Upload
dhanesh-sharma
View
264
Download
4
Embed Size (px)
Citation preview
8/10/2019 Answer to Homework Questions
1/102
1
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
8/10/2019 Answer to Homework Questions
2/102
2
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
8/10/2019 Answer to Homework Questions
3/102
3
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.
8/10/2019 Answer to Homework Questions
4/102
4
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.)
8/10/2019 Answer to Homework Questions
5/102
5
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
8/10/2019 Answer to Homework Questions
6/102
6
!"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)
8/10/2019 Answer to Homework Questions
7/102
7
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
8/10/2019 Answer to Homework Questions
8/102
8
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
8/10/2019 Answer to Homework Questions
9/102
9
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.
8/10/2019 Answer to Homework Questions
10/102
10
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
8/10/2019 Answer to Homework Questions
11/102
11
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
8/10/2019 Answer to Homework Questions
12/102
12
-
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 : ;
8/10/2019 Answer to Homework Questions
13/102
13
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
8/10/2019 Answer to Homework Questions
14/102
14
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.
8/10/2019 Answer to Homework Questions
15/102
15
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
8/10/2019 Answer to Homework Questions
16/102
16
(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
8/10/2019 Answer to Homework Questions
17/102
17
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.
8/10/2019 Answer to Homework Questions
18/102
18
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
8/10/2019 Answer to Homework Questions
19/102
19
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)
8/10/2019 Answer to Homework Questions
20/102
20
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
8/10/2019 Answer to Homework Questions
21/102
21
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.
8/10/2019 Answer to Homework Questions
22/102
22
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.
8/10/2019 Answer to Homework Questions
23/102
23
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
8/10/2019 Answer to Homework Questions
24/102
24
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
8/10/2019 Answer to Homework Questions
25/102
25
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:
8/10/2019 Answer to Homework Questions
26/102
26
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
8/10/2019 Answer to Homework Questions
27/102
27
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!)
8/10/2019 Answer to Homework Questions
28/102
28
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
8/10/2019 Answer to Homework Questions
29/102
29
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
8/10/2019 Answer to Homework Questions
30/102
30
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.
8/10/2019 Answer to Homework Questions
31/102
31
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
Total Expenses 39,600
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 Current Assets 122,200
Total assets 146,200
Current Liabilities
Trade Creditors 7,000
Rent payable 1,500
Total Current Liabilities 8,500
Owners equity
Opening Capital 87,300
Add Net Profit 50,400
Closing Capital 137,700
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.
8/10/2019 Answer to Homework Questions
32/102
32
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
Total Expenses 93,500
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
Total Current Assets 102,400
Total Assets 278,400
Current Liabilities
Creditors 15,000
Loan Payable 30,000
Interest payable 1,500
Total Current Liabilities 46,500
Opening Capital 54,400
Add Net Profit 177,500
Closing Capital 231,900
Total Liability & Equity 278,400
8/10/2019 Answer to Homework Questions
33/102
33
Question 5a)Forest Trees
Income StatementFor the year ended 31 December 2008
$
Sales 1,420,740
Less: Cost of Sales 1,014,380
Gross Profit 406,360
Less: Expenses
Rent 33,000
Wages 85,000
Utility(7000+300) 7,300
Advertising 125,200
Depreciation 19,000
Total Expenses 269,500
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
Total Current Assets 401,790
Total Assets 496,790
Current Liabilities
Trade Creditors 120,190
Utility payable 300
Total Current Liabilities 120,490Opening Capital 239,440
Add Net Profit 136,860
Closing Capital 376,300
Total Liabilities & Equity 496,790
8/10/2019 Answer to Homework Questions
34/102
34
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.
8/10/2019 Answer to Homework Questions
35/102
35
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)
8/10/2019 Answer to Homework Questions
36/102
36
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
Plant & Equipment 60,000
Long Term Bank Loan 39,510
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
8/10/2019 Answer to Homework Questions
37/102
37
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
Plant & Equipment 60,000
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 Current Assets 32,910
Total assets 137,910
Current Liabilities
Creditors 1,300Salary payable 800
Electricity & Telephone Payable 150
Total Current Liabilities 2,250
Long Term Liabilities
Long Term Bank Loan 39,510
Equity
Opening Capital 95,000
Add:Net Profit 3,150
Less: Drawings 2,000
96,150
Total Liability & Equity 137,910
8/10/2019 Answer to Homework Questions
38/102
38
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
8/10/2019 Answer to Homework Questions
39/102
39
Neon Lights Inc
Statement of Financial Position
As at 30/4/02 $000 $000 $000
Non-Current Assets Cost Acc Depn Net Book Value
Freehold Land 2,000.00 2,000.00
Building 5,300.00 1,166.00 4,134.00Fixtures & Fittings 2,170.00 1,018.90 1,151.10
Total 9,470.00 2,184.90 7,285.10
Current Assets
Trade Debtors 1,590.00
Less:Prov For Doubtful Debts 55.65
Net Debtors 1,534.35
Stocks 797.00
Prepaid Insurance 8.00
Total Current Assets 2,339.35
Total Assets 9,624.45
Current Liabilities
Bank Overdraft 365.00
Trade Creditors 1,097.00
Interest Payable 280.00
Wages payable 25.00
Total Current Liabilities 1,767.00
Non-current Liabilities
7% Loan 4,000.00
EquityCapital 2,700.00
Retained Profit 1,157.45
(195+1,112.45-150)Total Equity 3,857.45
Total Liabilities & Equity 9,624.45
8/10/2019 Answer to Homework Questions
40/102
40
Question 3
Tip Interior
Income Statement
For the year ended 31 March 2006$ $
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
Gross Profit 405,860
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
8/10/2019 Answer to Homework Questions
41/102
41
Tip Interior
Statement of Financial Position
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
Total Current Assets 389,518
Total Assets 664,518
Current Liabilities
Trade Creditors 120,190
Tax Payable 40,000
Unearned Fees 2,000
Audit fees Payable 5,000
Interest payable(40000X 12% X0.5) 2,400
Total Current Liabilities 169,590
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
8/10/2019 Answer to Homework Questions
42/102
42
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
8/10/2019 Answer to Homework Questions
43/102
43
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
8/10/2019 Answer to Homework Questions
44/102
44
Shakespeare Ltd
Statement of Financial Position
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
8/10/2019 Answer to Homework Questions
45/102
45
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.
8/10/2019 Answer to Homework Questions
46/102
46
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
8/10/2019 Answer to Homework Questions
47/102
47
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
8/10/2019 Answer to Homework Questions
48/102
48
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
8/10/2019 Answer to Homework Questions
49/102
49
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.
8/10/2019 Answer to Homework Questions
50/102
50
Question 2
Lincoln Plc
Statement of cash flow
For the year ended 31 December 2006$000 $000
Cash Flow from operating activities
Profit before taxation 240
Add: Depreciation expense 60
Interest expense 8
Interest Income -60
Gain on disposal -30
Increase stocks -25
Decrease debtor 16
Increase prepayment -40
Increase creditor 115
Cash generated from operations 284
Less; Interest paid -8
Taxes paid -100
Net cash from operating activities 176
Cash flow from investing activities
Purchase of non-current assets -230Disposal of non-current assets 100
Purchase of investments -50
Interest received 60
Net cash flow from investing activities -120
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
8/10/2019 Answer to Homework Questions
51/102
51
Question 3
Sloop PLc
Statement of cash flow
For the year ended 31 March 2008
$mil $milCash Flow from operating activities
Profit before taxation 660
Add: Depreciation expense 150
Interest expense 36
Interest Income -30
Gain on disposal -20
Increase stocks -242
increase debtor -18
Increase prepayment -60
Decrease creditor -20
Cash generated from operations 456
Less; Interest paid -34
Taxes paid -280
Net cash from operating activities 142
Cash flow from investing activities
Purchase of non-current assets -324
Disposal of non-current assets 160Purchase of investments -36
Interest received 30
Net cash flow from investing activities -170
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
8/10/2019 Answer to Homework Questions
52/102
52
(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.
8/10/2019 Answer to Homework Questions
53/102
53
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
8/10/2019 Answer to Homework Questions
54/102
54
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
8/10/2019 Answer to Homework Questions
55/102
55
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
8/10/2019 Answer to Homework Questions
56/102
56
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
8/10/2019 Answer to Homework Questions
57/102
57
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
Total Current Liabilities 444,000
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
8/10/2019 Answer to Homework Questions
58/102
58
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.
8/10/2019 Answer to Homework Questions
59/102
59
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.
8/10/2019 Answer to Homework Questions
60/102
60
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
8/10/2019 Answer to Homework Questions
61/102
61
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.
8/10/2019 Answer to Homework Questions
62/102
62
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
Total Current Assets 33,000
Total Assets 143,000
Current Liabilities
Trade Creditors 20,000
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
Total Liability & Equity 143,000
Workings
Sales 220000
2 X 110,000
COGS 209000
0.95X220000
Gross Profit 11000
5% X 220000
Expenses 4400
2% X 220000
Profit 6600
8/10/2019 Answer to Homework Questions
63/102
63
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
8/10/2019 Answer to Homework Questions
64/102
64
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.
8/10/2019 Answer to Homework Questions
65/102
65
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.
8/10/2019 Answer to Homework Questions
66/102
66
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
8/10/2019 Answer to Homework Questions
67/102
67
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.
8/10/2019 Answer to Homework Questions
68/102
68
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:
8/10/2019 Answer to Homework Questions
69/102
69
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.
8/10/2019 Answer to Homework Questions
70/102
70
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.
8/10/2019 Answer to Homework Questions
71/102
71
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.
8/10/2019 Answer to Homework Questions
72/102
72
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
8/10/2019 Answer to Homework Questions
73/102
73
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.
8/10/2019 Answer to Homework Questions
74/102
74
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
8/10/2019 Answer to Homework Questions
75/102
75
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
8/10/2019 Answer to Homework Questions
76/102
76
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
8/10/2019 Answer to Homework Questions
77/102
77
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.
8/10/2019 Answer to Homework Questions
78/102
78
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.
8/10/2019 Answer to Homework Questions
79/102
79
(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?
8/10/2019 Answer to Homework Questions
80/102
80
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
8/10/2019 Answer to Homework Questions
81/102
81
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.
8/10/2019 Answer to Homework Questions
82/102
82
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.
8/10/2019 Answer to Homework Questions
83/102
83
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
8/10/2019 Answer to Homework Questions
84/102
84
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_
8/10/2019 Answer to Homework Questions
85/102
85
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
8/10/2019 Answer to Homework Questions
86/102
86
?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
8/10/2019 Answer to Homework Questions
87/102
87
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
8/10/2019 Answer to Homework Questions
88/102
88
)*+,-./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)
8/10/2019 Answer to Homework Questions
89/102
89
(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.
8/10/2019 Answer to Homework Questions
90/102
90
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
8/10/2019 Answer to Homework Questions
91/102
91
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)
8/10/2019 Answer to Homework Questions
92/102
92
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.
8/10/2019 Answer to Homework Questions
93/102
93
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.
8/10/2019 Answer to Homework Questions
94/102
94
Question 5
Operating statement - April 2007 Fav Unfav Budgeted profit (500x36) 18,000Sal