AC1025 ZB d1

~~AC1025 ZB d0

This paper is not to be removed from the Examination Halls

UNIVERSITY OF LONDON

AC1025 ZB

BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the Social Sciences, the Diplomas in Economics and Social Sciences and Access Route

Principles of Accounting

Tuesday, 14 May 2013 : 10.00am to 1.15pm

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. Workings should be submitted for all questions requiring calculations. Any necessary assumptions introduced in answering a question are to be stated. Extracts from compound interest tables are given after the final question on this paper. 8-column accounting paper is provided at the end of this question paper. If used, it must be detached and fastened securely inside the answer book. A calculator may be used when answering questions on this paper and it must comply in all respects with the specification given with your Admission Notice. The make and type of machine must be clearly stated on the front cover of the answer book.

PLEASE TURN OVER © University of London 2013 UL13/0002

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SECTION A Answer question 1 from this section.

1.

(a)

Companies often describe their employees as their greatest asset, but employees do not appear as an asset on the statement of financial position of almost all companies. Required:

(b)

i.

Define assets and explain the difference between current and non-current assets. (4 marks)

ii.

Briefly explain, using the definition in i., why employees do not usually appear as assets. (2 marks)

The following are amounts extracted from the balance sheet of Rudge Ltd as at 30 April 2013.

Ordinary share capital Non-current assets Retained Earnings at 1 May 2012 Trade payables

£ 30,000 110,000 45,400 20,000

The following ratios have been calculated from the financial statements of Rudge Ltd for the year ended 30 April 2013.

Sales (all credit sales) to non-current assets Gross profit percentage Expenses percentage of sales Long-term debt to equity Receivables repayment period Inventory holding period

2:1 5% 2% 50% 1 month 0.5 months

Required: Prepare, as far as the above information allows, the Statement of Financial Position of Rudge Ltd as at 30 April 2013. Assume that the balancing figure in the Statement of Financial Position represents cash in hand. (8 marks)

(c)

Define the term ‘Accounting Rate of Return’ and explain the advantages and disadvantages of it as a method of investment appraisal. (4 marks)

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(d)

Barkis Ltd operates a small hotel. The hotel has rooms for 30 guests over an operating season of 40 weeks. The budgets for the year ended 30 June 2014 have been prepared using the following data.

Weekly income per guest Variable weekly cost per guest Fixed costs per annum

£ 2,200 1,200 400,000

The company has in the past expected an average room occupancy over the season of 60% of total capacity. The directors are concerned that the global recession will reduce the demand for holidays and are considering a price reduction. Required: i.

Calculate the budgeted total contribution and net profit for the year to 30 June 2014 if past occupancy rates are maintained. (3 marks)

ii.

Calculate the break-even point in guest weeks and margin of safety based on i. expressed in percentage terms. (2 marks)

iii.

Calculate the occupancy level needed to maintain the net profit calculated in i. if the weekly income per guest was reduced to £2,000. (2 marks)

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SECTION B Answer question 2 and not more than one further question from this section. 2.

The following is the trial balance of Pickwick Ltd at 30 September 2012: £ Authorised, allotted and called-up share capital: 100,000 equity shares of £1 each 50,000 7% redeemable preference shares of 50p each Property cost (buildings cost £160,000) Property accumulated depreciation Goodwill Plant and machinery (cost £80,000) Plant and machinery accumulated depreciation Loose tools (cost £13,000), at valuation Inventories, as at 1 October 2011 Trade receivables Trade payables Bank Sales Purchases Directors’ salaries Insurances Light and heat Wages Interest on debentures Preliminary Expenses 10% debentures Provision for doubtful debts Share premium Retained earnings General reserve Interim dividend on equity shares Bad debts written off Investments: non-current Investment income

£ 100,000 25,000

200,000 60,000 20,000 80,000 13,100 9,100 9,400 11,200 8,300 6,050 135,250 49,700 22,000 4,650 3,830 6,600 1,200 1,270 24,000 910 35,000 2,580 20,060 3,250 700 8,000 £ 430,900

650 £ 430,900

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Additional information: 1.

Inventories at 30 September 2012 are valued at £13,480.

2.

Insurances include a payment of £2,300 for the six months from 1 July 2012.

3.

The directors wish to provide for the audit fee of £1,750.

4.

The amounts shown in the trial balance for property, plant and machinery and loose tools are balances as at 1 October 2011. Depreciation on the buildings is straight-line over 40 years and on plant and machinery is 15% per annum using the straight-line method. The loose tools were valued at £7,800 on 30 September 2012. Goodwill did not suffer any diminution in value.

5.

The provision for doubtful debts is to be adjusted to 10% of the trade receivables at the end of the year.

6.

The preference share dividends are outstanding at the end of the year and the last half year’s interest on the debentures has not been paid.

7.

The tax on this year’s profits is estimated at £6,370.

8.

The directors propose to declare a final dividend on the equity shares of 13 pence per share.

9.

The Directors wish to write off preliminary expenses against general reserve and to transfer £2,500 from retained earnings to general reserves.

Required: Prepare Pickwick Ltd’s: (a)

Income statement for the year ended 31 December 2012.

(12 marks)

(b)

Statement of changes in equity for the year ended 31 December 2012.

(4 marks)

(c)

Statement of financial position as at 31 December 2012.

(9 marks)

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3.

Copperfield Ltd operates a small chain of retail shops which sell high quality teas and coffees. Its business has expanded rapidly over the last two years. Approximately half of sales are on credit. Abbreviated and unaudited accounts are given below.

Copperfield Ltd Income Statements for the years ended 31 March 2013 £000 Sales Cost of sales Gross profit Labour costs Depreciation Other operating costs

2012 £000 12,080 6,282 5,798

2,658 625 1,003

£000 7,800 4,370 3,430

2,106 450 92 4,286 1,512 66 1,446 259 £ 1,187

Profit from operations Interest Profit before tax Tax Profit for year

£000

2,648 782 782 158 £ 624

Dividends paid were 2013: £300,000 (2012: £250,000).

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Copperfield Ltd Statements of financial position at 31 March 2013 £000 ASSETS Non-current assets (see note) Current assets Inventories Receivables Bank and cash Total assets EQUITY & LIABILITIES Equity Ordinary share capital (50p shares) Share premium Retained earnings

2012 £000

£000

2,728 1,583 996 26

1,536 925 488 312

2,605 £ 5,333

750 250 1,759

£

1,725 3,261

750 250 872 2,759

Non-current liabilities Secured loan Current liabilities Trade payables Other payables Tax Bank overdraft

£000

1,872

300 1,418 417 259 180

Total equity and liabilities

910 321 158 -

£

2,274

1,389

5,333

£ 3,261

Note: Schedule of non-current assets Short Fixtures leasehold & fittings £000 £000 Cost At 1 April 2012 Disposals Additions At 31 March 2013 Depreciation At 1 April 2012 Disposals Charge for year At 31 March 2013 Net book value At 31 March 2013 © University of London 2013 UL13/0002

Motor vehicles £000

Total £000

1,198 947 2,145

1,155 780 1,935

560 (210) 120 470

2,913 (210) 1,847 4,550

547

558

329 876

178 736

272 (180) 118 210

1,377 (180) 625 1,822

1,269

1,199

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260 2,728 Question continues on next page D1

Required: You are a shareholder in Copperfield Ltd with a 5% holding. You have been informed that the Company will announce a rights issue in the near future. (a) (b)

Calculate and comment on four key changes in the Income Statements between 2012 and 2013. (5 marks) Calculate the following ratios for 2013 and 2012: i. ii. iii. iv. v. vi. vii. viii. ix.

(c)

Return on capital employed. Asset turnover. Operating profit margin percentage. Gross profit percentage. Current ratio. Quick assets ratio Inventory turnover. Receivables collection period. Payables payment period.

(9 marks)

Comment on what your calculations in (a) and (b) indicate about the financial performance and position of Copperfield Ltd. (11 marks)

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4.

Magwitch Limited is a family owned company. Mrs Pip is a minority shareholder and has recently received the financial statements, shown below, for the year ended 30 April 2013 together with the 2012 comparative figures. She is very confused as the company has made a profit for 2013 but has a large overdraft at the end of the financial year. She is also worried about the Company’s financial management. Statement of Financial Position at 30 April

Non-current assets Cost Accumulated depreciation Current assets Inventory Receivables Bank Total assets Current liabilities Bank overdraft Payables Taxation Non-current liabilities Long-term loan Total liabilities Equity Share capital Share premium Retained Earnings

Total equity and liabilities

2013 £000

2012 £000

2,190 895 1,295

1,310 500 810

1,500 2,680 4,180 5,475

500 890 60 1,450 2,260

1,810 1,100 280 3,190

680 320 1,000

60 3,250

260 1,260

600 15 1,610 2,225

400 600 1,000

5,475

2,260

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Income Statement for the year ended 30 April 2013 £000 Sales Opening inventory Purchases

500 16,400 16,900 1,500

Closing inventory Cost of sales Gross profit Expenses Profit from operations Interest Profit before tax Corporation tax Profit for the year

15,400 5,600 3,370 2,230 200 2,030 520 £1,510

Statement of changes in Equity for the year ended 30 April 2013 Ordinary Share Retained Share Capital Premium earnings £000 £000 £000 Balance at 1/7/12 400 600 Issue of share capital Profit for year Dividends paid

200

____ 600

Balance at 30/6/13

£000 21,000

15

______ 15

1,510 (500) ______ 1,610

Total £000 1,000 215 1,510 (500) _____ 2,225

The following information is available: 1.

The additions to non-current assets were purchased for cash of £930,000. Non-Current assets which had originally cost £50,000 were sold for £20,000; the loss on disposal of these assets of £8,000 is included in expenses on the Income Statement.

2.

Payables consist of

Trade Accrued interest 3.

2013 £000 1,080 20 1,100

2012 £000 665 15 680

There was an issue of shares for cash during the year ended 30 April 2013.

Required: (a)

Prepare a Statement of Cash Flows for the year ended 30 April 2013 for Magwitch plc. (17 marks)

(b)

Prepare an e-mail for Mrs Magwitch which, based on the Statement of Cash Flows for 2013, evaluates the Company’s financial management. (8 marks)

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SECTION C Answer one question and no more than one further question from this section. 5.

Esther Summerson, Managing Director of Carstone Engineering, was pleased with the summary income statement for 2012. Sales targets had been exceeded and the company earned more profit than was planned. This information needed to be presented to the Board. Esther instructed Harold Skimpole, her accounting assistant, to prepare a short report for the Board Meeting the follow week summarising the key factors that accounted for the overall profit variance of £252,000. Harold prepared the following data: Carstone Engineering 2012 Operating Results Budget £’000 10,800 4,500 6,300 3,800 2,500

Sales Manufacturing Costs Contribution Fixed Overheads Profit

Actual £’000 11,466 5,014 6,452 3,700 2,752

Manufacturing Costs Budget £’000 Material A 180,000 kg @ £10

1,800

Material B 180,000 kgs @ £3

540

Labour 180,000 hours @ £8 Variable overhead £4 per direct labour hour Units sold

Actual £’000 202,000 kgs @ £10.20

2,060.40

196, 000 kgs @ £2.90

1,440 193,000 hours @ £8.40

720 £4,500 180,000

568.40

1,621.20

764 £5,014 196,000

Required: (a)

Prepare an operating statement which shows all appropriate variances and reconciles the budgeted and actual profit for the year. (17 marks)

(b)

Outline one possible explanation for each of the material and labour variances.

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(8 marks)

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6.

Scrooge Ltd owns a small chain of shops. At the beginning of June the business had an overdraft of £35,000 and the bank had asked for this to be eliminated by the end of November. As a result, the directors have recently decided to review their plans for the next six months. The following plans were prepared for the business some months earlier:

Sales revenue Purchases Administration expenses Selling expenses Taxation payment Finance payments Shop fittings purchased

May £’000 180 135 52 22 5 -

June £’000 230 180 55 24 5 -

July £’000 320 142 56 28 5 14

Aug £’000 250 94 53 26 22 5 18

Sept £’000 140 75 48 21 5 6

Oct £’000 120 66 46 19 5 -

Nov £’000 110 57 45 18 5 -

Notes: 1.

The inventories level at 1 June was £112,000. Suppliers allow one month’s credit.

2.

The gross profit margin is 40 per cent.

3.

All sales proceeds are received in the month of sale. However 50 per cent of customers pay with a credit card. The charge made by the credit card business to Scrooge Ltd is 3 per cent of the sales revenue value. These charges are in addition to the selling expenses identified above. The credit card business pays Scrooge Ltd in the month of sales.

4.

The business has a bank loan, which it is paying off in monthly instalments of £5,000. The interest element represents 20 per cent of each instalment.

5.

Administration expenses are paid when incurred. This item includes a charge of £15,000 each month in respect of depreciation. The taxation payment relates to the previous six months.

6.

Selling expenses are payable in the following month.

Required (working to the nearest £1,000): (a)

Prepare an inventories budget for the six months to 30 November based on the plans above. (4 marks)

(b)

Prepare a cash budget for the six months ending 30 November, showing the cash balances at the end of each month, based on the plans above. (9 marks)

(c)

Prepare a budgeted income statement for the whole of the six-month period ending 30 November. (A monthly breakdown of profit is not required.) (7 marks)

(d)

What problems is Scrooge Ltd likely to face in the next six months? Suggest how the business might deal with these problems. (5 marks)

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7.

The accountant of your business has recently been taken ill through overwork. In his absence his assistant has prepared some calculations of the profitability of a project, which are to be discussed at the board meeting of your business. His workings, which are set out below, include some errors of principle. You can assume that the statement below includes no arithmetical errors.

Sales revenue Less Costs Materials Labour Overheads Depreciation Working capital Interest on working capital Write-off on development costs Total costs Operating profit/(loss)

Year 1 £’000 -

Year 2 £’000 450

Year 3 £’000 470

Year 4 £’000 470

Year 5 £’000 470

Year 6 £’000 £470

180 180 (180)

126 90 45 120 27 30 438 12

132 94 47 120 27 30 450 20

132 94 47 120 27 30 450 20

132 94 47 120 27 420 50

132 94 47 120 27 420 50

Return on investment Total profit (loss) Cost of equipment =

(£28,000) £600,000 =

(4.7%)

You ascertain the following additional information: 1.

The materials figure is made up as follows: % of total cost Material P Material Q

20 80

All of material P is currently in stock and has no alternative use. It could have all been sold at the start of Year 1 for £50,000. Material Q all needed to be purchased. 2.

The labour cost includes an allocated proportion of a supervisor’s wages amounting to £8,000 per annum.

3.

The additional working capital will no longer be required at the conclusion of the project. The interest on working capital is a notional charge.

4.

The cost of equipment in the assistant’s calculation of return on investment includes £100,000, being the carrying amount of an old machine. If it were not used for this project, it would be scrapped with a zero net realisable value. New equipment costing £500,000 will need to be purchased on 31 December Year 0. The development costs of £90,000 have already been spent.

5.

Overheads have been costed at 50 per cent of direct labour, which is the business’s normal practice. An independent assessment has suggested that incremental overheads are likely to amount to £30,000 a year.

6.

The business’s cost of capital is 12 per cent. You should assume that all cash flows occur at the end of the year to which they relate unless otherwise stated in the above information. Question continues on next page

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Required: (a)

(b)

(c)

Prepare a corrected statement of the incremental cash flows arising from the project. Where you have altered the assistant’s figures you should attach a brief note explaining your alterations. (12 marks) Calculate: i.

The project’s payback period.

ii.

The project’s net present value as at 31 December Year 0.

(6 marks)

Write a memo to the board advising on the acceptance or rejection of the project, you should briefly explain why the assistant’s calculation of Return on Investment is not the best basis for the decision. (7 marks)

N.B. All figures to be rounded to nearest £000.

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Extracts from compound interest tables (1) Present value of £1 P

%: Period 1 2 3 4 5

%: Period 1 2 3 4 5

1 0.990 0.980 0.971 0.961 0.951

2

3

4

5

6

7

8

9

10

0.980 0.961 0.942 0.924 0.906

0.971 0.943 0.915 0.888 0.863

0.962 0.925 0.889 0.855 0.822

0.952 0.907 0.864 0.823 0.784

0.943 0.890 0.840 0.792 0.747

0.935 0.873 0.816 0.763 0.713

0.926 0.857 0.794 0.735 0.681

0.917 0.842 0.772 0.708 0.650

0.909 0.826 0.751 0.683 0.621

11

12

13

14

15

16

17

18

19

20

0.901 0.812 0.731 0.659 0.593

0.893 0.797 0.712 0.636 0.567

0.885 0.783 0.693 0.613 0.543

0.877 0.769 0.675 0.592 0.519

0.870 0.756 0.658 0.572 0.497

0.862 0.743 0.641 0.552 0.476

0.855 0.731 0.624 0.534 0.456

0.847 0.718 0.609 0.516 0.437

0.840 0.706 0.593 0.499 0.419

0.833 0.694 0.579 0.482 0.402

7

8

(2) Annuity of £1 %: Period 1 2 3 4 5

%: Period 1 2 3 4 5

1

2

3

0.990 1.970 2.941 3.902 4.853

0.980 1.942 2.884 3.808 4.713

0.971 1.913 2.829 3.717 4.580

0.962 1.886 2.775 3.630 4.452

0.952 1.859 2.723 3.546 4.329

0.943 1.833 2.673 3.465 4.212

0.935 1.808 2.624 3.387 4.100

0.926 1.783 2.577 3.312 3.993

0.917 1.759 2.531 3.240 3.890

0.909 1.736 2.487 3.170 3.791

11

12

13

14

15

16

17

18

19

20

0.901 1.713 2.444 3.102 3.696

0.893 1.690 2.402 3.037 3.605

0.885 1.668 2.361 2.974 3.517

0.877 1.647 2.322 2.914 3.433

0.870 1.626 2.283 2.855 3.352

0.862 1.605 2.246 2.798 3.274

0.855 1.585 2.210 2.743 3.199

0.847 1.566 2.174 2.690 3.127

0.840 1.547 2.140 2.639 3.058

0.833 1.528 2.106 2.589 2.991

4

5

6

9

10

END OF PAPER

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