MIDLANDS STATE UNIVERSITY

FACULTY OF COMMERCE

GRADUATE SCHOOL OF BUSINESS

LEADERSHIP

FINANCIAL ACCOUNTING

CODE: MBA701

MAY/JUNE 2019 SESSIONAL EXAMINATIONS

DURATION: 3 HOURS

INSTRUCTIONS

1. Section A is compulsory, UllWel' all questions

Answer any two question in section B
3. Show all workings
4. Use of a silent non-programmable calculator is permissible

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SECTION A — COMPULSORY

Question one

Thandeka General Dealers, a sole trader business is concerned about the unavailability of
cash in the business and why the business has failed to meet its customers' orders. The
following is a summary of information from the books of the business related to the last two

years.

Summarised Statement of Comprehensive Income for the year ended 31 December 2016 and

2017.

31 December 2016 31 December 2017

$000 S000

180 240
Sales
(90) (160)
Cost of goods sold
90 80
Gross profit
(60) (68)
Sundry expenses
30 12
Net profit
Opening stock January 2016, was $30 000

Statement of Financial Position as at:

31 December 2016 31 December 2017

$000 $000 $000

$000
80 60
Net fixed assets
Current assets
10 40
Stock
20 40
Debtors
Cash at bank 6

Current liabilities
(20)
Bank overdraft
0
Creditors 18
98 60

Financed by:
80 98
Opening capital

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 12
Net profit for the year 30

Less Drawings
60
21,

From the Statements of Comprehensive Income and Statements of Financial Position

above for the two years:

a) Calculate the following ratios for each year showing the formula first
14marks1
i. Return on capital employed (based on closing capital)
[4marks]
ii. Gross profit as a percentage of sales
[4marks]
iii. Net profit as a percentage of sales
[4marks]
iv. Current ratio
[4marksi
v. Quick (acid test) ratio
[4marks]
vi. Stock turnover
of the changes between the two years, based on the ratios calculated in
vii. Make an analysis
Illmarks1
(a)
15marksi
viii. Suggest how the company can improve future liquidity

Question two

Statements of financial position for the years ended 30 June 2017 and 30 June 2016

30 June 2017 30 June 2016

Assets
86,100 47,850
Cash
68,250 79,650
Accounts receivable (Debtors)
312,000 292,950
Merchandise Inventory (Stocks)

7,200 3,300
Prepaid expenses
271,650 293,400
Equipment
(123,900) (95,100)
Accumulated depreciation — Equipment
621,300 622,050
Total Assets

Liabilities and equity

57,600 67,500
Accounts payable (Creditors)

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 10,200 8,850
Income taxes payable
0 9,000
Dividends payable
0 75,000
Bonds payable
337,500 337,500
Common stock (Shares), $10 par value

216,000 124,200
Retained earnings
621,300 622,050
Total liabilities and Equity

Statement of Comprehensive Income for the year ended 30 June 2017

892,200
Sales
444,600
Cost of goods sold

Other operating expenses 240,600

51,000 (736,200)
Depreciation Expense
156,000

Other gains (losses)

Loss on sale of equipment 6,600

1,650 (8,250)
Loss on bond retirement (redemption)
147,750
Income before taxes
(27,450)
Income taxes expense
120,300
Net Income

Additional Information

a) Equipment costing 42,750 with accumulated depreciation of 22,200 was sold for cash.
•
b) Equipment purchases are for cash.
Accumulated depreciation is affected by depreciation expense and sale of equipment.
c)
d) The balance of retained earnings is affected by dividend declarations and net income.
e) All sales, are made on credit
f) All merchandise inventory purchases are on credit
g) Accounts payable balances result from merchandise inventory purchases
h) Prepaid expenses relate to "other operating expenses."
Required

1) Prepare a statement of cash flows using the indirect method for June 2017
[15 marks]

2) Briefly Comment on any insights and strategies that the organization may be adopting.
[5 marks]

Page 4 of 5
SECTION B — CHOOSE ANY TWO QUESTIONS

Question three

The following data is available for A ltd for the month of January 2017
Static Budget Actual

Units 10,000 10,200

Sales Revenue $120,000 $117,300

Variable manufacturing costs $30,000 $32,640

Fixed manufacturing costs $36,000 $34,000

Variable marketing and admin expense $20,000 $21,000

Fixed Marketing and admin expenses $24,000 $22,000

Required:

a) Prepare a variable costing Income Statement that clearly shows the flexible budget
and the actual results (4 marks)
b) Do variance analysis based on the actual results and the flexible budget, clearly
indicating whether the variances are favourable or unfavourable. (4 marks)
c) Suggest one reason of what may have caused each variance in (b) above (4 marks)
d) State and briefly explain with an example in each case four reasons why variance
analysis is important to management (8 marks)

Question four

State and explain with an example in each case, five limitations of relying on ratios analysis
to interpret financial statements (20 marks)

Question five

State and justify, with an example in each case, any five pieces of information that may be
found in the notes to the financial statements (20 marks)

END OF EXAMINATION QUESTION PAPER

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