POA 2008 ZA + ZB Commentaries

March 21, 2018 | Author: Emily Tan | Category: Net Present Value, Cash Flow Statement, Historical Cost, Depreciation, Balance Sheet


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Examiners’ commentaries 2008Examiners’ commentary 2008 25 Principles of accounting Specific comments on questions Zone A SECTION A Question 1 Distinction is often made between financial and management accounting. Briefly explain the differences between these terms. This question requires explanation of the differences between financial accounting and management accounting. These differences are covered on pages 16 and 17 of the subject guide. Good answers would link the attributes of the two types of accounting, for example: Financial accounting Is concerned with the preparation of accounting information for the needs of users who are external to the business. Management accounting Is concerned with the preparation of accounting information for the needs of users who are internal to the business. Question 2 The chairman of Lateen Ltd… [For full question please refer to the examination paper.] Accounting ratios are an important element of the syllabus; this question requires ratios to be used in constructing a balance sheet. The information given was sufficient to determine the following balance sheet figures: Current assets Quick assets ( Cash Stock Fixed assets (1.75 x 125,000) (1.05 x 125,000) 52) = (Quick Assets – Debtors) = (Current Assets – Quick Assets) = (Total Assets – Current Assets) = ((260,000 x 20%) – 33,250) Share capital = (Net assets – retained profits) = (143,750 – 18,750) = £125,000 = = = = £71,250 £87,500 £50,000 £18,750 = = = £218,750 £131,250 £60,000 Debtors (260,000 x 12) Retained profits = (Gross Profit – expenses) Using these figures and the amount given for current liabilities, a complete summarised balance sheet can be constructed. The topic of accounting ratios is dealt with on pp.106–113 of the subject guide and in Chapter 16 of Glautier and Underdown. 1 25 Principles of accounting Question 3 Galleon Ltd commenced business… [For full question please refer to the examination paper.] Depreciation is one of the fundamental accounting issues and this question tests students’ ability to apply a given depreciation policy to a set of facts. Part (a) requires computation of the profit and loss account depreciation charge for each of two years (2007: £6,900; 2008: £9,425) together with the loss on disposal of the vehicle (2008: £8,800). Part (b) requires the relevant balance sheet values of cost (2007: £41,000; 2008: £8,700) and accumulated depreciation (2007: £6,900; 2008: £12,325). In this type of question the presentation of clear workings is essential. There are examples of these calculations in the subject guide (pp.57–61). Question 4 Dhow Ltd’s… [For full question please refer to the examination paper.] (a) Prepare a forecast outline balance sheet for Dhow Ltd as at 31st March 2009, incorporating the above transactions. (a) It is important to understand the practical implications of different types of share issue on a company’s shareholders funds in the balance sheet. This question involves a bonus issue and a subsequent rights issue at a premium. The question also involves an issue of loan stock. These transactions give rise to the following forecast balance sheet: £m Forecast balance sheet as at 31st March 2009 Net assets Loans (20 + 10) 148 (30) 118 60 8 50 118 Ordinary shares of £1 each Share Premium Retained earnings In this type of question, clear workings are essential; in particular, in the calculation of the impact of each transaction on the company’s retained earnings and net assets. The relevant issues are dealt with on pages 88 and 89 of the subject guide. (b) Describe how each of the share issues in the year ended 31st March 2009 will affect the earnings per share of Dhow Ltd. (b) This section requires descriptions of how each share issue will affect the earnings per share (EPS) but did not ask for calculations of EPS. The answers could be quite short as follows: • Bonus issue increases shares and thus will reduce the EPS. 2 B and C).] The calculation of stock value by application of a specific accounting base is a common and relatively straightforward examination question. Inventory. Question 5 The following data… [For full question please refer to the examination paper. The closing stock figure should be written down by £6. The results obtained are as follows: A £ 73. This question involves the calculation of profit for different customers where each has different trading terms with the reporting company.000 11.500 and cost of sales for the six months ending on that date of £61. as B and C are higher. 3 . but not the best margin. still produces the highest profit.] Required: Calculate the mix of sales which would enable Xebec Ltd to maximise profits.7% Profit after customer costs Net profit margin The question required brief commentary on these results: The gross profit figures simply show that the largest sales produce the highest gross profit.000 12.500. C the smallest customer produces the highest margin. In fact. as this amount will also be included in purchases.] Required: Calculate the profit earned on sales to each of the customers and the net profit margin for each customer (A. the largest customer. A. Briefly comment on your answers. The transport charge should be included in the cost of the relevant units.000 19. Earnings per Share is explained on page 113 of the subject guide. and calculate the profit for the year which would be achieved by that sales mix. Question 7 Xebec Ltd manufactures… [For full question please refer to the examination paper. Question 6 Skiff Plc… [For full question please refer to the examination paper. purchases and sales calculations are given on pages 52 and 53 of the subject guide.Examiners’ commentaries 2008 • Rights issue will increase shares but also generate profits from new funds therefore impact will probably be to increase EPS.4% B £ 51.000 to net realisable value. However. However.75% C £ 63. the cost of sales figure remains unchanged. The above figures needed to be adjusted for the two additional pieces of information. thus closing stock increases by £2. This question requires the use of the FIFO method and the basic data gives a closing stock at 31st December 2007 of £35.500. but the picture becomes more complex when the customer related expenses are included. this amount should not be included as cost of sales but reflected in the profit and loss account as an exceptional charge. 332 The use of a columnar format would be essential in answering this question. Answers which explained the two techniques in detail would not specifically answer the question being asked.000 33. Question 8 Dinghy Products Ltd… [For full question please refer to the examination paper.54 2.792 300 300 276 576 3.800 3.33).448 1.72 0. Opia £3.500 1.704 3.300 1.200 0. An example of this type of calculation is found on pages 159–160 of the subject guide.50. This topic has not been tested before in this format therefore a full answer is given below: Indirect costs Storeman’s salary Office clerk’s salary Rent (basis: floorspace) Sub-total Reapportion (basis: issues) Total departmental costs Total direct labour hours (W) Indirect cost per labour hour Indirect cost per mast Indirect cost per boom Turning £ Finishing £ Office £ 1.500 20 1.25 Principles of accounting This question requires an application of contribution analysis. Question 9 What factors should be considered when deciding whether to use full or marginal costing? This question requires a discussion of the factors which should be considered in deciding whether to use full or marginal costing. This topic is specifically dealt with on page 145 of the subject guide.380) Total £ 1.300 80 1. The topic of overhead (indirect cost) absorption using traditional full cost methods is covered on pages 142–145 of the subject guide (a further example is given on page 148) and in detail in Chapter 26 of Glautier and Underdown.500. the products are ranked in order of contribution per kilo and after applying the maximum market demand constraint the optimum production schedule is: Units Musk Opia Silk 8. Having established this.500 The resulting maximum net profit is £215. This is a common mistake made by candidates and clearly illustrates the need to read the 4 . Musk £6.] Required: Calculate the indirect cost of producing a mast and a boom.064 2.520 1.380 (1. The limited factor is clearly identified as raw material ‘Essence’ and thus the first stage is to calculate the contribution per kilo of Essence for each product (Silk £2.520 Storeroom £ 1.18 0.000 3.800 0.344 1.000 15.800 600 600 1.104 1. This type of analysis is covered on pages 157–161 of the subject guide and in Chapter 31 of Glautier and Underdown. Note that this is not reduced by the direct labour cost which is clearly identified as being not dependent on the level of production and thus a fixed cost for this calculation. These calculations are explained on pages 166–171 of the subject guide. (b) Calculate the payback period for the project. using current demand.667 units). Thus. The break-even point is higher (8.333 units) and margin of safety (1. Part (b) uses the annual cash flows to give a payback period of three years two months. Setting organisational objectives 5 .500). Question 12 Glautier and Underdown… [For full question please refer to the examination paper.] The five stages of planning identified by Glautier and Underdown (page 353) are summarised as follows: 1. giving calculations to support your comments.500) and to calculate average investment (£7. Question 10 Lugger Ltd… [For full question please refer to the examination paper. Give your answers in terms of units produced. Investment appraisal using accounting rate of return (ARR) and payback are recurring themes in this examination.661 units) and margin of safety is lower (1. Part (b) requires comment on the leasing proposal including supporting calculations. At 10.] Required: (a) Calculate the break-even point and margin of safety for the present machine.Examiners’ commentaries 2008 question (even very short ones) carefully and to address the specific issues raised. Thus average ARR is 18 per cent.000 units the current and proposed machines give the same total cost and profit figures.] Required: (a) Calculate the average accounting rate of return over the life of the project. The contribution per unit is then used to calculate break-even point (18. Part (a) of this question needs a calculation of the contribution per unit of £12 (£18−£6). there is no compelling financial support for the leasing of the new machine.333 units). Break-even and contribution analysis are key areas of the management accounting syllabus. Question 11 Proa Ltd… [For full question please refer to the examination paper. In answering part (a) it is necessary to adjust the annual cash flows for depreciation to give average annual profit (£13. (b) Comment on the proposal to lease the new machine. materials and money. for example. often called the four Ms: men. (5 marks) (a) This question requires a statement showing how the balance on the suspense account should be eliminated. SECTION B Question 13 Clipper Ltd… [For full question please refer to the examination paper. Assessing the environment in which the organisation will be operating by reference to the external factors which are likely to affect its operations. (21 marks) (b) Students are strongly advised to use the eight-column accounting paper in answering this type of question. 5. Once more it is necessary to read the question carefully. for management is concerned with making the most efficient use of those scarce resources.200 1.000 Disposal proceeds Provisions Debtors (Bal. Determining the strategy for achieving the stated objectives by means of an overall plan which specifies strategic goals. 4.100 700 57. However the adjustments necessary to arrive at amounts for cost of 6 . Assessing existing resources.000 (b) A profit and loss account for Clipper Ltd for the year ended 31st December 2007 and a balance sheet as at that date. with and without policy changing on the part of the planning organisation. Strategic decisions are concerned with establishing the relationship between the firm and its environment.25 Principles of accounting 2. only the advantages of budgets as part of planning would be insufficient. This aspect of the planning function involves making an estimate both of external resources which are accessible. machines. the latter covering a period of a year or less and containing sets of instructions of the type found in annual budgets. in a form suitable for presentation to the directors. it is quite specific and answers which dealt with. Often only brief workings are required and therefore a complete set of ‘T’ accounts or journals is a waste of time.] Required: (a) Show the adjustments necessary to eliminate the balance on the suspence account.fig) ______ 57. Designing a programme of action to achieve the selected strategic goals by means of both long-range programmes and shortrange programmes. and resources already held which are either idle or which might be more efficiently utilised. For this purpose forecasts have to be made which attempt to predict what will happen in the future. Although this statement could be in any appropriate format a double entry based approach would be shown as follows: Suspense account Balance B/ d 50.000 5. Such workings can be effectively shown on the face of the profit and loss account and balance sheet. 3.000 Purchases (closing stock) 57. 050.000 164.000 715.250 63.000 1.100) 63.750) (72.250 108.500 55.500 4.000 4.000 26. The final accounts of Clipper Ltd should be as follows: Clipper Ltd Profit and loss account for the year ended st 31 December 2007 £ Sales Cost of sales Gross profit Distribution costs Administration costs Selling costs Directors remuneration Audit fee Bad debts Depreciation Loss on disposal Profit before interest and tax Interest Profit before interest Taxation Profit for the year Dividend paid Retained profit for the year 42.000 £ 1.2).400 2.1 and 6.000 7 .600 74.000 38.900 30.000) (85.750 5.000 59. examples 6.850 (48.000 203. An acceptable layout with appropriate sub-headings is given in the subject guide (Chapter 6.000 180.750 228.500 71.600) (6.500) ( 30.000 335.000 165.000 56.900 Fixed assets Clipper Ltd th Balance sheet as at 30 December 2007 £ £ Cost Accumulated Depn/Amor 95.900 15. debtors and fixed assets were quite involved and therefore separate clear workings would be necessary to enable candidates to be awarded with all appropriate marks.000 260.000) 203.000 (38.000) £ Net Motor vehicles Plant and equipment Current assets Stock (483-24) Debtors Prepayments Bank Creditors: due within one year Trade Accruals Taxation Net current assets (working capital) Total assets less current liabilities Loans Capital and reserves Ordinary share capital Retained Earnings 56.800 148.850 36.000 41.000 75.Examiners’ commentaries 2008 sales.050 6.000 (25. The profit and loss account and balance sheet for Clipper plc should be properly headed. that is all assets less all liabilities. If you wish to reconcile the increase/decrease in cash balances and the profits for the year you should refer to the cash flow statement attached to the accounts. These fundamental issues are covered in chapter 2 of the subject guide. The layout and preparation of a cash flow statement is given on pages 92–94 of the subject guide. without any figures. Profits represent the increase in the net assets of the firm. Using the eight-column accounting paper is recommended. the confusion is caused by viewing profits as being the same as cash surpluses.25 Principles of accounting (c) One of the directors of Clipper Ltd has sent you the following e-mail. Cash represents only one element of the company’s resources and profit is the increase in these resources over the year. SECTION C Question 14 (a) Prepare a cash flow statement for Sloop Plc for the year ended 31st March 2008. (16 marks) (a) This question requires preparation of a cash flow statement. in response to the director. The cash flow statement of Sloop plc should be as follows: 8 . The direction of cash flows (outflows or inflows) is clearly a key issue and care should be taken to ensure that this is correct. (4 marks) (c) This question requires a brief explanation of the accounting issues. ‘Why do we only have £4.800 in the bank when we have retained profits in excess of £30.000?’ Draft a brief email. Answers should examine the comparative objectivity of cash flow statements and the subjective nature of some accruals-based estimates and judgments. (4 marks) (b) The argument proposed is that cash flow statements are more reliable than accruals-based financial statements. performance evaluation and variance analysis are frequently examined in this paper. It is very important that full 9 .] Required: (a) Prepare an operating statement. reconciling budgeted and actual profit for Cleanahull Ltd for May 2008 showing two variances for sales and for each cost category. (13 marks) (a) Budgetary control. Good answers would clearly identify the trade-off between relevance and reliability and assess the usefulness of both conventions in isolation and as a total reporting package. Briefly examine this argument.Examiners’ commentaries 2008 Cash flow statement for the year ended 31st March 2008 £m Operating profit Depreciation Profit on disposal of fixed assets Increase in stock Increase in debtors Increase in prepayments Decrease in trade creditors Net cash flow from operating activities Returns on investment and servicing of finance Investment income Interest paid £m 666 150 (20) (242) (18) (60) (20) 456 30 (34) (4) (280) Taxation Capital expenditure Purchase of tangible fixed assets Disposal of tangible fixed assets Purchase of fixed asset investments Equity dividends paid Net cash flow before financing Financing Issue of ordinary shares Repayment of loans Decrease in cash balances Reconciliation of cash balances Decrease in cash at bank Increase in bank overdraft (324) 160 (36) (200) (160) (188) 76 (64) 12 (176) 88 88 176 (b) It has been argued that cash flow statements are more reliable than financial statements prepared under the accruals convention. Question 15 Cleanahull Ltd… [For full question please refer to the examination paper. 184 756 5. thus producing an unfavourable variance. 10 . instead they should give a more meaningful analysis. ‘unfavourable labour variances show they were paid more’.940 600 6.965 (b)Prepare a brief report to the owner of Cleanahull Ltd commenting on the performance in May 2008 suggesting possible reasons for any unexpected results. It appears that Cleanahull is short of skilled labour and may have substituted unskilled. Variance analysis. Operating statement for Cleanahull for May 2008 Budgeted profit for month (288 x £18) Sales margin volume variance Standard profit for actual sales Sales price variance Cost variances Material Price variance Efficiency variance Skilled labour Price variance Efficiency variance Unskilled labour Price variance Efficiency variance Variable overheads Spending variance Efficiency variance Fixed overheads Spending variance Volume variance Actual profit for month Fav £ Unfav £ 140 60 297 528 99 330 165 140 1. is covered on pages 198–206 of the subject guide. This has led to a cost saving of £198 (66 x [£8-£5]). The unskilled labour is being paid below budget by 5% which again suggests there is no shortage. Again using labour cost as an example a good answer might be as follows: Skilled labour has been used very efficiently with 10% less hours than standard. A straightforward layout of the operating statement is given below. However the unskilled labour is a similar amount over budget (66 hours). with comprehensive examples.g. although Cleanahull should establish whether the use of unskilled labour has been the cause of the overuse of materials.365 7.260 2.25 Principles of accounting workings are shown and that students ensure they understand and clearly indicate the direction (favourable or unfavourable) of the variances computed. Good answers should go beyond statements of the facts.192 £ 5. (7 marks) (b) This part of the question requires a brief report which comments on the variances and suggests possible reasons for unexpected results. this has resulted in a substantial favourable variance. As long as there has been no loss in quality this is satisfactory. The shortage of skilled labour may also be the cause of the skilled labour price variance – labour may be short and those workers may work overtime or be paid more than budget. e.600 - ___ 827 1. 2) (19.712 0. It is important to adopt a well-organised approach to the layout of the answer.Examiners’ commentaries 2008 Question 16 Yawl Ltd… [For full question please refer to the examination paper.8 520.3 202.2) Material (480) (480) (480) (384) (240) Variable costs (80) (80) (80) (64) (40) Cash flow (580) (576) 224 220.5 157.490–500 of Glautier and Underdown.4) 178.8 NPV = − £48.636 0. The relevant examples and discussion of disconnected cash flow appraisal techniques is covered in Chapter 13 of the subject guide and pp. 11 .2 211. (12 marks) Required: (a) Investment appraisal using discounting methods is a key part of the syllabus.507 Discounted cash flow (580) (514.8 400 Discount factor 0 0.900 A negative NPV indicates that the project is expected to earn less than the opportunity cost of capital of the finance providers.893 0.8 332.2) (19. (8 marks) (b) The key points should explain the following: • • • • • • • • the time value of money discounting cash flows to a common point in time opportunity cost of investors’ funds minimum rate of return required on a project NPV = shareholder wealth increase NPV decision rule the significance of being cash flow-based rather than profit-based only incremental cash flows are considered. (b) List and briefly explain the key points you would make to a management team unfamiliar with discounted cash flow appraisal techniques. In answering this type of question it is strongly advised that the eight-column accounting paper be used to produce a table of cash flows and present values for each of the relevant years. This firm would serve its shareholders best by not proceeding with this project. This question combines application of the Net Present Value method of investment appraisal with an understanding of opportunity costs.] (a) Use the net present value method of project appraisal to advise the management of Yawl Ltd whether to go ahead with the product. The most appropriate way of presenting the answer to this question is as follows: £000s 2009 start 2009 end 0 2010 2011 2012 2013 2014 Sales 800 800 800 640 400 Equipment (480) 80 Stock (60) 60 Working capital (40) 40 Overheads (16) (16) (19.797 0.567 0.7 295. 4. A brief summary of these are given below: Break-even for final order for pump Material A (note 1) Material B (1. There is no increase in supervisors’ overtime as a result of this order.151–161) and Glautier and Underdown (Chapter 31). 12 .depreciation (note 6) .] Required: (a) Prepare a break-even price report… [For full question please refer to the examination paper.25 Principles of accounting Question 17 Ketch plc… [For full question please refer to the examination paper.15 – note 2) Labour (1. The special packaging is a relevant cost for this order. 6.000 x 50p (note 5) Fixed costs .000 3.000 500 250 7. sunk costs and opportunity costs. This is an irrelevant sunk cost.] (14 marks) (a) This question requires application of a number of decision-making techniques. with the explanations. Replacement cost will include the 5 per cent price increase. Good answers go beyond a simple restatement of the facts given in part (a). No depreciation needs to be included. 7.900 (b) Prepare a brief report to the sales manager… [For full question please refer to the examination paper. Information for short-run tactical decisions is covered in the subject guide (pp. 5.000 x ½ x ½ x £12 – note 3) Variable overheads . There is no change in the basic labour costs but half of the 500 hours will be paid at 50 per cent extra – this must be included.packaging 1.supervisors’ overtime (note 4) .] (b) This analytical question should be answered by clearly identifying three issues as required. 3. Opportunity cost being half of the sale proceeds. These should relate the key strategic and operational matters raised by the decision facing the company and relate these appropriately to the answer given to part (a). The additional maintenance charge is relevant – it would not be paid if this order were not accepted. £ 1.150 3. Good answers would clearly link all of the costs included and excluded. 2.000 x £3. in particular the identification of relevant costs.maintenance (note 7) Notes: 1. so there is no loss of value through additional use. A key part of the requirement is the explanation of each cost included in the final amount and the reasons for exclusion of any costs which are referred to in the original data. in as much detail as possible.200 x 5%) £ 403.200 28. These differences are covered on pages 16 and 17 of the subject guide.000 (85. Fig) Net Profit (403. Briefly explain the differences between these terms. Profit and Loss Account for the year ended 31st December 2007 Sales (33.000 388.400 100. in this case we know the figures for debtors. Good answers would link the attributes of the two types of accounting. Management accounting Is concerned with the preparation of accounting information for the needs of users who are internal to the business. Question 2 The following information is available in respect of Bagehot Ltd… [For full question please refer to the examination paper. taking into account all the above information.] Required: Prepare for Bagehot Ltd a profit and loss account for the year ended 31st December 2007 and a balance sheet as at that date. This question requires explanation of the differences between financial accounting and management accounting.600 x 12) Opening stock Purchases Closing stock (Bal fig) Expenses (Bal. for example: Financial accounting Is concerned with the preparation of accounting information for the needs of users who are external to the business.640 20. opening stock. There are some items which are deduced as balancing figures. purchases. If these amounts are placed into the financial statements then the ratios can be used to find most of the other items. loans and share capital. This question requires the use of accounting ratios in constructing a set of financial statements from incomplete information. for example expenses and reserves bought forward.600) 302.800 80.000 360.160 1 . In this situation the key is to adopt a logical approach starting from the actual amounts given.Examiners’ commentaries 2008 Examiners’ commentary 2008 25 Principles of accounting Specific comments on questions Zone B SECTION A Question 1 Distinction is often made between financial and management accounting. Bagehot Ltd. 000 2:1 60.400 (29.600 33.600 216.570). the final figure in this reconciliation is an error which is the balancing figure (£3.000) 115. and the list of balances on the other. This is a typical question which involves the correction of the balances in the creditor’s ledger control account (£321.760 186.600 (30.100). Control accounts play an important part in internal control within a record keeping system based on double entry.] Required: (a) Calculate the corrected creditors ledger control account balance.400 145.600 20.600 26.880 127. The key to this type of question is a clear distinction between the adjustments to the control account on the one hand.800 85. An illustrative example of this type of question is found on page 44 of the subject guide.25 Principles of accounting Balance sheet as at 31st December 2007 Fixed assets (403.000 ÷ 12) Loan Share Capital Reserves : Brought forward Current year Note 1 Creditors Acid Test ∴ Debtors + Bank ∴ Bank = = = = 30.880 39.000 26. and. (b) reconcile this with the total of the individual creditors’ balances in the creditors ledger.200 ÷ 4) Current assets Stock Debtors Cash at bank (Note 1) Creditors (360.160 Accounting ratios are covered on pages 106–116 of the subject guide. Question 3 In the books of Beveridge Ltd the creditors ledger control account… [For full question please refer to the examination paper.520) 186.120 147.400 £ 100. 2 . The second part of the question requires the reconciliation of this figure with the total of the individual creditors’ balances in the creditor’s ledger. Rights issue will increase shares but also generate profits from new funds ∴ the impact will probably be to increase EPS. with examples. Question 5 Explain. the terms ‘monetary assets’ and ‘non-monetary’ assets and describe their treatment in historical cost accounting and one alternative valuation convention.Examiners’ commentaries 2008 Question 4 Hicks Plc’s outline balance sheet… [For full question please refer to the examination paper. (b) Describe. describe the treatment under HCA and one alternative. The relevant issues are dealt with on pages 88 and 89 of the subject guide. give examples 3. how each of the share issues in the year ended 31st March 2009 will affect the earnings per share of Hicks Plc. (b) This section requires descriptions of how each share issue will affect the earnings per share (EPS) but did not ask for calculations of EPS. These transactions give rise to the following forecast balance sheet: £m st Forecast balance sheet as at 31 March 2009 Net assets Loans 122 (20) 102 60 8 34 102 Ordinary shares of £1 each Share premium Retained earnings In this type of question clear workings are essential. incorporating the above transactions.] Required: (a) Prepare a forecast outline balance sheet for Hicks Plc as at 31st March 2009. Earnings per Share is explained on page 113 of the subject guide. 3 . in particular in the calculation of the impact of each transaction on the company’s retained earnings and net assets. without calculations. (a) It is important to understand the practical implications of different types of share issue on a company’s shareholders funds in the balance sheet. The answers could be quite short as follows: Bonus issue increase shares and thus will reduce the EPS. The question also involves an issue of loan stock. There are essentially three elements to this question as follows: 1. explain the terms 2. This question involves a bonus issue and a subsequent rights issue at a premium. which gave FIFO values of £6. (i) (ii) (iii) Sales price variance.500 and £36. Non-monetary assets are those which have a value which may be regarded as changing in line with changing price levels of different types of asset: examples are stocks and fixed assets.500. as below: i. (a) This question involves the calculation of a number of sales variances. calculate the cost of sales and closing stock figures for inclusion in the accounts for the six months to 31st December 2007 under both the FIFO and LIFO assumptions.] Required: Using only the data in the table above. Examples are cash.] Required: (a) Compute the following variances for product ‘Adam’ for July. and on pages 321–336 of Glautier and Underdown. Sales margin volume variance. or by contract. The calculation of cost of sales and stock values by application of the various accounting bases is a common and relatively straightforward examination question. Question 7 Smith Plc manufactures and sells a range of… [For full question please refer to the examination paper.25 Principles of accounting Good answers would have clearly addressed all of these elements as follows. Monetary assets are those which by their nature. under LIFO the amounts are £60.500 and £35. are expressed in pounds (money values) regardless of changes in price levels.000 (F) 4 . Question 6 Clark Distributors Ltd began business… [For full question please refer to the examination paper. debtors and bank balances. Sales contribution volume variance.500. The issues in this question are dealt with on pages 127–128 of the subject guide. Accounting treatment Monetary HCA Current money value CPP Current money value OR CVA Current money value Non-monetary HC HC x change in purchasing power of £ Replacement cost or Realisable value or Value in use. A worked example of this type of question is given on page 53 of the subject guide. Sales contribution variance £8. It is important to provide your workings for this type of question. There were no particular problems posed by this question. Sales price variance £8.000 (U) ii. shows the additional contribution from increased sales and thus ignores the fixed overheads.] This question tests the application of break-even analysis and the use of a contribution approach to decision making.000 – 6.000 units 500. in this question a mistake in one element of the computations would only be penalised for that mistake and the correct elements of the computation would be rewarded as appropriate. Question 8 A summary of Pareto Company’s profit… [For full question please refer to the examination paper.000 F 2. iii.000 (F) Students are always advised to show clear workings. It would be necessary to calculate a separate fixed overhead volume variance to reflect the fact that the increase in volume will not result in any additional fixed costs.Examiners’ commentaries 2008 iii. The solutions are as follows: (a) (b) (c) 500. For this to be done it is important that workings are clear and legible with relevant descriptions and labels.] Required: (a) What is the break-even point in units? (b) What is the margin of safety in units? (c) If an extension to the factory… [For full question please refer to the examination paper.17 Required contribution 5 .000 8.000 (F). Sales margin volume variances £6. Pages 201 and 202 of the subject guide give illustrative examples.000 units Extension to factory Contribution per unit = 0. Shows the additional net margin from increased sales but this includes an allocated fixed cost element. (b) The difference between (ii) and (iii) is the treatment of fixed overheads.000) x £1 Sales contribution volume variance 6. For example. ii. Thus Sales margin volume variance Fixed overhead volume variance* (AQ – SQ) x FO per unit (8.50 − (30 × 110) 100 = £0. The techniques are relatively straightforward but students need to read the question carefully in order to use the data correctly. g. Traditional costing methods are explained on pages 142–144 of the subject guide and a comprehensive coverage is given in Chapter 16 of Glautier and Underdown. Question 10 In the context of cost-volume-profit analysis… [For full question please refer to the examination paper. Allocate these costs to the four production and three service departments (cost centres) using appropriate methods (e. floor area. capital value) 3. 6 . Example: Direct material where there are discounts available for larger orders.529. (a) Non-linear variable costs vary with volume of activity but with a cost per unit which is different for different levels of activity. Good answers would clearly identify the required levels of contribution and volume in order to give full data for decision making. power. Absorb the total indirect cost for each production cost centre into the total cost of each of the three different product lines.000 units and so there will be sufficient capacity. depreciation).600.000 0.000 = £260. To gain good marks both of the requirements must be met. 2.000 + 110.411 units The required volume is less than the new capacity of 1.] This question requires brief explanations and give examples of three management accounting terms. Collect and classify overhead costs as between indirect material.17 = 1. This question could easily be misinterpreted by students who do not read the question carefully but see the word ‘cost’ and write about issues which are not relevant to the specific issue being examined.000 ∴ Required volume = 260.] Answers should briefly explain the stages in the process of cost determination. Short term decision making involving these techniques is covered on pages 152 and 156 of the subject guide and in Chapter 28 of Glautier and Underdown.25 Principles of accounting = FC + Profit = 150. Apportion the costs of the service departments to the production departments using appropriate methods. Question 9 Rickwood Ltd… [For full question please refer to the examination paper. 4. indirect labour and other identifiable cost headings (e.g. insurance. 1. This aspect of the planning function involves making an estimate both of external resources which are accessible. outside of this range these costs will no longer behave in the assumed linear fashion. Assessing the environment in which the organisation will be operating by reference to the external factors which are likely to affect its operations. (c) The relevant range is the range of outputs over which the assumption that a cost-volume relationship is a linear relationship is realistic. 4. Question 11 Hayek Plc is considering investing in either project P or project Q: [For full question please refer to the examination paper.] The five stages of planning identified by Glautier and Underdown (page 353) are summarised as follows: 1. often called the four Ms: men. machines. These terms are explained within Chapter 11 of the subject guide. Assessing existing resources. Part (b) required standard text book appraisal of the disadvantages of payback. 3.] Required: (a) Calculate the payback period for each project and on this basis advise Hayek Plc which project to invest in. (b) Briefly explain two disadvantages of payback period as a method of investment appraisal. For this purpose forecasts have to be made which attempt to predict what will happen in the future.000 and 15. 2. Payback is a straightforward investment appraisal method. Question 12 Glautier and Underdown state that… [For full question please refer to the examination paper. Determining the strategy for achieving stated objectives by means of an overall plan which specifies strategic goals. Example: Rental of storage facility which has a maximum capacity after which a new facility will have to be rented. Example: A firm may determine variable and fixed costs which will be realistic between 10.Examiners’ commentaries 2008 (b) Stepped fixed costs are those which do not vary with volume of activity between two levels of activity but which will require an extra resource at the higher level.000 units. with and without policy changing on the part of the planning organisation. Strategic decisions are concerned with establishing the relationship between the firm and its environment. and resources already held which are either idle or which might be more efficiently utilised. management is concerned with making the most efficient use of scarce resources. Setting organisational objectives. The only complication here was remembering to adjust profits to cash flows (by adding back depreciation) to give payback periods of 21/3 years for project P and four years for project Q. 7 . materials and money. which is discussed on pages 166–169 of the subject guide. The adjustment of these and of the other accounting records is a recurring question in this examination. Such workings can be effectively shown on the face of the profit and loss account and balance sheet. However. only the advantages of budgets as part of planning would be insufficient. Designing a programme of action to achieve selected strategic goals by means of both long-range programmes and short-range programmes. Once more it is necessary to read the question carefully. The question is quite specific and answers which dealt with.25 Principles of accounting 5. for example. the adjustments necessary to arrive at amounts for cost of sales. (b) Prepare a profit and loss account for Keynes Plc for the year ended 30th April 2008 and a balance sheet at that date in a form suitable for the directors.600) (12.000 17. Often only brief workings are required and therefore a complete set of ‘T’ accounts or journals is a waste of time. and fixed assets were quite involved and therefore separate clear workings are necessary to enable candidates to be awarded with all the appropriate marks. In this case the adjustments are as follows: Bank balance per trial balance Administration standing order Bank interest paid Compensation received Refund received Bad debt recovered Bank balance per cash book £ (6. loss of equipment.000 5. (a) The reconciliation of the bank balance per the cash book and the balance on the bank statement often reveals errors and omissions.000) (900) 20.500 Students are strongly advised to use the eight-column accounting paper in answering this type of question. (22 marks) The final accounts of Keynes plc should be as follows: 8 .] Required: (a) Show any necessary adjustments to the bank balance according to the (3 marks) cash book as at 30th April 2008. administration cost. the latter covering a period of a year or less and containing sets of instructions of the type found in annual budgets.000 12. SECTION B Question 13 Keynes Plc is a company incorporated… [For full question please refer to the examination paper. 100 3.960.000 71.000 2.000 18.457.000 18.516.500 511.500 5.000 1.000 37.444.000 49.900 52.000 £ 3.000 1.000 12.528.Examiners’ commentaries 2008 Keynes plc Profit and loss account for the year ended 30th April 2008 £ Sales Cost of goods sold Gross profit Bad debt recovered Distribution costs Administration costs Auditors remuneration Depreciation/Amortization Loss on equipment Bad debts Profit before interest and tax Interest Profit before tax Taxation Net profit after tax Dividends paid Retained profit for the year 566.100 9 .000 306.000 1.100 12.000 50. 000 428.000 1.000 Current assets Stock Debtors Prepayments Bank 459.100 (180.400) (24.000 17.665.25 Principles of accounting Keynes plc Balance sheet as at 30th April 2008 £ Cost £ Accumulated Depn/Amort 132.400) 269.100 The profit and loss account and balance sheet for Keynes plc should be properly headed and an acceptable layout with appropriate subheadings is given in the subject guide (see Chapter 6 examples 6.000 308.2).100 1.000 1.500 Creditors: due within one year Creditors Accruals Taxation Net current assets (working capital) Total assets less current liabilities Creditors: due after one year Capital and reserves Issued ordinary share capital Reserves: Share premium Retained earnings (389.500 685.576.000 £ Net Fixed assets Leasehold property Plant and equipment 440.845.840. The main points to be included in a comprehensive answer were: • • • • accounts prepared on the basis of historical cost asset values of non-monetary assets do not reflect current value freeholds are not included at the moment at valuation but could be with change of accounting policy plant and equipment stated at depreciated historical cost and only reduced to realisable value if have a lower value in use 10 .100 1.268. (5 marks) The section requires a draft note in response to the director’s statement.000) 1. (c) Draft a note in response to the director’s statement.100 660.665.100 1.000 2.1 and 6.005.572.000) (416.000) ( 3.000 1.000 577.000 206.000 3. (a) The cash flow statement of Toynbee plc should be as follows: Toynbee plc Cash flow statement for the year ended 31 December 2007 £m Operating profit Depreciation Profit on disposal of fixed assets Increase in stock Increase in debtors Increase in prepayments Decrease in trade creditors Net cash flow from operating activities Returns on investment and servicing of finance Investment income Interest paid £m 666 150 (20) (242) (18) (60) (20) 456 30 (34) (4) (280) Taxation Capital expenditure Purchase of tangible fixed assets Disposal of tangible fixed assets Purchase of fixed asset investments Equity dividends paid Net cash flow before financing Financing Issue of ordinary shares Repayment of loans Decrease in cash balances Reconciliation of cash balances Decrease in cash at bank Increase in bank overdraft (324) 160 (36) (200) (160) (188) 76 (64) 12 (176) 88 88 176 11 .] Required: (a) Prepare a cash flow statement for Toynbee Plc for the year ended 31st December 2007. Question 14 The following are the summarised accounts of Toynbee Plc… [For full question please refer to the examination paper. The layout and preparation of a cash flow statement is given on pages 92–94 of the subject guide. (16 marks) This question requires preparation of a cash flow statement. Using the eight-column accounting paper is recommended. The direction of cash flows (outflows or inflows) is clearly a key issue and care should be taken to ensure that this is correct.Examiners’ commentaries 2008 • SECTION C thus the balance sheet should not be used as a statement of corporate value. (4 marks) (b) This question specifically deals with arguments in respect of the reliability of cash versus accruals accounting. Students should think carefully about the layout to be used in presenting their answer. The question asks for statements for the year ended 30th June 2008 only and anyone producing 2007 figures would be wasting valuable time and effort. A suggested presentation of the answer is as follows: 12 . Students should carefully structure their layouts to bring out the important features of their answer and give all relevant workings. depreciation. Answers should discuss the following: • subjective nature of accruals convention giving examples of estimates and judgments such as stock values. Students are again strongly advised to read even short questions very carefully and to focus on the specific issue raised. A key issue is the measurement of the value of stocks under each method. etc. This question requires an application of the techniques explained in Chapter 10.] Required: (a) Prepare internal management profit statements for the year ended 30th June 2008 using marginal costing. comparative objectivity of cash flow statements trade off between reliability and relevance thus while cash flows are more reliable on their own they are less relevant for assessing financial performance and position.25 Principles of accounting (b) It has been argued that cash flow statements are more reliable than financial statements prepared under the accruals convention. debt provisions. • • Question 15 Coase Ltd is a single-product manufacturing company… [For full question please refer to the examination paper. (5 marks) Chapter 10 of the subject guide covers cost accounting and the differences between marginal and traditional absorption costing. Answers which covered the general advantages/disadvantages of cash flow statements would not address the issue. Briefly examine this argument. Explain your answer. (7 marks) (b) Prepare a draft profit and loss account for the year ended 30th June 2008 using full absorption costing. (8 marks) (c) Give calculations showing why the profits for 2008 are not the same in your answers to (a) and (b) above. 000 631.000 x 90) Opening stock (2.000 12. while a proportion is carried forward in stock valuation in absorption costing systems.500 x £6.000 75. The above reconciliation shows exactly how the profit figures differ.443.000 x 54.500 x £61.500) £ 2.000 889.000 729.521.505.361.000 The difference in profit figures is caused by the different treatments of fixed production overheads.000 22.000 180.000 1.43) Closing stock (1.500 x £6.000 x 3) Contribution Fixed overhead Profit 96.613.500 £ 2.500 (82.000 x 48) Production cost (24.43) Selling and admin costs Profit (c) Marginal profit Fixed overhead B/F in absorption O Stock 2.000 x £6.500 75.143 9.643 2.000 634.347.143 92.000 1.000 814.43) Cost of sales Under-absorption (3.000 (b) Profit statement using absorption costing for the year ended 30 June 2008 £ Sales revenue Opening stock (2.500 108.250.07) Production cost (24.143 1.Examiners’ commentaries 2008 Coase Ltd (a) Profit statement using marginal costing for year ended 30 June 2008 £ Sales (25.500 x 55) Closing stock (1.143 1. Fixed overheads are all written off as period costs in marginal costing systems.250. 13 .07 Fixed overhead C/F in absorption C Stock 1.500 631.500 x £61.500 1.43 Reduction in absorption profit Absorption profit 634.500 706.500 x 55) Cost of sales Selling of admin expenses (25.000 1. The most appropriate way of presenting the answer to this question is as follows: £000s Sales Equipment Stock Working capital Overheads Material Variable costs Cash flow Discount factor Discounted cash flow NPV = -£24. This question continues application of the Net Present Value method of investment appraisal with an understanding of opportunity costs. Good answers would also explain the omission of sunk costs (research £20.3 (-9. It is important to adopt a well organised approach to the layout of an answer.6) (-192) (-32) +166.712 78. (8 marks) (a) Investment appraisal using discounting methods is a key part of the syllabus.6 2014 200 (-290) 0 (290) +200 0. (12 marks) (b) List and briefly explain the key points you would make to a management team unfamiliar with discounted cash flow appraisal techniques.8 2009 end 0 2010 +400 2011 +400 2012 +400 2013 +320 +40 +30 +20 (-9.] Required: (a) Use the net present value method of project appraisal to advice the management of Wilkes Ltd whether to go ahead with the proposed project.4 0. This firm would serve its shareholders best by not proceeding with this project.000) and non cash-flow items (depreciation).4 A negative NPV indicates that the project is expected to earn less than the opportunity cost of capital of the finance providers.893 (257.507 101.797 89.500 2009 start (-240) (-30) (-20) (-8) (-240) (-40) (-288) 0.2) (-8) (-240) (-40) +112 0. In answering this type of question it is strongly advised that the eight-column accounting paper be used to produce a table of cash flows and present values for each of the relevant years.4 0.25 Principles of accounting Question 16 Wilkies Ltd… [For full question please refer to the examination paper. 14 .636 105.4 0.6) (-240) (-40) +110.6 (9.6) (-120) (-20) +260. (a) The key points to be included in this explanation are: • • • • • • • • the time value of money discounting cash flows to a common point in time opportunity cost of investors’ funds minimum rate of return required on a project NPV = shareholder wealth increase NPV decision rule the significance of being cash flow-based rather than profit-based only incremental cash flows are considered.567 147. Question 17 The production manager… [For full question please refer to the examination paper. The hiring of the labour on the other contract represents the additional cash flows of undertaking this contract.750) 8.000 4. incremental and opportunity costs and setting aside of any sunk costs or costs not relevant to the decision.Examiners’ commentaries 2008 The relevant examples and discussion of discounted cash flow appraisal techniques is covered in Chapter 13 of the subject guide and pages 490–500 of Glautier and Underdown.000 12. giving the reasons why and the price. bearing in mind that the competitor is prepared to undertake the project for £30.000 30. (6 marks) (c) Identify four non-monetary factors that should be taken into account before tendering for this project. Incremental costs will provide an additional contribution which will result in an increase in profits. Students should note that the requirement asks for an explanation of each of the figures used. clearly stating how you have arrived at your figures and giving reasons for the exclusion of other figures.750 18. The net cost of purchasing the machinery represents the additional cash flows associated with the contract. Question 11.000 (b) The report should indicate that the costs given in the question do not represent incremental cash flows arising from undertaking the contract.2 on page 162 of the subject guide gives a good example of this type of problem. This involves recognition of relevant. (a) Relevant costs of the project Material A Material B Direct labour Net cost of machinery Relevant cost Contract price Contribution Notes: There is a saving in material costs of £1.750 if material A is not used.] (a) Cost the project for the production manager. (4 marks) This question involves analysis of a complex set of information in order to determine the relevant costs for a decision on acceptance of a special job. Assuming that the 15 . Good answers should explain why the individual costs were or were not included in the calculations.000. The following provides a summary of the calculations and explanations required. £ (1.000 7. (10 marks) (b) State whether the company should tender for the project. Supervision and overheads will still continue even if the contract is not accepted and are therefore irrelevant. The actual cost of material B represents the incremental cost. However answers which simply repeated the figures and explanations in (a) would not be sufficient. Is the contract likely to result in repeat business with the customer? Students may have identified other relevant issues and appropriate marks would be awarded.000 would be appropriate.25 Principles of accounting company has spare capacity and that a competitor is prepared to accept the order at £30. Is the overseas customer credit worthy? iii.000 then a tender price slightly below £30. Has the workforce the necessary skills to undertake the project? iv. i. The price given by the production manager includes non-relevant costs. 16 . c) Before accepting the contract the following non-monetary factors might be considered. Is there sufficient spare capacity to undertake the project? ii.
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