On 1 January 2009 machinery costing $285 000 had been purchased. There were nodisposals of machinery.

(ii) A vehicle with a book value of $3 200 had been sold on 1 February 2009 for $2 000. A newvehicle had been purchased on this date costing $8 000.

(iii) The revaluation reserve represents a revaluation of premises during the year ended 31 March2009.

REQUIRED

(a) The Cash Flow Statement in accordance with IAS 7 for the year ended 31 March 2009. [26]

(b) Discuss why a Cash Flow Statement would be important to a prospective investor in a

company.

[ 5 ]

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Question 1B

The use of historical cost as a basis for accounting is widespread.

Required:

(a) Explain THREE ways in which the use of historical cost accounting may mislead users of financial

statements. (6 marks)

(b) Briefly state THREE reasons why historical cost accounting remains in use in spite of its limitations.

(3 marks)

[9 marks ]

Question 2 [40 marks]

Susan Lee is planning to start trading on 1 July 2013 with $25 000 of her own savings and a$15 000 bank loan to the business. Both of these amounts will be paid into the businessbank account on 1 July 2013. Susan has also arranged a $5 000 bank overdraft facility.

Susan has already prepared budgets for her sales and purchases for the first six months oftrading. These are as follows:

July Aug Sep Oct Nov DecSales ($) 12 500 22 500 32 500 25 000 22 500 30 000Purchases ($) 40 000 17 500 25 000 15 000 22 500 17 500

Additional information:

1. 40% of sales will be for cash, for which a 2% discount will be allowed. The remainderare on two months credit.

2. Purchases for July 2013 will be paid for immediately in cash. From August 2013 Susanhas arranged credit terms and will pay in the month after purchase.

3. Equipment is to be purchased for $16 000 on 1 July 2013. Payment is to be made infour equal monthly instalments starting in October 2013.

4. The equipment is to be depreciated at 20% per annum using the straight line method,the rate applying for each month of ownership.

5. Susan intends to take cash drawings of $2 000 per month in July, August and September2013 and $2 500 in October, November and December 2013.

6. The bank loan is repayable in 2010 and interest at an annual rate of 8% is payable atthe end of each quarter. The first payment is to be made on 30 September 2013.

7. Other expenses (excluding depreciation) of $2 400 are to be paid monthly commencingin July 2013.

8. Closing stock at 31 December 2013 is estimated at $21 500 at cost.

REQUIRED

(a) The Cash Budget for the six months ending 31 December 2013. [20]

(b) The Budgeted Income statement for the six months ending 31 December 2013. [8]

(c) The Budgeted Balance Sheet as at 31 December 2013. [12]

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Question 3

Queen's Park plc has recently implemented a system of standard costing. It now has the actualresults for the first month of the systems operation to compare with its standard figures.

Standard costs:

Material per unit 7 kg at $8 per kgLabour per unit 3 hours at $10 per hour Variable overheads 3 hours at $3 per hour Fixed overheads $5 per unit

Standard production and sales quantity per month: 1 700 units

Standard selling price: $125 per unit

Actual results for the month:

Production 1 850 unitsSales 1 750 units at $130 per unitMaterials $102 000 for 12 000 kgLabour $50 400 for 4 800 hoursVariable overheads $16 000Fixed overheads $9 000

REQUIRED

(a) Calculate each of the following variances:

(i) material price variance; [4]

(ii) material usage variance; [4]

(iii) labour rate variance; [4]

(iv) labour efficiency variance; [4]

(v) sales volume variance; [4]

(vi) sales price variance; [4]

(vii) total fixed overhead variance; [4]

(viii) total variable overhead variance. [4]

(b) Prepare a statement to reconcile budgeted costs with actual costs [8]