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Question 1

(a) Cash flow statement for the year ended 31 October 2006

05
$000

Cash flows from operating activities


Net profit before tax
Adjustments for
Depreciation
Interest received
Interest paid
Profit on equipment disposal
Operating profit before working capital changes
Decrease in inventory
Decrease in receivables
Decrease in payables
Cash generated from operations
Interest received
Interest paid
Tax paid (W4)
Net cash from operating activities

10,889

6,784 1
(101) 05
1,749 05
(1,806) 1
17,515
3,015 05
3,034 05
(270) 05
23,294
101 05
(1,749) 05
(2,395) 2
19,251

Cash flows from investing activities


Purchase of property, plant and equipment (W1 to W3)
Proceeds from sale of equipment
Net cash used in investing activities

(7,671)
5,667

Cash flows from financing activities


Proceeds from issues of share capital
Dividends paid
Repayment of long term borrowing
Net cash used in financing activities

4,231
(3,697)
(16,889)

Net increase in cash and cash equivalents


Cash and cash equivalents at the beginning of the period
Cash and cash equivalents at the end of the period

$000

3
1
(2,004)

1
1
1
(16,355)
892
(4,806)
(3,914)

1
1

(b) Cash flow statements may be more useful than profit statements for the following reasons:
Cash flow statements help users understand where the company has generated its cash and how it
has been applied during the period.
1
Cash flow statements are more objective than profit statements as they cannot be manipulated by
choosing more favourable accounting policies.
1

Cash flow statements provide a useful insight into the changes in the structure of working
capital.
1
Cash flow statements enable users to establish whether the company is able to repay its debts. 1
(max
2)

(c) It is a requirement; it completes the financial picture i.e. profits, state of affairs, cash; shows
cash inflows and cash outflows important for survival; shows how efficiently or inefficiently
cash has been used throughout the year; shows clearly internal and external financing etc.
1 point identified plus 1 further mark for development
(d) Speed up collection
Delay payment
Delay capital expenditure
1 point identified

Question 2

(a)
(i)

(ii)

(iii
)

Gross profit as % of sales:

Net profit as % of sales

Expenses as % of sales

(iv) Stockturn

(v)

Rate of return

(vi) Current ratio:

400 x 100 = 22.2%


1,80
0

60 x 100
1,80
0

340
1,80
0

= 3.3%

x 100

= 15.2%

x 100

= 3.3%

x 100

= 11.9%

2 700

90
2,700

x 100 = 18.9%

320
2 700

1
400
(300 + 200) /
2

= 5.6
times

60
(240+230 / 2

= 25.5%

409
245

410

=
1.67

= 8.8
times

2 290
(280 + 240) / 2

90
(430+440) / 2

382
252

= 20.7%

= 1.52

1 mark per ratio calculated


(b) Business B has made more net profit (90,000 compared with 60,000) but, in terms of
capital employed, B has only managed to achieve a return of 20.7 per cent whereas A has
managed a return of 25.5 per cent. A is clearly more efficient in the use of its resources. Reasons
as follows possibly as not until you know more about the business could you give a definite
answer.
(i) B managed to sell far more merchandise but at lower prices, i.e. took only 15.2 per cent
margin as compared with As 22.2 per cent margin.

(ii) Maybe less efficient use of mechanised means in the business by B. Note that assuming A
and B both use similar depreciation rates, B has more equipment and it is considerably newer
than As.
(iii) B did not have as much stock lying idle. B turned over stock 8.8 times in the year as
compared with 5.6. This could indicate inefficient purchasing by A and/or a likelihood of stock
outs and, so, loss of sales.
(iv) While A waited (on average) 1.37 months to be paid by customers. B managed to collect in
0.62 months on average. Money represented by debts is money lying idle. However, A took
longer (2.26 months) to pay its creditors than B (1.34 months). It appears that A was therefore
less efficient in controlling its debtors whereas B was less efficient in controlling its creditors
payments. Overall, these two results probably cancel each other out so far as explaining As
higher rate of return.
1 mark each, max 4
(c) Shares
Advantages
Owenership of the company
Possible future capital gain
Disadvantages
No fixed dividend
Ranked last when company is liquidated
Bond
Advantages
Fixed interest
Can get back capital
Disadvantages
No room for growth in income
No ownership of the company
Convertible bond
Advantages
Fixed interest
Possible to get ownership of the company
Disadvantages
Very low interest

Conversion is no feasible if share price is low


1 mark each, max 6
(d) This means using capital reserves before revenue reserves in order to maintain distributable
reserves so that maximum future dividends can be paid.
(i) Revaluation reserves
(ii) Share premium
(iii) General reserves and retained earnings
1 mark each max 3

Question 3
(a)
Consignment to Adams, Canada
2015
$
Jan 16 Goods sent on
consignment (a)
500
Feb 28 Bank: carriage (b)
50
Jul
31 Adams: Import duty (d)
25
Distribution (d)
30
,, 31 Adams: Commission (e)
45
, 31 Profit on consignment (transferred to
profit
and loss account)
100

2015
Jul 31 Sales (c)

750

$
750

750

1 mark per entry

2015

2015

1 mark per entry


(c) Consignment is a term used to refer to an arrangement whereby goods are sent by their owner
(consignor) to an agent (consignee) who holds and sells the goods on behalf of the owner for a
commission. It is important to understand that the agent never owns the goods. 2
A joint venture (JV) is a business agreement in which the parties agree to develop, for a finite
time, a new entity and new assets by contributing equity. They exercise control over the
enterprise and consequently share revenues, expenses and assets.
2
Will should continue to use consignment if he does not wish to share control with another party.
2
(d) Advantages
Speed
Accuracy

Automatic documents productions


Legibility
Efficiency
Disadvantages
Costs of hardware and software
Staff training
Opposition from staffs
Staff complacency
Work hazards
Back up
Data security
Will should continue to use computerized accounting as its pros outweighs the cons.
1 mark per point

Question 4
Success Fabrication
Manufacturing Accounts for the year ended 31 October 2014
$
Raw material
Opening inventory
Purchases
Carriage inwards
(-) Closing inventory
Cost of raw materials consumed
Direct labour
Prime cost

25,400 (1/2)
91,535 (1/2)
1,960 (1/2)
28,900 (1/2)
89,995
84,208 (1/2)
174,203

Factory overhead expenses


Rent 3/4
Fuel and power
Depreciation: Machinery

3,900 1
8,120 (1/2)
10,200 (1/2)
196,423
31,100 (1/2)
227,523 (1/2)
24,600 (1/2)
202,923

Add Opening work in progress


Less Closing work in progress
Production cost of goods completed

Income statement for the year ended 31 October 2014


Sales
Cost of goods sold
Opening inventory
Production cost
Less Closing inventory
Gross profit
Less Expenses:
Office salaries
Rent 1/4
Lighting and heating
Depreciation: Office equipment
Net profit

$
318,622 (1/2)
23,260 (1/2)
202,923 (1/2)
(28,840) (1/2) (197,343)
121,279
(33,419)
(1,300)
(4,420)
(2,300)
79,840

(1/2)
1
(1/2)
(1/2)

(b) (i) Receivables that were thought to be good at year end will not now be paid. Adjusting
event
(ii) Success Fabrication has announced a bid to take over another company. Non adjusting
event
(iii) Some material errors have been discovered which show the financial statements are
incorrect. Adjusting event
(iv) The factory workforce at Success Fabrication has started strike action for an indefinite length
of time. Non adjusting event
1 mark per point

(c)

Year

Discount factor

1
2
3
4

0.909
0.826
0.751
0.683

Cash Flow
$
9 681 (1)
9 080 (1)
8 122 (1)
6 589 (1)

(d) Fair value less cost to sell = $26 000 200 = $25 800
Value in use = $26,900 (higher = recoverable amount)
(e) Impairment loss = $30,000 - $26,900 = $3,100

Question 5

Discounted cash flow


$
8 800 (1)of
7 500 (1)of
6 100 (1)of
4 500 (1)of
26 900

(a)
$
Revenue

working 1

1 715 610

purchase cost

(200 000) (1)

salary

(30 000 + 36 000 + 43 200 + 51 840 + 62 208)

rent

(3600 + 3600 + 4500 + 4500 + 4500)

air fare

(1000 5)

( 223 248) (2)


(20 700) (2)
(5000) (1)

Net cash flow

1 266 662 (1of)

working 1
$
1 000 000 x 1.1 - 1000 000

100 000 (1)

(1000 000 + 100 000 .1.1 ) 1000 000

210 000 (1of)

(1000 000 + 210 000 .1.1 ) 1000 000

331 000 (1of)

(1000 000 + 331 000 .1.1 ) 1000 000

464 100 (1of)

(1000 000 + 464 100 .1.1 ) 1000 000

610 510 (1of)


1 715 610
[22]

(b)
year

annual net cash flow

dis factor

(200 000

+ 3600)

(203 600) (1of)

(100 000

30 000 3600 1000)

0.893

58 402.20 (1of)

(210 000

36 000 4500

1000)

0.797

134 294.50 (1of)

(331 000

43 200 4500 1000)

0.712

200 997.60 (1of)

(464 100

51 840 4500 1000)

0.636

258 699.36 (1of)

(610 510

62 208 1000)

0.507

277 482.11 (1of)

N.P.V (1)

726 275.77 (1of)


[8]

Question 6
(a)

Materials
Labour
Overheads
Total Cost
Margin
Selling Price

48.00 1
22.50 1
10.50 1
81.00 1
19.00
100.00 1OF
[5]

(b) (i) Sales price variance: $102.50 $100.00 1OF 5 100 = $12 750 F 2OF + 1OF
(ii) Sales volume variance = 100 $100 = $10 000F 2
(iii) Material price variance = $0.25 43 460 = $10 865 A 2
(iv) Material usage variance = 1 060 $6 = $6 360 A 2
(v) Labour rate variance = $0.25 15 500 = $3 875A 2
(vi) Labour efficiency variance = 400 $7.50 = $3 000F 2

[4]
[2]
[2]
[2]
[2]
[2]

(c) Sales volume Increase in demand for product


1
Sales Price Ability to charge higher price because of increased demand
1
Material price Increase in cost of material because of change in supplier
1
Material usage more waste than expected.
1
Labour rate = Pay increase or decrease / different grade of labour employed
1
Labour efficiency = More skilled staff / different materials used which may effect efficiency 1
[6]

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