SURNAME OF CANDIDATE:

FIRST NAME OF CANDIDATE:

STUDENT ID:
SIGNATURE:

Official Use Only

Q

Mark

1
2
SCHOOL OF ACCOUNTING

3
4

ACCT 1511:
Accounting and Financial Management 1B

5
6
Total
(/75)

FINAL EXAMINATION
November 2007
Time Allowed:
Reading Time:
Total Number of Questions:

3 Hours
10 minutes
7

Answer ALL questions.

The questions are NOT of equal value.
Answers to Questions 1 to 6 must be written in ink on the lines or in
spaces provided in this Booklet.

Question 7 must be answered on the separate Generalised Answer Sheet

provided using a 2B pencil.
This paper is NOT to be retained by the candidate.
DO NOT OPEN THIS PAPER UNTIL INSTRUCTED BY THE EXAM
SUPERVISOR

QUESTION 1 (10 MARKS): CASH FLOW STATEMENTS

The CEO of Jackson Corporation has come to your bank for a loan. He states: Each
of the last three years, our cash has gone down. This year, we need to increase our
cash by $7,000 so that we have a $20,000 cash balance at year-end. We have never
borrowed any money on a long-term basis and are reluctant to do so. We definitely,
however, need to purchase some new and more advanced equipment to replace the old
equipment we are selling this year. We received quotes ranging from $25,000 to
$35,000 for the new equipment. We also want to buy back some of our own shares
because they would be a good investment. In addition, we would like to pay
dividends of 50% of net profit instead of our usual 40%. Given our expected net
profit of $20,000 and the following estimations of cash flows, I estimate we will have
to borrow $12,000 and this is the maximum amount we are willing to borrow.
SCHEDULE OF EXPECTED CASH FLOWS FOR 2007
$
Inflows of cash:
Cash collected from customers
Gain on sale of old equipment
Proceeds from sale of old equipment
Proposed bank loan
Total inflows

34,000
3,000
8,000
12,000
57,000

Outflows of cash:
Depreciation expense
Purchase equipment
Cash paid to suppliers
Pay dividends (50% of net profit)
Total outflows
Increase in Cash

50,000
7,000

Opening cash balance

Closing cash balance

6,000
30,000
4,000
10,000

13,000
20,000

The CEO explains that the $5,000 expected cost of share buyback was not included
because it would involve only a transaction between the company and its existing
shareholders and would be of no interest to outsiders.
After looking at the schedule, you find that there are serious problems and
inaccuracies. You need to explain to the CEO why his schedule of cash flows is
incorrect and that he will likely need to borrow more than $12,000 to have a $20,000
cash balance at the end of 2007.

Required:
(a) Identify and explain three (3) inaccuracies in the Jackson Corporations schedule
of expected cash flows for 2007. (6 marks)
1.

2.

3.

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(b) Give two (2) suggestions which may allow Jackson corporation to maintain its
cash balance of $20,000 at the end of 2007 without increasing the loan of
$12,000. (4 marks)
1.

2.

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QUESTION 2 (10 MARKS): FINANCIAL STATEMENT

ANALYSIS
As a senior investment analyst, you have been analysing financial results of Coles
Ltd. and Woolworths Ltd. for the last few years. The following table shows a
summary of comparative financial results for Coles and Woolworths Ltd.
2006
$ million
Income Statement
Sales
Other income
COGS
Gross Profit
EBIT
Interest expense
Interest WIN
NPBT
Tax Expense
NPAT continuing operations
Profit from discontinued
operations
NPAT attributable to
shareholders
Pro forma NPAT

Coles
2005
$ million

2004
$ million

34,212.0
33,018.0
32,266.8
91.8
71.9
(26,160.8) (25,305.3) (24,059.5)
8,143.0
7,784.6
8,207.3

Woolworths
2006
2005
$ million
$ million
37,849.7

31,481.2

9,444.6

(23,678.9)
7,802.3

1,722.2
(249.7)

1,302.1
(150.1)

1,014.6

1,152.0
(334.8)
817.2

850.9
(98.9)

1,027.2
(55.2)

888.1
(13.5)

752.0
(215.6)
536.4

972.0
(285.9)
686.1

874.6
(258.1)
616.5

627.2

(48.2)

1,163.6
786.6

637.9
692.0

616.5
576.0

1,014.6

816.2

3.62%

2.33%

19.43%

20.23%

12.70%

Gross profit growth

Gross Margin
Net Profit Margin

4.60%
23.53%
1.57%

-5.15%
23.36%
2.08%

10.94%
25.44%
1.91%

21.05%
24.95%
2.68%

12.13%
24.78%
2.60%

Net Profit Margin

Asset Turnover
Leverage
ROE

1.57%
3.75
2.54
14.91%

2.08%
3.58
2.70
20.09%

1.91%
3.57
2.21
15.10%

2.68%
2.84
3.31
25.19%

2.60%
3.59
4.38
40.82%

Sales growth

Required:
(a) Comment on the sales growth of Coles in 2005 and 2006 in comparison with
Woolworths over the same period. Support your answer by referring to the
relevant financial information. (3 Marks)

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(b) Compare the gross profit growth and gross margin for Coles Ltd in 2005 and 2006
to Woolworths over the same period. Support your answer by referring to the
relevant financial information. (3 Marks)

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QUESTION 2 IS CONTINUED ON PAGE 6.

4

Note: Use the following formulae for ratio calculations if required.

Key Ratio Formulae:
Performance Ratios
Return on Equity (ROE) = Net Profit After Tax / Shareholders Equity
Return on Assets (ROA) = Earnings before Interest & Tax (EBIT) / Total Assets
Profit Margin = Net Profit After Tax / Sales Revenue
Gross Margin = Gross Profit / Sales Revenue
Activity Ratios
Asset Turnover = Sales Revenue / Total Assets
Inventory Turnover = COGS / Average Inventory
Days Inventory on Hand = 365 / Inventory Turnover
Debtors (receivables) Turnover = Credit Sales / Average Trade Debtors
Days in Debtors = 365 / Debtors turnover
Creditors Turnover = Purchases (or COGS) / Average Accounts Payable
Days in Creditors = 365 / Creditors Turnover
Cash Flow Cycle = Days in Inventory + Days in Receivables Days in Creditors
Liquidity and Financial Structure Ratios
Current Ratio = Current Assets / Current Liabilities
Quick Ratio = (Current Assets Inventories) / Current Liabilities
Interest Coverage = EBIT / Interest Expense (net)
Debt to Equity Ratio = Total Liabilities / Total Equity
Debt to Assets = Total Liabilities / Total Assets
Leverage = Total Assets / Shareholders Equity

QUESTION 2 CONTINUED:
(c) If the management of Coles was facing a takeover offer in 2006, how might they
persuade shareholders to reject the takeover offer and continue to give the
management a chance to improve the Companys performance? (Hint: you may
refer to the information on page 3, including the Du Pont analysis) (4 Marks)

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QUESTION 3 (10 MARKS): ACCOUNTING POLICY CHOICE

In the Announcement accompanying the 2005 financial results of the Woolworths
Ltd, the following disclosure was made:
Consistent with the requirements of UIG (Urgent Issues Group) Interpretation
1002, settlement discounts, rebates and other purchase allowances totalling
$600.9 million currently recognised in operating revenue, these will be
reclassified as a reduction in cost of sales of $418.3 million, a reduction in
administration expenses of $36.1 million and as an increase in other revenue
from ordinary activities of $146.5 million.

Required:
(a) Provide a journal entry for the accounting policy reclassification mentioned
above. (2 Marks)

(b) Explain the rationale for treating settlement discounts, rebates and other purchase
allowances as a reduction in cost of sales rather than revenue. (2 Marks)

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(c) No disclosure was provided as to the effect of the above accounting policy change
on the 2004 financial statements. As a very diligent financial analyst, you wish to
reconstruct the Income Statement of Woolworths for 2004 for comparative
purposes. Assuming that the effect of reclassification for 2004 was estimated as
$530.7 million against sales, and the same proportion of adjustments was applied
to other revenue, administrative expenses and cost of sales as in 2005, reconstruct
the following subset of the Income Statement for the period ending 2004. (3
Marks)
($ million)

2005

2004
After
Reclassification

2004
Before
Reclassification

Income Statement
Revenue
COGS
Gross Profit
Operating Expenses
EBIT

31,481.2

27,933.9

(23,678.9)

(20,975.5)

7,802.3

6,958.4

(6,500.2)

(5,893.3)

1,302.1

1,065.1

(d) State two (2) ratios, each from a different category (performance, activity,
liquidity or financial structure), that the above adjustment would affect and the
direction of such effect (i.e. increase or decrease). (2 Marks)

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(e) Explain whether the above adjustment would affect Return on Equity (ROE) ratio.
(1 Mark)

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QUESTION 4 (10 MARKS): CORPORATE GOVERNANCE

The following are excerpts from the 2007 annual report of Company Q, a well-known
ASX listed company regarding the backgrounds (edited) of its Board Members
(directors):
Director 1
Peter was appointed the Chief Executive Officer and Managing Director of Company
Q in March 2001. He was the Chief Executive Designate from November 2000, after
serving as Deputy Chief Executive Officer since November 1998. He was appointed
to the Board in August 2000. Before joining the Company, Peter was Director of
Marketing and Industry Sales at Company Xenon and General Manager of Marketing
and Corporate Affairs at Company Zeus. He has also worked in the Mining and
Media Industries.
Director 2
Leon was appointed to the Board on 1 July 2006. Leon was previously the Chief
Executive Officer and Managing Director of the Company Q between 1993 and
March 2001. He is Chairman of Woolworths Limited, Insurance Australia Group
Limited (IAG), Rip Curl Group Pty Ltd and the Australian Council for the Arts. He is
a Director of IAG Finance (New Zealand) Limited and is also involved in other arts
and private organisations. Leon was formerly the Group Chief Executive of the DB
Group in New Zealand and National Chairman of Partners of Corrs Chambers
Westgarth. He was also the Chief Executive Officer of Australian Airlines from
December 1985 until September 1989. He has been admitted as a barrister and/or
solicitor in various state jurisdictions in Australia.
Director 3
Helen was appointed to the Board of Company Q in January 2004 and is the
Chairperson of the Board. She is a Director of Wesfarmers Limited, National
Australia Bank Limited and the Murdoch Children's Research Institute. She is also a
Fellow of the Australian Institute of Company Directors, a Fellow of the Australian
Institute of Management and a Fellow of the Finance and Treasury Association. She
was a Director of AMP Limited and Suncorp-Metway Limited. Helen was a Member
of the Financial Sector Advisory Council, the Companies and Securities Advisory
Committee, the Merrill Lynch Australasia Advisory Board and an Advisory Member
of the Deloitte Touche Board of Partners. She has also served on a variety of not for
profit boards. Prior to becoming a professional company director in 1996, Helen held
various senior executive positions with Chase Manhattan Bank, Banque Nationale de
Paris and National Australia Bank in New York, Europe and Australia.

Required:
(a) State whether each of the directors should be an executive, non-executive, or an
independent director of Company Q. Explain your answer. (3 Marks)
Director 1:

Director 2:

Director 3:

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(b) With reference to the ASX Corporate Governance Councils Principles of Good
Corporate Governance and Best Practices Recommendations, explain whether the
three directors should be appointed to the Remuneration Committee of the Board.
(3 Marks)

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QUESTION 4 IS CONTINUED ON PAGE 12.

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Please note that any writing on this page will not be marked.

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QUESTION 4 CONTINUED:
(c) With reference to the ASX Corporate Governance Councils Principles of Good
Corporate Governance and Best Practices, explain whether the three directors
should be appointed to the Audit Committee of the Board. (4 Marks)

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QUESTION 5 (15 MARKS): COST CONCEPTS

Part A (10 marks)
Bee Ltd. is a manufacturing company which uses normal job-order costing for its
manufacturing processes. Some of the transactions and additional information for the
period ending 30 June 2007 are as follows:
1. Raw materials used were $380,000.
2. Direct labour incurred were $360,000 (wage was paid at a rate of $15/hour).
Wages are yet to be paid.
3. Manufacturing overhead was allocated at $20 per direct manufacturing labour
hour.
4. Goods worth $940,000 were completed in 2007.
5. Goods worth $900,000 were sold.

Work-In-Process, 1 July 2006 = $20,000.

Finished goods, 1 July 2006 = $10,000

Required:
(a) Write appropriate journal entries for each of the transactions above. (5 marks)
1.

2.

3.

4.

5.

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(b) Construct the T accounts for Work-In-Process and Finished Goods Inventory
accounts. Clearly identify each items in the T accounts. (5 marks)

14

Part B (5 marks)
Sunshine Ltd is a leading manufacturer of the portable solar air cooler units which
have become very popular with the environmentally conscious office workers. The
following data relates to costs incurred by the company for the year ending 30 June
2007.

Finished goods inventory, 1 July 2006

Finished goods inventory, 30 June 2007
Direct materials, 1 July 2006
Direct materials, 30 June 2007
WIP, 1 July 2006
WIP, 30 June 2007
Direct materials used
Indirect materials used
Factory supplies used
Depreciation factory
Depreciation sales office computer
Sales personnel wages
Assembly personnel wages
Factory supervision
Sales revenue

$
255,000
270,000
82,000
98,000
164,000
184,000
1,724,000
3,000
12,500
134,000
23,000
350,000
2,120,000
183,500
5,500,000

15

Required:
Prepare a statement of cost of goods manufactured in the space provided below.

16

QUESTION 6 (20 MARKS): BUDGETING FOR PLANNING AND

CONTROL
Part A (5 marks)
Prudence Prentice, a recent business graduate of the UNSW, has been hired as the
new sales manager of Lookit Ltd, an espresso coffee machine manufacturer. She is a
firm believer of preparing master budgets, and has argued strongly that one of the
many benefits of budgets is that they can be used as a motivational tool for
employees. For example, Prudence believes that Lookit Ltd should prepare a sales
budget to motivate its 20 sales personnel to achieve 10,000 units sales target the next
quarter in order to meet the company-wide quarterly profit target of $1,500,000. She
has decided that each employee will get a bonus of $300 if both targets are met.
Required:
(a) What is a problem with using the sales budget to motivate employees to perform
better? Explain your answer. (2 marks)

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(b) At the end of the quarter, it has been found that while the sales department was
able to sell 10,000 units of espresso coffee machine, the company fell short of its
profit target of $1,500,000 by $100,000. Prudence has decided that since only one
target was met, there will not be any bonus for sales personnel. Do you agree with
her decision? Explain your answer. (3 marks)

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Please note that any writing on this page will not be marked.

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Part B (6 marks)
Selmac Ltd is a retailer of fashion accessories which have recently become very
popular with trend-conscious university students. The company is looking to increase
the sale of its most popular product ShinyBlue, a bracelet made of created sapphire
and faux platinum. The company is, however, a bit concerned with increasing
incidences of bad debts, and would like to prepare a budget for each of the upcoming
months. The following information was available from Selmac Ltds financial
records for the first 5 months of 2008.
Product ShinyBlue
2008

Expected Purchases Expected Sales

($)
($)
January
142,000
172,000
February
148,000
166,000
March
136,000
160,000
April
154,000
178,000
May
160,000
166,000
Additional Information:

Collections from customers are normally 70 per cent in the month of sale, 20 per
cent in the month following the sale and 9 per cent in the second month following
the sale.

1 per cent of sales is expected to be uncollectible.

Selmac Ltd. takes full advantage of the 2 per cent discount allowed on purchases
paid for by the tenth of the following month.

Cash payments for expenses are expected to be $114,400 for the month of May.
Selmac Ltds cash balance on May 1 was $122,000.

19

Required
(a) Calculate the projected cash receipts for the month of May. (3 marks)

(b) What is the projected cash payment for the month of May. (3 marks)

20

Part C (9 marks)
Barton Ltd manufactures and sells solid timber entertainment centre units, customdesigned for todays ever-growing plasma TV owners. The company plans to sell
400,000 units in July 2007.
Additional Information:

Management anticipates a growth rate in sales of 5 per cent each month.

The desired monthly ending inventory in units of finished product is 80 per cent of
the next months estimated sales.

There are 300,000 finished units in the inventory on 30 June 2007.

Each unit of finished product requires 4 metres of direct material at a cost of $1.50
per metre.

There are 1,600,000 metres of direct material in the inventory on 30 June 2007.

Required:
(a) Calculate Barton Ltds production requirement in units for the three-month period
ending 30 September 2007. (5 marks)

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21

(b) The company wishes to have direct materials inventory at the end of each quarter
equalling to 25 per cent of the direct material used during that period. If the
company were to produce 1,200,000 units of finished product in the quarter
ending 30 September 2007, calculate the estimated cost of direct materials
purchased for the quarter using appropriate T accounts. (4 marks)

Do not write beyond this line

22

SOLUTION OUTLINES
QUESTION 1
(a)
1.
$3,000 gain on sale of equipment is not a cash inflow non-cash revenue and
therefore should not be on the CFS.
2.
Depreciation expense is not a cash outflow non-cash expense.
3.
$5,000 cost of share buyback is a cash outflow under financing activities and
should be included in the CFS.
(b)
1.
Maintain cash dividends at the rate of 40% of net profit.
2.
Delay any share buyback until the cash flow position of the company
improves.
3.
Consider buying a cheaper equipment.

QUESTION 2
(a)
Coles seems to have difficulty growing its business compared to Woolworths.
In 2005, sales growth dropped from 19.43% to low single digit 2.33% compared
to Woolworths double digit growth of 12.13%. In 2006 it continues in low single
digit growth of 3.62% compared to Woolworths of 20.23%
(b)
Coles seems to have more trouble passing on cost of goods increases to customers,
or pricing its items slightly lower (or more discounts) than Woolworths to draw in
customers.
Gross profit growth dropped to -5.15% in 2005 and continues to grow only 4.6%
in 2006, compared to Woolworths of 12.13% and 21.05% in 2005 and 2006.
This is confirmed by lower gross margin of around 23.+% in 2005 and 2006 down
from 25.44 in 2004 compared to Woolworths maintaining gross margins in high
24+%.
(c)
Coles management has been able to match and beat Woolworths on Asset
Turnover at 3.75x
Can take steps to improve Net Profit Margin to match Woolworths of 2.68%
Can easily borrow or do share buyback to increase leverage to 3.31 or more.
If so, can obtain ROE of 25.53% (2.68% x 3.75 x 3.31)
Can continue to invest more in supply chain/ logistics to reduce Cost Of Doing
Business
Could reposition businesses to consolidate and re-brand General Merchandise
stores, e.g. Kmart, Target, for which they pay fees to US brand name owners.
Could grow by acquiring more businesses in line with existing businesses in
supermarkets, liquor
Could grow by setting up more stores

23

QUESTION 3
(a)
DR

Revenue
$600.9m
CR
Other revenue
$146.5m
CR
Administrative expenses
$36.1m
CR
COGS
$418.3m
or Discounts, rebates and allowances (a Cost of sales adjustment
account)
(b)
See tutors during consultation times
(c)
($ million)

2005

2004
2004
Reclassification
After
Before

Income Statement
Operating revenue
COGS

31,481.2
(23,678.9)

Gross Profit
Operating Expenses

7,802.3
(6,500.2)

EBIT

1,302.1

27,532.7
(20,606.1)
6,926.6
(5,861.5)
1,065.1

27,933.9
(20,975.5)
6,958.4
(5,893.3)
1,065.1

(d)
Performance: any one of the following
Any profit margin
Increase
Activity: any one of the following
Asset Turnover
Inventory Turnover
Creditors Turnover
or any of the above Days version

Decrease
Decrease
Decrease
Increase

(e)
No because it does not affect Net Profit, nor Equity.

24

QUESTION 4
(a)
Director 1: Peter, being the current CEO of Company Q, is an executive director. He
cannot an independent director.
Director 2: Leon seems to be a non-executive director. He was formerly the CEO of
Company Q it is unlikely that he can be considered an independent director.
Alternative argument: he may be an independent director since there is no current
relationship with Company Q.
Director 3: Helen does not seem to be a current or former employee of Company Q.
She is the current chairperson of the board and seems to be an independent director.

(b)
ASX Recommendations:
At least 3 members with the majority being independent
Chaired by independent director
All directors could be appointed and still maintain majority being independent (nonexecutive). Chairperson however should not be Peter.
(c)
ASX Recommendations:
At least 3 members
Only the non-executive directors with majority independent
Chairperson by independent director, who is not the chairperson of the board
Should also have a member with a financial expertise
Peter (CEO) should not be on the committee.
Leon can be on the committee.
Helen should be on the committee but should not be the committee chairperson since
she is the board chairperson.

25

QUESTION 5
Part A
(a)
1. Dr WIP
Cr Raw materials

380,000

2. Dr WIP
Cr Wages payable

360,000

380,000

360,000

3. Dr WIP
480,000
Cr Overhead control

480,000

4. Dr Finished goods
Cr WIP

940,000
940,000

5. Dr COGS
Cr Finished goods

900,000
900,000

(b)

o/b
Raw materials
Wages
Overhead control
c/b

o/b
WIP
c/b

20,000
380,000
360,000
480,000
300,000

10,000
940,000
50,000

WIP
940,000

Finished Goods
900,000

Finished goods

COGS

26

Part B
Statement of Cost of Goods Manufactured
Direct Materials
Direct Labour
Factory Overheads
Indirect materials
Factory supplies
Depreciation - factory
Factory supervision

1,724,000
2,120,000

Total manufacturing costs

WIP, o/b
WIP, c/b
Cost of goods manufactured

4,177,000
164,000
184,000
4,157,000

3,000
12,500
134,000
183,500

27

QUESTION 6
Part A
(a) See tutors during consultation times
(b) See tutors during consultation times
PART B
(a)
Month

Expected
Sales
$160,000
$178,000
$166,000

March
April
May
Total

Percent

Collection

9%
20%
70%

$14,400
$35,600
$116,200
$166,200

(b)
Expected cash payments
April purchases to be paid in May
Less: 2% cash discount
Net
Cash payments for expenses
Total

$154,000
$3,080
$150,920
$114,400
$265,320

Part C
(a)
July
Projected sales 400,000
Ending inv
336,000
Beginning inv 300,000
Production
436,000

August
420,000
352,800
336,000
436,800

September
441,000
370,440
352,800
458,640

Quarter
1,261,000
370,440
300,000
1,331,440

(b)

o/b
purchases
c/b

Direct Materials (in $)

2,400,000 7,200,000
6,600,000

DM used

1,800,000

28