ACC10007

Sample Exam 1 Suggested solution

Question one – Solution

Roscommon Industries

Cash Flow Satement for year ended 3o

June 2015
$000
Cash Flow from Operating Activities
Cash Receipts from Customers $ 480,000
Cash Payments to Suppliers (313,000
)
Cash Payments of Wages (32,600)
Cash Payments of Rent (65,000)
Cash Payment of Other Expenses (40,400)
= Net Cash Flow from Operating activities 29,000

Cash Flow from Investing Activities

Purchases of Non Current Assets $
- Vehicle 0
Proceeds from Sale of Non Current Assets 0

= Net Cash Flow from Investing Activities 0

Cash Flow from Financing Activities

Proceeds from Loan $ 0
Loan Repayment 0
Drawings (46,000)

= Net Cash Flow from Financing Activities (46,000)

= Net Cash Flow for the year $ (17,000)

+ Bank @ beginning 16,600
= Bank @ end $ (400)

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Roscommon Industries
Cash Flow Statement -
Workings

Operating Activities

Cash Receipts from

Customers

Accounts Receivable @ $ 23400

beginning
+ Sales 506000
= Potential Receipts from 529400
Customers
- Accounts Receivable @ end 49400
= Cash Receipts from Customers $ 480000

Cash Payments to Suppliers Purchases

Accounts Payable @ beginning $ 37200 Cost of Sales $ 304000
+ Purchases 310000 + Inventory @ end 30400
= Potential Payments to 347200 = Goods Available for Sale 334400
Suppliers
- Accounts Payable @ end 34200 - Inventory @ beginning 24400
= Cash Payments to Suppliers $ 31300 = Purchases $ 31000
0 0

Cash Payments of Wages Cash Payments of Rent

Wage Expense as per Income $ 34320 Rent Expense as per Income $ 55000
Statement Statement
+ Accrued Wages @ beginning 0 - Prepaid Rent @ beginning 0
- Accrued Other Expenses @ 1720 + Prepaid Rent @ end 10000
end
= Cash Payments of Wages $ 32600 = Cash Payments of Rent $ 65000

All Other Expenses Paid

Van Running $ 35000

Electricity 5400

= Cash Payments of All Other $ 40400

Expenses

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Solution to Question 2

Part A

Define the following terms

a) Stepped fixed costs

b) Semi-variable costs

c) Contribution margin ratio Refer text book and lecture notes.

Part B
State four underlying assumptions for cost-volume-profit analysis
Refer text book and lecture notes.
Part C

a) Calculate the contribution margin per unit

SP = 125,000 / 5,000 = $25 SP
VC = 90,000 / 5,000 = $18 - VC
$ 7 = CM

b) Calculate Contribution Margin ratio

CM ratio = CM = 7 = 28%
SP 25

c) Calculate the company’s break-even point in units

B/e = FC = 28,000 = 4,000 units

CM 7

d) Calculate the company’s break-even point in sales dollars

4,000 x $25 = $100,000 or,

FC = 28/000 = $100,000
CM ratio 0.28

e) If the business wants to make $10,500 PBT how many units would it have to sell

FC + PBT = 28,000 + 10,500 = 5,500 units

CM 7

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Solution to Question 3
Lewis Toy Company manufactures stuffed animals in house. An outside supplier Nguyen
Company has offered to supply the stuffed animals at $22 each. Lewis Toy Company
requires 10,000 stuffed animals each year. The total manufacturing product costs of the
stuffed animals is as follows:
Item Product
Price per unit $32
Variable costs per unit
Direct material $12
Direct labour $ 6
Variable overhead $ 2
Fixed overhead costs per unit $ 3
Total unit costs $23

The fixed overhead is an allocated expense that relates to the rent of the factory. The rent
would still be incurred regardless if the stuffed animals are made or outsourced to Nguyen.
Required:
a) What are the alternatives Lewis Toy Company has in relation to its product?
b) List the relevant costs for each alternative?
c) What is the total relevant cost for each alternative?
d) Based on your answer to c) above, should Lewis Toy Company continue to make the
product or buy it from Nguyen Company? Explain
e) Give an example of an irrelevant cost in this decision and explain why it is irrelevant
f) What are the relevant costs in a decision making context?
g) What is meant by a limiting factor (scare resource). Give two common examples.
a) Continue to make or buy

b & c) Relevant costs to Make = DM$12 + DL $6 + VOH $2= $20

Relevant costs to Buy = $22

d) Lewis Toy company should continue to make the product, because it is $2 cheaper
per unit to make than buy. In total $20,000 cheaper to make.

e, f and g) Refer text and lecture notes.

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Solution to Question 4

a) Calculate the predetermined overhead rates for cost centres X and Y?

Cost Centre X = $280,000/$400,000 =$0 .70 per direct labour dollar or 70% of direct
labour costs
Cost Centre Y = $600,000/40,000 = $15 per machine hour

b) Calculate the predetermined overhead rates if machine hours is used for X and direct
labour hours for Y?
Cost centre X= $280,000/4,000 = $70 per machine hour
Cost centre Y = $600,000/14,000 = $42.86 per direct labour hour

c) Why do companies calculate predetermined overhead rates? Refer text and lecture
notes

Part B
Refer text and lecture notes

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Solution to Question 5
Select the most appropriate answer for the following:

1. Operating, financing and investing activities are shown on which financial statement?
a) Profit or Loss Statement
b) Retained Earnings statement
c) Balance sheet
d) Statement of Cash Flows

2. Which of the following is NOT found in a Balance Sheet?

a) Assets
b) Owner’s equity
c) Depreciation expense
d) Accounts payable

3. Which of the following is NOT a financing activity?

a) Payments to suppliers
b) Cash dividends paid
c) Repayment of long-term debt
d) Issue of shares

4. Which of the following characteristics would normally be associated with equity capital?

a) Interest payment

b) Dividend payment

c) Related to big business

d) secured investment

5. Which of the following is a long term source of external finance?

a) Bank overdraft

b) Finance leases

c) Invoice discounting

d) Retained profits

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Question 6 Solution
Emma's Total = Liabilities + Owners'
Assets Equity
Non
Worksheet Current Assets Non Current Current Curre Owners'
Assets Liabilities nt Equity
Acc Prov Prepai Acc Accrued Account Liabilit Retained
d s y
Bank Receiv for DD Inv Exp Machiner Depn Wages Payabl Loan Capita Earning Notes
y e l s

Balance @ beginning $ 4000 3000 9000 400 28500 -5000 200 3800 9000 20000 6900

Transactions / Adjustments
Credit Purchases of stock 32000 32000
Credit Sales 55000 55000 credit sales
Paid Acc Pay -25000 -25000
Paid wages -6000 -200 -5800 wages
wages owing 300 -300 wages
Rent -3600 -400 -4000 rent
Interest -450 -450 interest
Collection from Acc Rec 37000 -37000
Drawings -4000 -4000
Doubtful debts -30 -30 Doubtful
debts
Depn 10% of cost -2850 -2850 Depn

Cost of Sales Adj: Inv @ end -33500 -33500 cost of sales

$7,500

Balance @ end 1950 21000 -30 7500 0 28500 -7850 300 10800 9000 16000 14970

Inventory / Cost of Sales

Adjustment
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Inventory @ beg 9000 8070
+ Purchases 32000
= Available for sale 41000
- Inventory @ end 7500
= Cost of Sales 33500

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 Emma's Business
Income Statement for year ended 30 June
2014

Sales
Cash Sales $
Credit Sales 55000 $ 55000

less Cost of Sales $ 33500

= Gross Profit $ 21500

Less Other Expenses

Wages $ 6100
Rent 4000
Interest 450
Doubtful Debts 30
Depreciation 2850

Total Other 13430

Expenses

= Net Profit before Tax $ 8070

Emma's Business
Balance Sheet as at 30 June
2014

Current Assets Current Liabilities

Bank $ 1950 Accrued Wages $ 300
Accounts Receivable 21000 Accounts Payable 10800
less Prov for Ddebts -30 20970
Inventory 7500 Total Current Liabilities $ 11100
Prepaid Exp Non Current Liabilities
Total Current Assets $ 30420 Loan 9000
Total Liabilities $ 20100
Non Current Assets
Vehicle $ 28500 Owners' Equity
- Acc. Depn -7850 Capital @ beg $ 20000
- Drawings -4000
Total Non Current $ 20650 Retained earnings @ beg 6900
Assets
+ Profit/ (Loss) 8070
Total Owners' Equity 30970

Total Assets $ 51070 Total Liabilities & Owners' $ 51070

Equity
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Question 7 Part A Solution
2014 2015 2016

Net Profit before Interest & Tax

Net Profit before Tax 45,000 65,000
Add Back Interest 25,000 15,000
= Net Profit before Interest & Tax 70,000 80,000

Average Assets
Total Asset (Current + Non Current) 463,000 339,000 318,000
Average 401,000 328,500

i) Return on Assets
Net Profit before Interest & Tax 70,000 80,000
Average Assets 401,000 328,500

= 17.5% = 24.4%
ii) Net Profit Margin
Net Profit before Interest & Tax 70,000 80,000
Sales 600,000 500,000

= 11.7% = 16.0%
iii) Gross Profit Margin
Gross Profit 240,000 220,000
Sales 600,000 500,000

= 40% = 44%

iv) Inventory Turnover

Average Inventory
Inventory 120,000 68,000 65,000
Average 94,000 66,500

Inventory Turnover
Average Inventory x 365 94,000 x365 66,500 x365
Cost of Sales 360,000 280,000

= 95.27 days = 86.87 days

v) Average Settlement Period for Accounts Receivable

Average Accounts Receivable
Accounts Receivable 100,000 45,000 35,000
Average 72,500 40,000

Average Settlement Period for Accounts Receivable

Average Accounts Receivable 72,500 x365 40,000 x365
Credit Sales 600,000 500,000

= 44.17 days = 29.2 days

Part B:
refer to text and lecture notes. In your answer try to consider:
- whether profitability and efficiency have improved or deteriorated? What could have happened? What are
your recommendations?
- what each ratio measures and the implications of the ratios calculated. Show understanding of the ratios
and any relevant interrelationships (eg improvement in NPM mainly explained by improvement in GPM)
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