Examiners’ commentaries 2012Examiners’ commentaries 2012 AC1025 Principles of accounting Important note This commentary reflects the examination and assessment arrangements for this course in the academic year 2011–12. The format and structure of the examination may change in future years, and any such changes will be publicised on the virtual learning environment (VLE). Information about the subject guide Unless otherwise stated, all cross-references will be to the latest version of the subject guide (2012). General remarks Learning outcomes At the end of this course, and having completed the Essential reading and activities, you should be able to: • distinguish between different uses of accounting information and relate these uses to the needs of different groups of users • explain the limitations of such statements and their analysis • categorise cost behaviour, and prepare and contrast inventory valuations under different costing methods • describe the budgeting process and discuss the use of budgets in planning and control • explain, discuss and apply relevant techniques to aid internal users in decision-making. What the Examiners are looking for The examination paper covers a range of financial and management accounting topics, all of which the well-prepared candidate will have studied. The questions are designed to encourage candidates to think about the theories and principles of accounting and to demonstrate their ability to apply relevant concepts in a variety of situations or to a given set of information. Where appropriate, questions are sub-divided to help candidates answer in a logical manner. The examination will always include questions designed to test candidates’ ability in interpretation and analysis of financial information. The rubric of the examination paper is set out on the front cover and you should ensure that you precisely follow these instructions. It is very important that you do not waste time and effort in answering more questions than required, as marks will only be awarded to the correct number of questions. You are advised to read all of the questions before deciding which to answer in each section. Time allocation is an important factor in accounting examinations. You should decide how much time to spend on each question, based on the overall marks for the question and for each section, and should then adhere to these time allocations. The 1 AC1025 Principles of accounting format of the examination requires you to answer question 1 of Section A, which is in four parts. It is important that you allocate your time on this question so that you attempt all of the four parts. You are then required to answer question 2 of Section B, and two further questions, one from Section C and one from either Sections B or C. Please note that failure to comply with these requirements may result in some of your work not being marked. The rubric of the examination states that workings must be submitted for all questions requiring calculations. The importance of this cannot be overstated as, in the absence of workings, simple arithmetic errors cannot be distinguished from errors of principle and understanding. Thus the absence of workings will very often lead to an over-penalisation of errors. Of course, arithmetic errors may, in some instances, result in some loss of marks and you should always be careful to check your calculations. The rubric also states that any necessary assumptions introduced into answering a question should be stated. If you do not understand what a question is asking (a circumstance the Examiners endeavour to avoid), then you must state any consequent assumptions that you have made. Even if you do not answer in precisely the way the Examiners had hoped, you may get a good mark – providing your assumptions are reasonable. The most frequent reason for failing to do well in the examination, apart from lack of knowledge, is not answering the question actually set. You should take time to read each question carefully, and then attempt to answer everything that the Examiners require. Far too many candidates include every scrap of knowledge they have on a topic without specifically addressing the question and this can have a disastrous effect on their marks. Read the question carefully and tailor your answer to precisely what it asks and you should do well. Accounting is a progressive subject where it is essential to understand a particular topic before you go on to the next. Make sure that you understand the basic concepts and can apply them in an appropriate manner so that there is a logical structure to your answers. Do not write something that you do not understand for, if you do, you are likely to produce a muddled response. In answering computational questions, think carefully about the layout and logical progression of your answer before writing and set out your answer in a structured and easily readable format. You will be rewarded for an appropriate, logical and sensible method, even if the figures contain errors. The subject guide and textbook contain numerous worked examples, which you should have studied carefully, and practice questions with solutions, which should form a key part of your study and revision. You will find 8-column accounting paper is incorporated into the answer booklet. It may be particularly useful where tables of figures are required because it keeps answers neat and saves ruling lines for different columns. You are strongly advised to practise using it while you are preparing answers as part of your study of accounting. A sheet is available to download from the AC1025 page on the VLE and you can print off as many sheets of the paper as you need. This subject does not require a lot of reading beyond the core text of Perks, R. and D. Leiwy Accounting: understanding and practice. (Maidenhead: McGraw-Hill, 2010) third edition [ISBN 9780077124786], but it is essential that you adopt an approach of thorough study, plenty of practice answering questions and an ability and willingness to think logically. 2 Examiners’ commentaries 2012 All major topics are covered at the appropriate level in the recommended text by Perks and Leiwy and others are covered in the subject guide. References presented in the ‘Comments on specific questions’ for Zone A and Zone B indicate where certain topics may be found in the current edition of the subject guide (2012), which is an essential part of the study material for this course. You are also encouraged to read the financial press, including accounting journals and listen to, or watch, financial programmes and visit appropriate websites. This will enable you to keep abreast of current issues and help you to develop your ideas and opinions about them. Question spotting Many candidates are disappointed to find that their examination performance is poorer than they expected. This can be due to a number of different reasons and the Examiners’ commentaries suggest ways of addressing common problems and improving your performance. We want to draw your attention to one particular failing – ‘question spotting’, that is, confining your examination preparation to a few question topics which have come up in past papers for the course. This can have very serious consequences. We recognise that candidates may not cover all topics in the syllabus in the same depth, but you need to be aware that Examiners are free to set questions on any aspect of the syllabus. This means that you need to study enough of the syllabus to enable you to answer the required number of examination questions. The syllabus can be found in the Course information sheet in the section of the VLE dedicated to this course. You should read the syllabus very carefully and ensure that you cover sufficient material in preparation for the examination. Examiners will vary the topics and questions from year to year and may well set questions that have not appeared in past papers – every topic on the syllabus is a legitimate examination target. So although past papers can be helpful in revision, you cannot assume that topics or specific questions that have come up in past examinations will occur again. 3 AC1025 Principles of accounting Examiners’ commentaries 2012 AC1025 Principles of accounting – Zone A Important note This commentary reflects the examination and assessment arrangements for this course in the academic year 2011–12. The format and structure of the examination may change in future years, and any such changes will be publicised on the virtual learning environment (VLE). Information about the subject guide Unless otherwise stated, all cross-references will be to the latest version of the subject guide (2012). Comments on specific questions Candidates should answer FOUR of the following SEVEN questions: QUESTION 1 of Section A, QUESTION 2 of Section B, ONE question from Section C and ONE further question from either Section B or C. All questions carry equal marks. Section A Answer Question 1 from this section. Question 1 (a) Swallow commenced business on 1st October 2010 purchasing fixtures and fittings for £25,000 and a motor vehicle for £16,000. The fixtures and fittings were estimated to have a useful life of 8 years and a residual value of £1,800. Further fittings were purchased on 1 November 2011 for £15,200 with nil residual value and a useful life of 8 years. During December 2011 the motor vehicle was involved in an accident and the insurance assessors considered it a write-off. A cheque for £3,200 was received in December from the insurers in full settlement. Another vehicle was purchased on 5 January 2012 at a cost of £18,500. The depreciation policy of Swallow is to charge a full year’s depreciation in the year of purchase and none in the year of disposal, and to depreciate fixtures and fittings on a straight-line basis and vehicles by 25% reducing balance…. [For the full question please refer to the examination paper.] Reading for this question Subject guide, Chapter 4. Perks, R. and D. Leiwy Accounting: understanding and practice. (Maidenhead: McGraw-Hill, 2010) third edition [ISBN 9780077124786] Chapter 1. Approaching the question One of the key aims of this course is to be able to apply financial accounting techniques and concepts to a set of data. Depreciation is a key accounting concept. Part (ii) requires a discussion of the advantages and disadvantages of the two methods of depreciation. 4 the cons are that it may not give an accurate measure of the loss in value or reduction in the useful economic life of an asset. The pros of using the straight line method are that it is easier to understand and the computations are simpler than other methods.700 Accumulated depreciation 6. It is also said to provide a more realistic measure of the reduction in the market value of non-current assets. 2011 2012 £ £ Depreciation 6.500 13.900 9.200 ÷ 8) (4.100 12.900) _______ 22.000 Depreciation (25%) ( 4. However.000 58.100 46. the cons of using this method are that the computations are more complex and difficult to understand.800 Purchases 15. Examiners’ commentaries 2012 Swallow – Income statement for year ended 30th September i.11 £ £ Purchases 25.425 Loss on disposal of vehicle – 8.800) ÷ 8 (2.875 ii.000 – 1.000) (25.625) 2.900 + (15.200 Loss 8.000 16.09. 5 .500 Depreciation (25%) (4.900 *12. The pros of the reducing balance method are that it gives a decreasing annual charge for depreciation over the useful life of an asset. Also it gives the same charge for depreciation in each year of the asset’s life which means that this method is more appropriate for assets which are depleted as a result of the passage of time such as buildings and patents.12 Proceeds 3.800 Statement of financial position at 30 September 2011 2012 Non-current assets £ £ Cost 41.9. This means that it is more appropriate for assets which deteriorate primarily as a result of usage where this is greater in the earlier years of their life such as plant and machinery and motor vehicles.000 y/e 30.800) ______ 32.325 *(2900 + 4800 + 4625) 34.200 18.375 Workings Fixtures Vehicles y/e 30. However. ) or the format (income statement. Answers which discuss the content of financial statements (income.) do not address the issue raised in the question. Approaching the question Understanding of the objectives and characteristics of financial statements is a fundamental conceptual underpinning to this course. etc. (c) Required: In the context of cost-volume-profit (CVP) analysis explain the meaning.000 and 15. will require an extra resource. Example A firm may determine variable and fixed costs which will be realistic between 10. The two principal (qualitative) characteristics of financial statements are relevance and faithful representation (or reliability). 6 . iii. at the higher level. Stepped fixed costs iii. Non-linear variable costs ii. and the comparability and understandability of faithful representation. i. Example Direct material where there are discounts available for larger orders. cash flow statements.AC1025 Principles of accounting (b) Required: Explain the objective of published financial statements and identify the two principal characteristics of financial statements which contribute to achieving this objective. outside of this range these costs will no longer behave in the assumed linear fashion.000 units. Good answers will explain the predictive and confirmatory value of relevance. Stepped fixed costs are those which do not vary with volume of activity between two levels of activity but which. (6 marks) Reading for this question Subject guide Chapter 1. An example of each of the terms should be used to demonstrate the meaning and application of the terms. Example Rental of storage facility which has a maximum capacity after which a new facility will have to be rented. Perks and Leiwy (2010) Chapter 15. Relevant range (6 marks) Reading for this question Subject guide Chapter 10. The relevant range is the range of outputs over which the assumption that a cost-volume relationship is a linear relationship is realistic. etc. Perks and Leiwy (2010) Chapter 3. Non-linear variable costs vary with volume of activity but with a cost per unit which is different for different levels of activity. assets. Approaching the question This question tests candidates’ ability to explain the three terms used in cost-volume-profit (CVP) analysis. and give an example of each of the following terms: i. Answers should explain that the objective of financial statements is to provide information that users (investors. ii. lenders and creditors) need in making decisions about the reporting entity. Sales of the existing and the new brand when both are priced at 90p per unit are expected to total 250. Kestrel is currently selling its full productive capacity of 100.000 units 100.6 0.000 + 30. [For the full question please refer to the examination paper. However.000 = 36p 250.000 • Margin of safety 50.000) – 60.000 + 30.000 (0.a.4 250. Existing Proposed scheme • BEP 30.000 50.000 Sales volume at predicted sales price 225.000 60.6 100.000 units 1.000 units p. At present the fixed expenses of the company are £30. Overall the proposed scheme seems to give reasonably low risk with higher profits. brands will be differentiated by the packaging and the marketing approaches adopted. Answers should show understanding of the techniques and an ability to assess the information and draw reasoned conclusions. This question requires basic calculations of information which would be useful to a company in deciding between two schemes. i.000 units. at what the company’s directors believe is the optimum price-volume relationship for the product.20 per unit.000 units = 50% = 40% ii. sales price can be dropped from 90p to 86p.000 = 150.000) – 30. Existing profit level = £30. The variable cost of this product is 60p per unit.a. Perks and Leiwy (2010) Chapter 15.] Reading for this question Subject guide Chapter 10.4 Sales price at predicted volume Cost = 60.000 = 0.20 – 0. Approaching the question A key learning outcome of this course is to apply decision-making techniques using accounting information.000 = £30.000 = 60.000 Price = 36 + 50 = 86p iii. Examiners’ commentaries 2012 (d) Kestrel Ltd manufactures a single product which sells at £1. The proposed scheme • gives 33% increase in profits if predictions are achieved • has a higher break-even point but if predicted sales are achieved.9 – 0. While being virtually identical from the manufacturing point of view. 7 .000 p.000 = £40. they are considering selling the product under an additional brand name. a similar unit margin of safety – but in percentage terms it is riskier • if the scheme is adopted the level of sales needed to at least achieve current profits is 90% of predicted levels • Or.5 • Profit (0. 000 and the plant and equipment should be depreciated to result in a net book value of £7. and one further question from either Section B or C Question 2 The following is the trial balance of Nightingale Ltd as at 30 April 2011: £ £ 100.700 Interest on debentures 1.000 Land and buildings.200 Interim dividend paid on equity shares 3.200 Trade payables 8. (2) Administrative expenses of £1.000 Accumulated depreciation: Plant and equipment 3.000 Accumulated depreciation: Buildings 13.000 General reserve 10.100 Plant and equipment.000 Provision for bad debts 910 Share premium 35. 8 .550 The following additonal information is available: (1) Inventory at 30 April 2011 is valued at £13. Depreciation is to be included in administrative expenses. (3) Depreciation on buildings is to be provided at a rate of 15% per annum on the carrying value of £80.300 Bank overdraft 7.250 Bed debts written off 700 Revaluation reserve 9.580 _______ ______ 376. (4) The provision for bad debts is to be adjusted to 10% of the trade receivables at the period end.000 Investments (current assets) 8.550 376. at cost 13.150 were prepaid on 30 April 2011.000 equity shares of £1 each 100. at valuation 240.480.000 50.900 Administrative expenses 28. Bad debts and changes to the provision are to be treated as administrative expenses.400 Distribution costs 11.800 on 30 April 2011.900 Inventory 9.800 Purchases 49.860 Retained earnings 2.400 Trade receivables 11.700 Sales 135.200 10% debentures 24.AC1025 Principles of accounting Section B Answer Question 2 from this section.000 7% preference shares of 50p each 25. You should pay attention to the presentation of your answer. A trial balance with several adjusting items has been the format for the compulsory question over recent years.620) Gross profit 90.370) Profit for the year 26. (a) i. It is very important that detailed. (8) The account policies of Nightingale Ltd include the following: • Preference shares are to be treated as a non-current liability and the preference dividend as a finance cost.970 Taxation (6. The 8-column accounting paper provided is particularly useful for presenting the financial statements. The workings may be shown on the face of the accounts or separately but candidates should try and help the Examiners to award all appropriate marks by clear presentations.370 is to be provided for. (6) The preference share dividends are outstanding at the period end (30 April 2011) and the last half year’s interest on the debentures has not been paid. The format of the Statement of Changes in Equity should follow best practice. [For the full question please refer to the examination paper. If figures in the final accounts comprise a number of items. (7) The directors propose to declare a final dividend on the equity shares of 13 pence per share and transfer £2. Income statement for the year ended 30 April 2011 £ Sales revenue 135. • Equity dividends are only accounted for when paid and are shown as part of the changes in equity. taking care to use the appropriate descriptions of line items in the income statement and statement of financial position.700) Administrative expenses [W2] (41. In answering this type of question a methodical and organised approach is needed.] Reading for this question Subject guide Chapters 5 and 6.150) Profit before tax 32. Approaching the question The preparation of final accounts from structured information is a key learning outcome. marks will be awarded accordingly.280 Distribution costs (11. legible workings are given in order that marks are awarded for all work which is correct. Perks and Leiwy (2010) Chapter 18. Examiners’ commentaries 2012 (5) The corporation tax on this year’s profit of £6.460) Profit before Interest and Tax 37.120 Finance costs [W6] (4.500 to general reserves. Without workings one error may result in several marks being lost.600 9 .900 Cost of sales [W1] (45. 250) Total income (profit) 26.000 50.080 Prepayments (1.300 222.000 35.000 7% preference shares 25.000 Current liabilities: Bank overdraft 7.200 10.990 Total equity and liabilities 255.500 (2.200 Preference dividend 1.700 23.640 Changes in equity: Equity dividends paid (3.430 180.420 Total liabilities: 74.AC1025 Principles of accounting ii. Statement of changes in equity for the year ended 30 April 2011 Share Share Revaluation General Retained Total capital premium reserve reserve earnings £ £ £ £ £ £ Balance at 1/5/10 100.860 10.800 Trade creditors 8.000 9.990 Reserves 180.420 Equity 100.100 214.200 2.900 Fixtures and fittings 13.120) 1.000 30.600 26.800 253.700 Current assets: Inventory 13.200 7.000 Total assets 255.000 Share capital 80.410 Presentation 10 .410 EQUITY AND LIABILITIES Non-current liabilities: 10% debentures 24.150 Investments 8.250) (3.580 157. Statement of financial position as at 30 April 2011 £ £ £ ASSETS Non-current assets: Land and buildings 240.000 5.750 Total current liabilities 25.600 Transfer 2.370 Accrued debenture interest 1.990 iii.000 9.000 35.300 Accrued tax 6.500) Balance at 30/4/11 100.480 Trade debtors Less: provision for doubtful debts 11.000 Total non-current liabilities 49.860 12.000 25. • A revaluation results in a gain which is accounted for as follows: • DR Asset account • CR Revaluation reserve • The revaluation reserve is not distributable so will not lead to higher dividend payments.200 Provision @ 10% 1.300 [W5] Provision for doubtful debts: Opening debtors* 11.400 Add: Purchases 49. • The revaluation might not have a large impact on income as the depreciation on land and buildings is likely to be relatively small. Examiners’ commentaries 2012 (b) Answers should include the following: • Land and buildings might have historical cost figures which do not bear much relationship to market value.620 [W2] Administrative expenses: TB (less prepaid of £1.800) = £1.460 [W3] Depreciation of buildings: 15% £80.700 Less: Closing inventory (13.120 Existing provision (910) Increase in provision 210 Bad debt of £700 already accounting for since in TB.300 Provision for doubtful debts [W5] 210 Bad debts 700 41.250 Depreciation of buildings [W3] 12.000 7% = 1.000 = £12.000 10% = 2.000 – 3.100 Closing valuation is £7. [W6] Finance costs: £ Interest on debentures: £24.480) 45. In order to provide a more relevant statement of financial position a recalculation might be considered.900) = £9.000 [W4] Depreciation of plant and equipment: Opening NBV is £(13.800 Depreciation for year: £(9.150) 27.400 Preference dividend: £25.750 4.100 – 7. Workings [W1] Cost of sales: £ Opening inventory 9.150 11 .000 Depreciation of P and E [W4] 1. (4) The taxation liability at each year end is settled in full in the following year. together with comparative figures for the previous year. You should adopt a systematic approach which will enable you to extract the cash flows from the accruals based income statement and statement of 12 .000).000 for 2011 (2010 was £28. Perks and Leiwy (2010) Chapter 6.000. is shown below: 2011 2010 £’000 £’000 ASSETS Non-current assets Property. (3) New debentures and shares issued in 2011 were issued on 1 January. (2) The company declared a final dividend of £26. plant and equipment – cost 270 180 Accumulated depreciation (90) (56) 180 124 Current assets Inventory 50 42 Trade receivables 40 33 Cash – 11 90 86 Total assets 270 210 EQUITY AND LIABILITIES Equity Equity share capital £1 shares 25 20 Share premium 10 8 Retained earnings 93 81 Total equity 128 109 Non-current liabilities 15% debentures repayable 2015 80 60 Current liabilities Trade and operating payables 33 24 Current tax payable 19 17 Bank overdraft 10 – Total current liabilities 62 41 Total liabilities 142 101 Total equity and liabilities 270 210 Additional information: (1) Plant had been sold during the year for £15.This is paid immediately after the AGM that takes place after the year end. Approaching the question This question requires preparation of a cash flow statement (CFS).AC1025 Principles of accounting Question 3 The statement of financial position of Lapwing plc for the year ended 31 December 2011.000 with a loss on disposal of £5.The company did not pay any interim dividends. [For the full question please refer to the examination paper. The cost of the plant sold was £27.000.] Reading for this question Subject guide Chapter 6. In 2012 part (c) was often not attempted and candidates should remember to attempt all sections of the questions in the paper.000) 12 Operating profit before working capital changes 117 Increase in trade receivables (7) Increase in inventories (8) Increase in trade payables 9 Cash generated from operations 111 Interest paid (12) Taxation (17) Net cash from operating activities 82 Cash flows from investing activities Sale of property. cash receipts from customers. plant and equipment 15 Payments to acquire property. in particular. The resulting increase or decrease in cash balances should be reconciled to the relevant figures in the statement of financial position. Good answers will be well presented. correctly describing the component cash flows with well laid out workings. Examiners’ commentaries 2012 financial position. cash payments to suppliers and cash payments to and on behalf of employees). (a) Computation of operating profit £’000 Increase in retained earnings (93–81) 12 Dividends 28 Taxation 19 Operating profit 59 (b) Lapwing plc Statement of cash flows for the year ended 31 December 2011 Cash flows from operating activities £’000 £’000 Profit before taxation 59 Depreciation charges 41 Loss on disposal 5 Loan interest (15% £800. 13 . plant and equipment (117) Net cash from investing activities (102) Cash flows from financing Issue of debentures 20 Issue of equity share capital 7 Equity dividends paid (28) Net cash used in financing activities (1) Decrease in cash and cash equivalents (21) Net cash and cash equivalents at 12 January 2011 11 Net cash and cash equivalents at 31 December 2011 (10) Statement of cash and cash equivalents 2010 Cash flow 2011 £’000 £’000 £’000 Cash at bank 11 (11) – Overdraft – (10) (10) Total cash and cash equivalents 11 (21) (10) (c) A statement of cash flows presented under the direct method shows operating cash receipts and payments (including. aggregating to the net cash flow from operating activities. To fulfill the contract.] Reading for this question Subject guide Chapter 7. The most common analytical technique is often testing by a mini-case study of the type used in this question. sales revenue had grown steadily at a rate of two to three per cent each year. Within weeks he had successfully negotiated a five-year contract with a large clothes retailer to make a range of sports and leisurewear items. During his period of office. interpret and communicate the information contained in financial statements. Excellent answers will use the analysis to draw appropriate conclusions which will be discussed from the perspectives of the lenders and shareholders. Financial information concerning the business is given below. For a number of years the chairman and managing director was David Bird. 5 and 7. PPE As at 2010 180 56 Disposal (27) (7) Additions (B/F) 117 Depreciation (B/F) ___ 41 As at 2011 270 90 Question 4 Osprey plc is a family-owned clothes manufacturer. Simon decided to expand the business. Workings Cost A/c Depn 1.365 Operating profit 914 1. which provide insight into the financial position and performance of the companies. David Bird retired on 30 November 2011 and was succeeded by his son Simon. 14 . Approaching the question The learning outcomes for Chapter 7 of the subject guide include the ability to analyse. Perks and Leiwy (2010) Chapters 4. Soon after taking office. It is important that answers go beyond simply stating that a particular ratio has gone up or down. Good answers will draw conclusions from the ratios and the background information. the interpretation should use the contextual information given in the question and make links between different ratios. Income statements for the year ended 30 November 2011 2012 £000 £000 Revenue 9. Osprey Ltd acquired new equipment and premises. The indirect method shows users can assess quality of earnings by referring to reconciliation of earnings/cash flows. The contract will result in an additional £2m in sales revenue during each year of the contract.482 11.AC1025 Principles of accounting The direct method shows actual inflows and outflows of activities.042 Interest charges (22) (81) Profit before taxation 892 961 Taxation (358) (386) Profit for the year 534 575 [For the full question please refer to the examination paper. Net profit margin 534 100 5. Current ratio 4926 1508 3. Operating profit margin 914 100 9. Examiners’ commentaries 2012 You should carefully read the requirements of the question which.86 x 12541 – 1508 11365 0. ROCE 914 100 8. specify the number and nature of the ratios to be calculated. There are no absolute answers to this type of question and you will be rewarded for a logical and informed analytical approach to the case study described in the question.7 : 1 7700 – 3420 0.81 x 19117 – 5174 iv.1% 575 100 11365 iii.6% 9482 1042 100 9.5 : 1 5174 vi. in this case. Asset turnover 9482 0.28% 11033 1042 100 7.8 : 1 5174 15 . Quick assets 4926 – 2386 1508 1.6% 9482 5. but for completeness provides more ratios than the question requires.2% 11365 ii.3 : 1 7700 1. The answer below illustrates such an approach.47% 13943 v. Osprey plc (a) 2011 2012 i. If you do not follow these instructions your work may not be marked. The lower operating margin and increases in sales revenue may well be due to the new contract. the gearing ratio is probably still low in comparison with other businesses. The balance sheet shows that the business now has a large overdraft and the trade payables outstanding have nearly doubled in 2012.1% 3675 100 26. However. There has also been a similar decrease in the quick assets ratio. The current ratio has decreased by more than half during the period.AC1025 Principles of accounting vii. The capital employed by the company increased in 2012 by a larger percentage than the increase in revenue. The increase in capital during 2012 is largely due to an increase in borrowing. If the conclusion is that it is. The major cause for concern has been the dramatic decline in liquidity during 2012. this could not prevent a slight fall in return on capital employed (ROCE) in that year. Receivables collection period 2540 365 98 days 9482 4280 365 137 days 11365 viii.4% 13943 (b) The operating and net profit margins were slightly lower in 2012 than in 2011. This may be due to the terms of the contract that has been negotiated and may be difficult to influence. increasing its long-term funding may be a sensible policy. the business should consider whether it is overtrading. The trade receivables outstanding and inventories have increased much more than appears to be warranted by the increase in sales revenue. If this is the case. the sales revenue to capital employed ratio decreased over the period. 16 . Hence. Although there was an increase in sales revenue in 2012. Gearing 1120 100 11033 11. Comparison of the premises and borrowing figures indicates possible unused borrowing (debt) capacity. 00 The direct material included in the budget is after taking into account a standard loss of material A in the process. (a) Product Y Product Z £ £ Standards for 31/3/13 Direct materials: A: 29. and one further question from either Section B or C Question 5 Hoopoe Ltd makes two products in one of its factories.16 14. This question provided a relatively complex scenario which required a logical and well structured approach to extracting the figures and preparing the budgets.00 72.89 per kg 56.5 hours at £4. The products comprise different mixes of two basic raw materials.86) 12.70 40 kg at £1.46 kg 80.667 kg (3) at £5.32) 21.00 Direct labour: Manufacturing 11.15 Packaging (5 hours at £4.00 20. Examiners’ commentaries 2012 Section C Answer one question from this section. Standard (budgeted) direct material and direct labour costs for the two products in the year ended 31 March 2012 were: Product Y Product Z (£ per hundred units) (£ per hundred units) Direct materials: Raw material A 156. [For the full question please refer to the examination paper.60 Direct labour: Mixing (2.25 Packaging 20.46 per kg 160.89 per kg 75.15 12. Approaching the question The preparation of budgets is a key learning outcome of Chapter 13 of the course.08 B: 30 kg at £1. Perks and Leiwy (2010) Chapter 13.60 21.25 11.333 kg (2) at £5.] Reading for this question Subject guide Chapter 13.60 17 .00 78.00 Raw material B 54. One grade of direct labour is employed in the mixing process and another grade in final packaging. 000 Production 1.AC1025 Principles of accounting Notes: 1.000 Kilos ii.00 Mixing (2.80 per kg 54. Standards for 31/3/12 Direct materials: A: 30 kg at £5.900.20 per kg 15 kg at £5.000 Add: Closing stock 90.710.635.50) Packaging (5 hours at £4) 11.000 Add closing stock 200. Y.667 (b) i.420 iii.659.000 Product Z: 925.333 20.125) =14.000 150.00 40 kg at £1.25 11.5 hours at £4.000 Required purchase cost = £ 1.710.000 units at 30 kg per hundred 513.075.000 2.000 950.000 Less closing stock 190.20 per kg 156.000 1. X. Production budget: Product Y (units) Product Z (units) Sales 1.25 2.00 3.000) Required purchases 878. Material B purchases budget: Required for production: Product Y: 1.000 925.000 125.10/1.00 B: 30 kg at £1.5 hours per hundred = 65.000 Less: Opening stock (95.00 20.80 per kg 78.875 hours 18 .Revised input for material A = 30 (1.000 883.10/1.00 Direct labour: 72.000 Product Z 925.000 units at 40 kg per hundred 370.000 units at 2.700.Revised input for material A = 15 (1.000 1.125) = 29.710. Mixing labour budget: Total production: Product Y 1. Continued investment in research and development has produced a new innovative product. Approaching the question The application of capital investment techniques is an important element of the syllabus and the learning outcomes for Chapter 12 of the subject guide. The 8-column accounting paper can help in this respect. Part (b) was a fairly straightforward comparison of the strengths and weaknesses of NPV and Payback methods. Examiners’ commentaries 2012 Question 6 Heron Electronics Ltd is an established company which has continued to be profitable in recent years despite operating at below full capacity. Having determined the net cash flow for each year. This type of question requires use of a significant amount of data and it is very important that your work is clearly presented and that all workings are legible and understandable. It is important to give workings of all figures and to explain clearly treatment of all amounts. Perks and Leiwy (2010) Chapter 12.000 2 30. 19 .000 5 40.000 (2) The company accountant has collated the following costing information relating to the drier proposal: [For the full question please refer to the examination paper. the microwave drier. Thus a net present value and payback can be arrived at and a decision recommended and justified.000 3 35. A suggested presentation of the answer is given below. (1) Market research supports the proposed price of £400 per drier with the following predicted sales over the next five years: Year Unit sales 1 20. The most effective approach to Part (a) is to construct a columnar table in which relevant cash flows can be inserted.] Reading for this question Subject guide Chapter 12. for example if a cost is to be treated as sunk and therefore not included as a relevant cost this should be stated. these are discounted using the discount factors taken from the tables provided.000 4 42. 637.600 Fixed costs (manuf) – (1.1 1673.350 2.797 0. The strengths of payback are: • simple to calculate and understand • favours early cash receipts • minimises time related risks • informative if there are liquidity problems.500 5.893 0. The weaknesses of payback are: • ignores cash flows after payback period • ignores timing of cash flows even before payback • not an absolute measure (poor for tanking projects of different size) 20 .200) (1.500) – – – – 300 Working capital (200) (200) (300) (400) (500) 1.567 NPV (7.400 (b) 12% PV Factor 1 0.636 0.200) (1.200) (1.800) (1.300 6.000 4. overheads 75 Variable S & D costs 25 (250) Contribution 150 per drier (c) The strengths and weaknesses of the two investment appraisal methods are outlined below. S and D) were not treated as relevant costs and only the changes at the higher output levels were included then the cash flows increase by £1.2 1462.100 and a payback of two and a half years.300 4.000 R&D is a sunk cost and therefore irrelevant.200) Contribution _____ 3.8 2494.200) (1.AC1025 Principles of accounting (a) Relevant cash flows and calculation of NPV [Note that the £200.000 Net Cash Flow (7.712 0. it may be of relevance to Heron because of their liquidity problems.500k for each of the years 2–5.700) 700 2.100 2.800) Fixed costs (S&D) – (300) (300) (400) (500) (500) Lost rents – (600) (600) (900) (1.250 6. Although payback is generally thought to be a weaker technique overall.7 1673.] All figures in £’000 Year 0 1 2 3 4 5 R&D and capital (7.700) 625.000 Payback is just over 4 years Alternative answer If the original fixed costs (M. Working 1 Calculation of contribution per drier £ £ Selling price 400 Direct labour 75 Direct material 75 Variable manuf. this gives a NPV of £5.8 Overall NPV = £230. budgeting and variance analysis to a given set of data. Inflation 3. Question 7 Dunnock Ltd manufactures a single product.400 units @ £102 Production 1.] Reading for this question Subject guide Chapter 14. • The month budget projects production and sales of 1.000 sq metres @ £4 per sq m Direct labour 6. Your answer should set out clearly all of your workings and cross-refer these to the final operating statement and relevant variances.000 Fixed overheads £6. [For the full question please refer to the examination paper. Risk (1 and 2 are included in money interest rates) • considers all cash flows and the whole life of the project • an absolute measure (therefore good for ranking projects). • The standard selling price of the kitchen is £100. which has a standard cost of £80 made up as follows: Direct material 15sq metres @ £3 per sq m £45 Direct labour 5 hours @ £4 per hour £20 Variable overheads 5 hours @ £2 per hour £10 Fixed overheads £5 £80 • Variable overheads are charged on a direct labour hour rate. The weaknesses of NPV are: • more complicated to calculate and understand • may give impression of ‘accurate figures’ but only as good as the estimates of relevant cash flows • has a long term view but does not consider liquidity and is not popular with managers who are assessed by short term performance measures.000 There are no inventories of materials at the beginning or end of the period. 2. Approaching the question This is a question which tests candidates’ ability to apply standard costing. It is important that you identify variances as either favourable or adverse (unfavourable). These 21 .400 units Direct materials 22.800 hours @ £5 Variable overheads £11.000 units. • Actual figures for the month of April are as follows: Sales 1. Perks and Leiwy (2010) Chapter 16. Examiners’ commentaries 2012 The strengths of NPV are: • takes into account time value of money • money sooner is better than money later because of: 1. Real Interest Rate (or opportunity cost). a laminated kitchen unit. have we changed supplier.000 F 32. • The efficiency of labour is better than anticipated.600 – Efficiency 400 F. This could be due to higher skilled staff mix. Management should investigate wastage and production processes. • Sales volume has increased even after a 2p increase in sales price. overtime or a response to higher market rates.800 32. 22 . • Variable overheads have cost less than anticipated. If costs had been on target. • Labour rates have increased.000) Actual profit 3.800 F Volume 10.800 could have been achieved. bonus schemes.800 Cost variances Fav Adv Materials – Price (22.800) – Efficiency 800 V. • Fixed overheads have increased and management should investigate the components of this cost.800 (b) Commentary • Overall budgeted profits of £20.AC1025 Principles of accounting techniques are clearly demonstrated by examples in the subject guide and you should be prepared to apply them in questions at this level. overhead – Spending _____ (1.000) 3.000 have not been achieved due principally to material cost overruns. The efficiency savings will relate to the labour efficiency referred to above.800 (29. a profit of £32. An analysis of the components would reveal where the reductions have occurred. • Materials suffered a large price rise and management should investigate the cause of this. Part (b) tests your understanding of the variances and their interpretations. Good answers will provide a well-explained commentary for management. this could be due to higher skilled employees or production process efficiencies. purchased better quality or is this a result of a market price increase? • Material usage was also worse than budget (which may mean better quality of material is unlikely). overhead – Price 2.000) – Efficiency (3.000 Sales variances – Price 2. for example. (a) Report on kitchen unit sales and production for April £ Budgeted profit 20.000) Labour – Price (6. The amount is relatively small compared to other cost variances. 800 5) – (6.800 A Labour efficiency (AQ SP) – (SQ SP) (6.000 Sales 100.000 11.000 Labour 20.800 4) = 6.000 140.800 Profit 20.000 139.000 6.000 88.800 2.000 3) = 22.000 A Materials efficiency (AQ SP) – (SQ SP) (22.000 3) = 3.000 Variable overhead 10.000 3.000 63.800 2) – (7.000 3) – (21.000) – (6. Examiners’ commentaries 2012 Workings 1. Budgeted and actual figures – April Original budget Flexed budget Actual Materials 45.000 28. Variances Sales price (AQ AP) – (AQ SP) (1400 102) – (1400 100) = 2.800 2) = 2.000 4) = 800 F Variable overhead price (AQ AP) – (AQ SP) (11.000 F Materials price (AQ AP) – (AQ SP) (22.000 142.000 A Labour price (AQ AP) – (AQ SP) (6.000 2) = 400 F Fixed overhead – spending 1000 A 23 .600 F Variable overhead efficiency (AQ SP) – (SQ SP) (6.000 4) – (22.000 80.000 34.000 5.000 110.800 F Sales volume 30.000 =10.000 Fixed overhead 5.000 – 20.000 14.800 4) – (7.000 30. Answers which discuss the content of financial statements (income. ONE question from Section C and ONE further question from either Section B or C. Comments on specific questions Candidates should answer FOUR of the following SEVEN questions: QUESTION 1 of Section A. (6 marks) Reading for this question Subject guide. all cross-references will be to the latest version of the subject guide (2012). and D. Leiwy Accounting: understanding and practice.) do not address the issue raised in the question. 2010) third edition [ISBN 9780077124786] Chapter 3. assets. cash flow statements. etc. Good answers will explain the predictive and confirmatory value of relevance. 24 . Chapter 1.) or the format (income statement. The two principal (qualitative) characteristics of financial statements are relevance and faithful representation (or reliability). Information about the subject guide Unless otherwise stated. The format and structure of the examination may change in future years. All questions carry equal marks. and any such changes will be publicised on the virtual learning environment (VLE).AC1025 Principles of accounting Examiners’ commentaries 2012 AC1025 Principles of accounting – Zone B Important note This commentary reflects the examination and assessment arrangements for this course in the academic year 2011–12. Approaching the question Understanding of the objectives and characteristics of financial statements is a fundamental conceptual underpinning to this course. (Maidenhead: McGraw-Hill. R. and the comparability and understandability of faithful representation. Perks. Answers should explain that the objective of financial statements provide information that users (investors. etc. QUESTION 2 of Section B. Question 1 (a) Required: Explain the objective of published financial statements and identify the two principal characteristics of financial statements which contribute to achieving this objective. lenders and creditors) need in making decisions about the reporting entity. Section A Answer Question 1 from this section. (1) 2011 Purchases Sales July 40 units at £1.700 The December sale occurred before the purchase in that month. The company operates the weighted average assumption for calculation of cost of sales. Examiners’ commentaries 2012 (b) The following data show the trading transactions of Othello Ltd for its first six months of trading.000) (22. Othello Ltd can only sell these for a price of £1. (4)Operating expenses for the six months amounted to 10% of sales revenue. Perks and Leiwy (2010) Chapters 1 and 2. Required: Prepare the Income Statement for Othello Ltd for the six months to 31st December 2011 from the above information. This amount is not included in the cost of £700 per unit. The most common failures were the incorrect treatment of the transport costs and using a periodic valuation rather than.418 25 . (3)The 20 units purchased in December had been made to order for a customer who has now gone into liquidation.000 Purchases (196. using a transaction-based valuation.000 per unit after a modification costing £150 per unit. Othello Ltd Income Statement for the six months to 31 December 2011 £ £ Sales 228. This question tests the use of one method.218 Operating expenses (10% 228. It is important to set out the statements and calculations in a clear and organised manner.800) Operating profit 64. (2)The 20 units purchased in November incurred a transport charge of £2. Closing inventory and the cost of sales is calculated whenever a sale is made.500) Less: Closing inventory 55.500 to move them to the company premises.200 each 90 units at £1.718 (140.000 each August 80 units at £ 900 each September 50 units at £1. as the question required.100 each November 20 units at £ 700 each December 20 units at £1. Approaching the question The learning outcomes in Chapter 9 require candidates to be able to prepare and contrast stock valuations under different costing methods. (6 marks) Reading for this question Subject guide Chapter 4.782) ________ Gross profit 87.500 October 40 units at £1. Purchases Cost 194. can motivate staff to achieve them. the production department needs to know how much the sales department is planning to sell in order to set its target for production. as such. (6 marks) Reading for this question Subject guide Chapter 13.g. The main purposes and benefits of budgeting are: • Planning and anticipation. Inventory valuation Units Cost At 31 August 120 112. especially if staff are rewarded on the basis of meeting budget (e. A cohesive budget allows activities to be coordinated.000 60 55. • Communication and coordination. Budgets and standard costs provide targets and. Net Realisable Value Sale price 1. Management are forced to think ahead and plan for future eventualities.000 Sale (50) (46. Regular budget-setting and review procedures also lead to regular examination of the organisation’s goals and decisions.667) 70 65. This is a straightforward test of this knowledge. 26 . For example. Preparation of budgets encourages communication between different parts of the organisation and different levels of management. Candidates should not spend time in detailed explanation of the techniques of budgeting but concentrate on the requirement to outline the purposes and benefits of budgeting. Approaching the question A key learning outcome is to understand the role of budgetary control in organisations. However.000 (c) Required: Outline the main purposes and benefits of budgeting.718 December (NRV) 20 17.718 3.500 2. care must be taken to ensure that the target is set at an appropriate level. in the form of a bonus).500 196.000 Transport costs 2.833 Sale (90) (87.500* 130 125.AC1025 Principles of accounting Workings 1.333 Purchases (October – November) 60 60.000 Less: costs 150 850 20 units = 17.115) 40 38. The simple presence of a target of any kind can often improve performance. Perks and Leiwy (2010) Chapter 13. • Motivation. It is important that answers calculate the contribution per unit of limiting factor in reaching the optimum mix of products. This question tests your understanding of contribution analysis and limiting factors. • Evaluation and control.000 kilos at £5 per kilo. Answers to part (ii) need to be specific in identifying an appropriate technique. The selling price and the variable costs per unit for each product are as follows: Mild Spicy Hot £ £ £ Selling price 30 40 60 Variable cost Spice A 10 23 25 Spice B 10 5 15 Spice B is in short supply and this year Cordelia is only able to purchase 240. The marketing manager predicts that the maximum demand for each product for the year will be: [For the full question please refer to the examination paper.000 27 . i.000 134. Managers know that budgeted expenditure has been authorised and can act accordingly.] Reading for this question Subject guide Chapter 10. Management performance can also be assessed and rewarded on this basis.000 240. Spice A is plentiful.67 • Optimum mix is: Product units Kilos of Spice A Spicy 16.000 Hot 30. Management monitor and evaluate whether budgets are fulfilled.000 Mild 67. Examiners’ commentaries 2012 • Authorisation and responsibility. • Contribution per unit of Spice B Mild Spicy Hot Sales price 30 40 60 Variable cost (20) (28) (40) 10 12 20 Spice B – input (k) 2 1 3 Contribution per kilo of Spice B 5 12 6.000 90. Setting individual budget for particular business activities or departments can be used to assign responsibility to individual managers for meeting those budgets. Approaching the question A key learning outcome of this course is to explain and apply decision- making techniques using accounting information. Budgets provide plans against which subsequent performance can be judged.000 16. Spicy and Hot. Perks and Leiwy (2010) Chapter 15. (d) Cordelia plc manufactures three spice mixes for catering firms: Mild. 000 12 = 192.500 Provision for doubtful debts at 31 March 2011 600 Purchases 94. 20p each.060 Dividends paid 5.000 ii.800 Dividends received 850 Equity shares.162.000 Interest paid on 6% loan notes 615 Inventories 4.000 Profit for year 1.000 10 = 670.000 Hot 30.677 Sales 124.593 The following further information is available: (1) Non-current assets are to be depreciated as follows: Plant and equipment 20% per annum straight-line Vehicles 25% per annum reducing balance 28 .000 20 = 600.593 £188.930 Accumulated depreciation at 31 March 2011: Plant and equipment 6.250 Trade payables 8. Question 2 Macbeth plc prepares its financial statements for the year ended 31 March.000 Fixed costs 300.315 Proceeds from issue of share capital 1.670 Administrative expenses 16.460 Vehicles 1. This situation gives multiple limiting factors and can only be resolved using linear programming. at cost 5.000 Mild 67.000 Plant and equipment. Section B Answer Question 2 from this section. The company has extracted the following trial balance at 31 March 2012: £000 £000 6% Loan notes (redeemable 2016) 10.160 Retained earnings at 31 March 2011 14. and one further question from either Section B or C.900 Taxation 4 Vehicles. fully paid 19.720 ________ _______ £188.852 Investments.000 1.120 Trade receivables 9.AC1025 Principles of accounting • Operating profits Profit Spicy 16. non-current 15.141 Bank 456 Purchases returns 106 Distribution costs 9. at cost 27.462. 160 – 106) (94.930 – 348)] – 600 120.174 Dividends received 850 32.000 insurance premiums for the year 1 November 2011 to 30 October 2012. (3) The company paid £156. In answering this type of question a methodical and organised approach is needed.463) Motor vehicles 25% (5. It is very important that detailed.180 (93. Approaching the question The preparation of final accounts from structured information is a key learning outcome.9 Depreciation: Plant and equipment 20% 27.720 – 1. Perks and Leiwy (2010) Chapter 17. The 8-column accounting paper provided is particularly useful for presenting the financial statements.012.054) (98. (a) Macbeth plc i.5) (31.906) Closing inventory 5.6) 29 . If figures in the final accounts comprise a number of items marks will be awarded accordingly but without workings one error may result in several marks being lost.852) Purchases (94.670) (1. The format of the Statement of Changes in Equity should follow best practice. A trial balance with several adjusting items has been the format for the compulsory question over recent years. legible workings are given in order that marks are awarded for all work which is correct.000 was received by the company after the above trial balance was extracted. Examiners’ commentaries 2012 (2) An invoice for telephone charges for the quarter ended 1 May 2012 for £15.726) Gross profit 31.900 Cost of sales Opening inventory (4. Telephone expenses are included in administrative expenses.060) Bad debts 75% 348 (261) Decrease in provision for doubtful debts [5% (9.735.315 (5.024 Expenses Administrative expenses 16. The workings may be shown on the face of the accounts or separately but candidates should try and help markers to award all appropriate marks by clear presentations. This amount is included in administrative expenses.060) Distribution costs (9.141 + (2/3 15) – (7/12 156) (16. [For the full question please refer to the examination paper.] Reading for this question Subject guide Chapters 5 and 6. Income statement for the year ended 31 March 2012 £000 £000 Sales 124. Part (b) of this question tests the ability to calculate and explain the dividends a shareholder will receive and how this relates to the information in the financial statements. You should pay attention to the presentation of your answer taking care to use the appropriate descriptions of line items in the income statement and statement of financial position. 315 11.5 33.890.669 Less: provision for doubtful debts 9.189.024.720 2.800) (5.460.6) Dividends paid (5.000 33.5 Current assets Inventory 5.0) 352.524.4 29.5 18. Macbeth plc Statement of changes in equity for the year ended 31 March 2012 Equity share Share Retained Total capital premium earnings £000 £000 £000 £000 Balance at 1 April 2011 19.035 14.5 Investments 15.677 Issue of shares 1.024.392 Motor vehicles 5.4 Non-current liabilities 10.930 – 261) 9.890.682.4 EQUITY & LIABILITIES Equity Equity share capital 20.000 14.180 Trade receivable (9.9 (479.4 iii.9 Total assets 47.120 Accruals 10 Corporation tax 30 8.000 500 1.5 3.429.1) Prepayments 91 14.6 ii.000 Share premium 500 Retained earnings 8.429.923 15. Macbeth plc Statement of financial position at 31 March 2012 ASSETS £000 £000 £000 Non-current assets Cost Accum Deprn NBV Plant and equipment 27.4 Interest payable (615) Loss for the year before tax (326.616 Total equity and liabilities 47.4 30 .524.250 67% loan notes Current liabilities Bank overdraft 456 Trade payables 8.677 33.AC1025 Principles of accounting Profit before interest and tax 288.037.4 29.6) (352.6) Taxation (26.605.500 Loss for the year (352.800) Balance at 31 March 2012 20.000 500 8. please refer to the examination paper.493 Accumulated depreciation 1.513 Equity Ordinary share capital 1. Examiners’ commentaries 2012 (b) Information for Mrs Macduff £ • Dividends received in 31/3/12 2011 Final dividend (1000 4p) 40 2012 Interim dividend (1000 2p) 20 60 • Dividend yield for 31/3/12 Interim (as above) 20p 2012 Final (1000 5p) 50p 70p Yield 7 100 = 3.] Reading for this question Subject guide Chapter 6.150 £ 2. Perks and Leiwy (2010) Chapter 6.500 Share premium 250 – Accumulated profits 282 187 2.170 Fixtures and fittings Cost 1.725 Accumulated depreciation 700 555 1.823 Current assets Inventory 620 435 Accounts receivable 290 255 910 690 Total assets £ 3.900 1.060 840 840 653 2.5% 200 Question 3 Falstaff plc’s statements of financial position for the years ended 31 December 2011 and 2010 are shown below: Statements of financial position at 31 December 2011 2010 £000 £000 £000 £000 Non-current assets Property Cost 2. 31 .150 £ 2.800 1.332 1.513 [For the full question.400 1.100 1.240 1.687 Non-current liabilities 8% debentures 450 360 Current liabilities Bank 70 222 Accounts payable 248 176 Taxation 50 68 368 466 Total equity and liabilities £ 3. Interest paid = 8% [(360 9/12) + (450 3/12)] = £30. Answers which prepare a full cash flow statement would be appropriately awarded but candidates are advised to produce only the answers required by the rubric of the question as the marks are allocated to the amount of time and effort required for such answers. This is added back to profit before tax in reconciliation of this to cash flow from operating activities.493 – 250) = 657 This is shown in statement of cash flows as a separate line in investing activities.032. Part (a) tests candidates’ understanding of the difference between cash flows and accruals based accounting.000 This is shown in a statement of cash flows as a separate line in financing activities but could also be shown as part of operating cash flows. Candidates should note that three examples are required. (a) Income statement prepared according to accounting convention of accruals: The accruals concept means profit is the difference between income earned and expenses incurred – cash doesn’t have to be received or paid for time to be recorded.000. (b) i. share and loan movements.000. ii.900 – (1.000. You should adopt a systematic approach which will enable you to extract the cash flows from the accruals-based income statement and statement of financial position. vi.AC1025 Principles of accounting Approaching the question This question requires an understanding of how specific items are shown in a cash flow statement (CFS) which is part of the learning outcome which refers to the preparation of financial statements from structured data. Net cash flow reconciles opening and closing bank and cash balances. v. Increase in accounts receivable = 290 – 255 = £35. receivables/prepayments and payables/accruals effect on profit.000 Property = 2. Taxation paid = 68 + (90 – 50) = £108. This is deducted from profit before tax in reconciliation of this to cash flow from operating activities. Dividends paid = Profit for year – difference between SoFP retained earnings = 175 – (282 – 187) = £80. Examples could include depreciation. acquisition of non-current assets.100 – 1. This is shown in the statement of cash flows as a separate line in operating activities.725 = 375 F + F = 1. 32 . iv Payments to acquire non-current assets = £1. This is shown in statement of cash flows as a separate line in operating activities. Good answers will be well presented. Loss on sale of non-current assets = 30 – (250 – 204) = £16.600. The statement of cash flows shows actual movements of cash (monies passing through current or near-current bank accounts) as well as cash receipts and payments and shows whether more cash has come in than has gone out over the accounting period. correctly describing the component cash flows with laid out workings. iii. 37 x 2695 ÷ 7300 0. The most common analytical technique is often testing by a mini-case study of the type used in this question. the interpretation should use the contextual information given in the question and make links between different ratios. You should carefully read the requirements of the question. but for completeness provides more ratios than the question requires. • Customers registered during 2011 have increased by 7% (2010: 3%). • Average revenue per personal customer per month (2011 = £10. If you do not follow these instructions your work may not be marked. interpret and communicate the information contained in financial statements. Excellent answers will use the analysis to draw appropriate conclusions which will be discussed from the perspectives of potential users. The latest annual report has just been released on the company’s website.56. The answer below illustrates such an approach. 2010 = £11.3% Asset turnover 2610 ÷ 6995 0. Examiners’ commentaries 2012 Question 4 Duncan plc operates a mobile phone network for personal and business customers. which provide insight into the financial position and performance of the companies. Highlights for the year: • A review of operating and administrative systems resulted in investment in non-current assets with a significant reduction in staffing levels. which in this case. There are no absolute answers to this type of question and you will be rewarded for a logical and informed analytical approach to the case study described in the question. • Growth has been offset by competitive pricing due to strong competition. It is important that answers go beyond simply stating that a particular ratio has gone up or down. 5 and 7. Approaching the question The learning outcomes for Chapter 7 of the subject guide include the ability to analyse. • £10 million has been spent in 2011 on new advertising and sports sponsorship to boost brand awareness. Good answers will draw conclusions from the ratios and the background information.37 x 33 . specify the number and nature of the ratios to be calculated.8% (985 ÷ (5220 + 2080)) 100 14. [For the full question please refer to the examination paper.9% (1060 ÷ 2695) 100 39. (a) 2010 2011 Return on capital employed (755 ÷ (4945 + 2050)) 100 10.20) has been affected by increased regulatory pressures on the pricing of mobile phone tariffs. The annual report includes the following: Duncan plc – Extract from the financial review for the year ended 31 December 2011.5% Net profit margin (755 ÷ 2610) 100 28.] Reading for this question Subject guide Chapter 7 Perks and Leiwy (2010) Chapters 4. 7p (590 ÷ 2670) 100 22.9% Current ratio (735 : 660) 1.1 14 (b) Commentary (summary of key points): • ROCE – Improved return on capital employed Increase due to improved margins with stable asset turnover • Net profit margin • Significant increase • Staffing cost savings • Even better if take out increased marketing costs • Selling and distribution costs reduced • Administrative costs are similar • Asset turnover • Remained constant • Increase in volume of customers but fall in revenue per customer due to competitive pricing and regulatory pressures. • Net asset increases but note PPE investment and fall in intangibles.AC1025 Principles of accounting Gross profit margin (1115 ÷ 2610) 100 42.2 : 1 Gearing (2050 ÷ 6995) 100 29.7 12 309 ÷ 22.7% (1400 ÷ 2695) 100 51. 200 ÷ 16.3% 28.5% (2080 ÷ 7300) 100 EPS (445 ÷ 2660) 100 16. • Gross margin • Significant increase • See net margin for analysis • Current ratio • Constant at reasonable level • Quick ratio • Improvement in solvency/liquidity • Large cash balance • But higher payables 34 .0 : 1 ((1095 – 15) : 910) 1.1 : 1 (1095 : 910) 1.2 : 1 Quick ratio ((735 – 95) : 660) 1.1p PE No. Thus a net present value can be arrived at and 35 .000 13. Approaching the question The application of capital investment techniques is an important element of the syllabus for this course and learning outcomes for Chapter 12 of the subject guide. The most effective approach is to construct a columnar table in which relevant cash flows can be inserted.000. The head office administration costs of Ophelia plc are expected to be £300. for example if a cost is to be treated as sunk and therefore not included as a relevant cost this should be stated.000 2015 36.000 240. these are discounted using the discount factors taken from the tables provided.09). The present position is that distribution is out- sourced to a transport company. Having determined the net cash flow for each year. However. It is important to give workings of all figures and to explain clearly treatment of all amounts. Section C Answer ONE question from this section.000 The figure for ‘Other Costs’ includes depreciation on the fleet on the straight- line basis.000 2014 35. it is projected.000 236.000 242.000 8.000 230.000 235.000 16.000 15. • Market price indicates that investors are happy with the strategies adopted by the company (If the PE had remained at 12 price would now be £2. the finance director believes that there is sufficient spare capacity in the head office to carry out the additional work.] Reading for this question Subject guide Chapter 12.000 2017 40.000 18. Perks and Leiwy (2010) Chapter 12.000 per annum and the running of the fleet would take up approximately 10% of the administrative time. This cost.65 rather than £3. and ONE further question from either Section B or C Question 5 Ophelia plc operates a chain of furniture stores and is considering its strategy on distribution and transport.000 2016 38. The expected cost for the year ended 30 June 2013 is £250. The Directors of Ophelia plc are considering an alternative strategy of acquiring a company owned and managed transport fleet.000 and it is estimated that the fleet would be sold at the end of year 2017 for £150. It is estimated that the following costs would be incurred over the next five years: Repairs and Drivers’ costs Other costs maintenance Year ended 30th June 2013 33. The initial cost of the transport fleet on 1 July 2012 would be £750. [For the full question please refer to the examination paper.000. Examiners’ commentaries 2012 • EPS • Significant improvement for reasons explained above. will rise by 10% per annum over the next five years. • PE No. 000 50.500 0.000 0. (750.750 386. (a) Incremental cash flows – Transport Fleet Project 2012 2013 2014 2015 2016 2017 £ £ £ £ £ £ Out-source costs 250.000) (38.000 Cumulative cash inflow 2013 149. Discount Factor P.000 2014 (+ 162.000) Fleet costs (750.000) (120.000) . 36 .876 Net present value (4.000 Sub-contract income 50.500 212.309 2017 386.000 302.000 275. A suggested presentation of the answer is given below.636 135.000) (115.750 366.000) (40.000) Repairs and maintenance (8.721 129.4 months.000 _______ _______ ______ ______ _______ _______ (750.057 2014 162.797 129.000 50.025 0.000 0.000) (36.025 N.000) 2013 149. Net Present Value CF.250 2017 (+ 44. Ignore overheads (b) i.750) 75.000 181. Part (d) required an understanding of Internal Rate of Return (IRR) and the problems in its application.228 2016 212.500 2016 (+ 212.000) 150.750 0.000) 149.000 50. Part (c) gave good candidates an opportunity to show their understanding of the decision-making process and place this into a business context.025 Drivers costs (33.000 2015 (+ 181.000) (13.114 2015 181.567 218.000) (35.000) 311.000) (16.893 133.000) Other costs (110.750) 705.500 332.V.000 50.416) (c) Recommendation: • Reject the transport fleet project • Accept the alternative project.B. ii. Payback Initial cost 750. The 8-column accounting paper can help in this respect.000 162.000) (116.000) (122. Answers should explain the following: • The project has a longer payback period than the alternative.000 (15. This type of question requires use of a significant amount of data and it is very important that your work is clearly presented and that all working are legible and understandable. 2012 (750.000 Payback = 4 years 1.000) (18.500) 492.AC1025 Principles of accounting a decision recommended and justified. 000 Question 6 Portia Ltd is a specialist manufacturer of components for luxury yachts.000 kg are currently held in stock at a book value of £4. The data relating to the production of each component ZK44 is as follows: Material requirements: 3 kg material M1 – see note (i) below. It is important in answering such questions that you keep in mind the basic contribution approach to the analysis and clearly distinguish between those costs and revenues that are relevant to the decision and those that are not.000 Depreciation (120.000 120.000 115. Good answers will set out the computations in a clear.000) (120. Perks and Leiwy (2010) Chapters 14 and 15.000) (120.000) (120.000) (120. logical and coherent manner.000) _______ _______ _______ _______ _______ 110.000 236.000 122. 2 kg material P2 – see note (ii) below 1 part No. Other costs 2013 2014 2015 2016 2017 Per Q 230. [For the full question please refer the examinatin question. Examiners’ commentaries 2012 • The project has = negative NPV thus the project would reduce shareholder wealth. 678 – see note (iii) below. (d) IRR = the discount rate at which the NPV of the project is equal to zero. Candidates should note that the question required a full explanation of the figures used in the analysis and marks were awarded as appropriate. A contract has been offered to Portia by Nerrisa Supermarine plc for the supply over the next twelve months of 400 identical components.70 per kg but it is known that future purchases will cost £5. ZK44. This question tests candidates’ ability to apply these techniques.000 235.000 116. 1. Part (b) requires candidates to place the calculations in the context of the wider business considerations by identifying three appropriate factors. Workings 1. • Subject to reliability of assumptions. Note (i) Material M1 is in continuous use by the company. The alternative has a positive NPV at discount rate of 12%. • The project would give more control over future service and costs whereas outsourcing would not. Approaching the question Relevant and opportunity cost recognition are key techniques in short- term decision-making.] Reading for this question Subject guide Chapter 10.000) 20% (750.000 242. It is not appropriate for decisions involving mutually exclusive projects.000 240.000 – 150. 37 .50 per kg. 678 (400 at £50) 3 20.400 to general fixed costs.000 Semi-skilled (2. then acceptance of the contract may be necessary to build a client relationship. If the company generates insufficient contribution from its activities to cover general fixed costs then it will incur losses and will not be able to survive in the long tier. Material M1 – Opportunity cost is replacement cost. – additional fixed overhead is an incremental cost.000 14. Therefore the relevant cost of P2 consists of the opportunity cost of £2 per kg. Analysis of production and sale of 400 units to Nerissa Supermarine plc. Notes: 1. 38 .200 Total relevant cost 56.AC1025 Principles of accounting (a) Contract for manufacture of ZK44.600 Contract price (400 components at £145 per component) 58. It is assumed that acceptance of the contract will not lead to the rejection of other profitable work. Material P2: If material P2 is not used on the contract it will be used as a substitute for material P4. If there are few manufacturers.600 Part no. (b) Factors which should be considered are: i. Semi-skilled – cost of additional labour. Part No. ii.000 Overheads: Variable (1. 3. 5.600 P2 (800 kg at £2 per kg) (1) 2 1. Notes £ £ Materials M1 (1. Can a price higher than £145 per component be negotiated? The contract only provides a contribution of £1. iv.000 hours at £3 per hour) 5 6.000 Contribution 1. Acceptance of the contract will provide additional employment for 12 months and this might have a significant effect on the morale of the workforce.000 hours at £4 per hour) 4 8.200 Labour: Skilled (2.60 – £1. Will acceptance of the contract lead to repeat orders which are likely to provide a better contribution to general fixed costs? iii.200 kg at £5. 6.200 Fixed: Incremental fixed costs 3. 678 – actual impact cost 4.600 machine hours at £7 per hour) 6 11.50 1 6.400 The incremental revenues exceed the incremental costs. Overhead – variable overhead only is relevant. Skilled labour – opportunity cost is replacement labour cost. 2.000 28. Using P2 as a substitute for P4 results in a saving of £2 (£3.60) per kg. Therefore the contract should be accepted subject to the comments in (b) below. 000. 1 and 2. Approaching the question The use of absorption costing is relevant to the learning outcomes of the preparation of costs under different costing methods.000.50 Manufacturing overhead £2. Space utilisation is as follows: Production department 1 40% Production department 2 50% Service department 10% In allocating the service department costs it is assumed that 60% of service department costs are labour related and the remaining 40% machine related. Fixed manufacturing costs can be analysed between the departments as follows: Production Production Service 1 2 Department £380.000 £265. Parts (b) and (c) require the preparation of profit statements using full absorption and managerial costing respectively.000 £465. Fixed selling costs are budgeted to be £875. Examiners’ commentaries 2012 v. The information appears to be lengthy but in fact the calculations are straightforward if a careful reading of the question is applied in a logical manner.000 In addition there are budgeted general factory fixed costs of £230. Again this requires a logical and well-structured approach to well-understood concepts. these represent space costs. Part (a) examines the ability to apply allocation assumptions to a data set.00 The selling price of the product is £36. The following are the variable costs per product unit for April: Direct materials £7. should Portia be looking at strategies for entering new markets? Question 7 Cymbeline Ltd manufactures a single product. The company has two production departments.000 for April. Given market conditions. and a service department.00 Direct labour £5. Perks and Leiwy (2010) Chapter 14.00 per unit. 39 . [For the full question please refer the examinatin question.] Reading for this question Subject guide Chapter 9. Fixed manufacturing costs are budgeted to be £1. for example.340. lighting and heating. 976.AC1025 Principles of accounting Prodn.240 Under-absorption of overhead: Department 1 ((£20.000 times the fixed overhead rate because actual volume was 4.320 Cost of sales 2.000 Total cost 3.200 Department 2 (4.880 Sales (114.000 £36) 4.000 £25.0 (40%) 115.560 Less: closing stocks m (2.6 (115.000 £14.000 arising from actual overheads exceeding estimated overheads plus 4.000 units less than estimated volume.6 1.000 + (4.000 3.000 Fixed manufacturing overhead (1.104.0 265 230 1.50) 1.11 (rounded to nearest p) (a) Calculation of total manufacturing cost per unit £ Direct materials 7. Service General Total Dept 1 Dept 2 Dept Factory Allocated 380.2) 606.440 Non-manufacturing costs 875.66) 51.888.000 40 .000 Net profit 216. Prodn.05)) 40.864.000 Net profit 239.50 Variable overhead 2.11) 24.000 Non-manufacturing overhead 875.000 £25.340 + 20) 1.11 Manufacturing cost 25.05 6.50) 29.8 96.6 _____ 57.360.000 units £6.000 1. (c) Marginal costing profit statement Variable production cost (116.0 (10/18) (172.8) Machine related costs (40% (8/18) 57.66 (b) Absorption costing profit statement Production cost (116.00 Direct labour 5.66) 2.4 733.340 Units of output 120 120 Overhead rate per unit 5.000 Sales 4.00 Fixed overhead: Department 1 5.104.000 Less: closing stocks (2.120 Note that the under-recovery of fixed overheads consists of £20.340 Allocation of general factory 92.000 £14.653.05 Department 2 6.000 £5.0 465.0 (50%) 23 (10%) (230) Share of service department 288 Labour related costs (60&) 76.682.925.