~~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.

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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: i. ii. Define assets and explain the difference between current and non-current assets. (4 marks) Briefly explain, using the definition in i., why employees do not usually appear as assets. (2 marks)

(b)

The following are amounts extracted from the balance sheet of Rudge Ltd as at 30 April 2013. 30,000 110,000 45,400 20,000

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

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 Required:

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

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. 2,200 1,200 400,000

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

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

ii.

iii.

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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. 2. 3. 4. Inventories at 30 September 2012 are valued at 13,480. Insurances include a payment of 2,300 for the six months from 1 July 2012. The directors wish to provide for the audit fee of 1,750. 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. The provision for doubtful debts is to be adjusted to 10% of the trade receivables at the end of the year. The preference share dividends are outstanding at the end of the year and the last half years interest on the debentures has not been paid. The tax on this years profits is estimated at 6,370. The directors propose to declare a final dividend on the equity shares of 13 pence per share. The Directors wish to write off preliminary expenses against general reserve and to transfer 2,500 from retained earnings to general reserves.

5. 6. 7. 8. 9.

Required: Prepare Pickwick Ltds: (a) (b) (c) Income statement for the year ended 31 December 2012. Statement of changes in equity for the year ended 31 December 2012. Statement of financial position as at 31 December 2012. (12 marks) (4 marks) (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 Profit from operations Interest Profit before tax Tax Profit for year Dividends paid were 2013: 300,000 (2012: 250,000). 000 12,080 6,282 5,798 000 2012 000 7,800 4,370 3,430

2,658 625 1,003 4,286 1,512 66 1,446 259 1,187

2,106 450 92 2,648 782 782 158 624

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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 Non-current liabilities Secured loan Current liabilities Trade payables Other payables Tax Bank overdraft 000 2,728 1,583 996 26 2,605 5,333 925 488 312 1,725 3,261 000 2012 000 1,536

750 250 1,759 2,759 300 1,418 417 259 180 2,274

750 250 872 1,872 910 321 158 1,389 3,261

Total equity and liabilities Note: Schedule of non-current assets

5,333

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 1,198 947 2,145 1,155 780 1,935

Motor vehicles 000 560 (210) 120 470

Total 000 2,913 (210) 1,847 4,550

547 329 876

558 178 736

272 (180) 118 210

1,377 (180) 625 1,822

1,269

1,199

260 2,728 Question continues on next page

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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 Companys financial management. Statement of Financial Position at 30 April 2013 000 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 2,190 895 1,295 1,500 2,680 4,180 5,475 2012 000 1,310 500 810 500 890 60 1,450 2,260

1,810 1,100 280 3,190 60 3,250

680 320 1,000 260 1,260

600 15 1,610 2,225 5,475

400 600 1,000 2,260

Total equity and liabilities

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Income Statement for the year ended 30 April 2013 000 Sales Opening inventory Purchases Closing inventory Cost of sales Gross profit Expenses Profit from operations Interest Profit before tax Corporation tax Profit for the year 500 16,400 16,900 1,500 15,400 5,600 3,370 2,230 200 2,030 520 1,510 000 21,000

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 Balance at 30/6/13 The following information is available: 1. 200 15 1,510 (500) ______ 1,610

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

____ 600

______ 15

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. Payables consist of 2013 000 1,080 20 1,100 2012 000 665 15 680

2.

Trade Accrued interest 3.

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

Required: (a) (b) Prepare a Statement of Cash Flows for the year ended 30 April 2013 for Magwitch plc. (17 marks) Prepare an e-mail for Mrs Magwitch which, based on the Statement of Cash Flows for 2013, evaluates the Companys 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 Actual 000 11,466 5,014 6,452 3,700 2,752

Sales Manufacturing Costs Contribution Fixed Overheads Profit Manufacturing Costs Budget 000 Material A 180,000 kg @ 10 Material B 180,000 kgs @ 3 Labour 180,000 hours @ 8 Variable overhead 4 per direct labour hour Units sold Required: (a) 1,800

Actual 000 202,000 kgs @ 10.20 2,060.40

540

196, 000 kgs @ 2.90

568.40

1,440 193,000 hours @ 8.40

1,621.20

720 4,500 180,000

764 5,014 196,000

Prepare an operating statement which shows all appropriate variances and reconciles the budgeted and actual profit for the year. (17 marks) Outline one possible explanation for each of the material and labour variances. (8 marks)

(b)

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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: 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 -

Sales revenue Purchases Administration expenses Selling expenses Taxation payment Finance payments Shop fittings purchased Notes: 1. 2. 3.

The inventories level at 1 June was 112,000. Suppliers allow one months credit. The gross profit margin is 40 per cent. 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. 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. 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. Selling expenses are payable in the following month.

4. 5. 6.

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

(b)

(c)

(d)

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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. Year 1 000 180 180 (180) Year 2 000 450 126 90 45 120 27 30 438 12 Year 3 000 470 132 94 47 120 27 30 450 20 Year 4 000 470 132 94 47 120 27 30 450 20 Year 5 000 470 132 94 47 120 27 420 50 Year 6 000 470 132 94 47 120 27 420 50

Sales revenue Less Costs Materials Labour Overheads Depreciation Working capital Interest on working capital Write-off on development costs Total costs Operating profit/(loss) 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. 3. 4. The labour cost includes an allocated proportion of a supervisors wages amounting to 8,000 per annum. The additional working capital will no longer be required at the conclusion of the project. The interest on working capital is a notional charge. The cost of equipment in the assistants 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 businesss normal practice. An independent assessment has suggested that incremental overheads are likely to amount to 30,000 a year. The businesss 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 University of London 2013 UL13/0002 Page 13 of 15
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6.

Required: (a) Prepare a corrected statement of the incremental cash flows arising from the project. Where you have altered the assistants figures you should attach a brief note explaining your alterations. (12 marks) Calculate: i. ii. (c) The projects payback period. The projects net present value as at 31 December Year 0. (6 marks)

(b)

Write a memo to the board advising on the acceptance or rejection of the project, you should briefly explain why the assistants 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

1 0.990 0.980 0.971 0.961 0.951

2 0.980 0.961 0.942 0.924 0.906

3 0.971 0.943 0.915 0.888 0.863

4 0.962 0.925 0.889 0.855 0.822

5 0.952 0.907 0.864 0.823 0.784

6 0.943 0.890 0.840 0.792 0.747

7 0.935 0.873 0.816 0.763 0.713

8 0.926 0.857 0.794 0.735 0.681

9 0.917 0.842 0.772 0.708 0.650

10 0.909 0.826 0.751 0.683 0.621

%: Period 1 2 3 4 5

11 0.901 0.812 0.731 0.659 0.593

12 0.893 0.797 0.712 0.636 0.567

13 0.885 0.783 0.693 0.613 0.543

14 0.877 0.769 0.675 0.592 0.519

15 0.870 0.756 0.658 0.572 0.497

16 0.862 0.743 0.641 0.552 0.476

17 0.855 0.731 0.624 0.534 0.456

18 0.847 0.718 0.609 0.516 0.437

19 0.840 0.706 0.593 0.499 0.419

20 0.833 0.694 0.579 0.482 0.402

(2) Annuity of 1 %: Period 1 2 3 4 5 1 0.990 1.970 2.941 3.902 4.853 2 0.980 1.942 2.884 3.808 4.713 3 0.971 1.913 2.829 3.717 4.580 4 0.962 1.886 2.775 3.630 4.452 5 0.952 1.859 2.723 3.546 4.329 6 0.943 1.833 2.673 3.465 4.212 7 0.935 1.808 2.624 3.387 4.100 8 0.926 1.783 2.577 3.312 3.993 9 0.917 1.759 2.531 3.240 3.890 10 0.909 1.736 2.487 3.170 3.791

%: Period 1 2 3 4 5

11 0.901 1.713 2.444 3.102 3.696

12 0.893 1.690 2.402 3.037 3.605

13 0.885 1.668 2.361 2.974 3.517

14 0.877 1.647 2.322 2.914 3.433

15 0.870 1.626 2.283 2.855 3.352

16 0.862 1.605 2.246 2.798 3.274

17 0.855 1.585 2.210 2.743 3.199

18 0.847 1.566 2.174 2.690 3.127

19 0.840 1.547 2.140 2.639 3.058

20 0.833 1.528 2.106 2.589 2.991

END OF PAPER

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