This paper is not to be removed from the Examination Halls

UNIVERSITY OF LONDON AC1025 ZB

(279 0025)

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

Monday, 14 May 2012 : 2.30pm to 5.45pm

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.

© University of London 2012

UL12/0004 PLEASE TURN OVER
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SECTION A

Answer question 1 from this section.

1. (a) Required:

Explain the objective of published financial statements and identify the two principal
characteristics financial statements which contribute to achieving this objective. (6 marks)

(b) The following data show the trading transactions of Othello Ltd for its first six months of
trading. The company operates the weighted average assumption for calculation of cost of sales.
Closing inventory and the cost of sales is calculated whenever a sale is made.

(1) 2011 Purchases Sales

July 40 units at £1,000 each
August 80 units at £ 900 each
September 50 units at £1,500
October 40 units at £1,100 each
November 20 units at £ 700 each
December 20 units at £1,200 each 90 units at £1,700

The December sale occurred before the purchase in that month.

(2) The 20 units purchased in November incurred a transport charge of £2,500 to move them to
the company premises. This amount is not included in the cost of £700 per unit.

(3) The 20 units purchased in December had been made to order for a customer who has now
gone into liquidation. Othello Ltd can only sell these for a price of £1,000 per unit after a
modification costing £150 per unit.

(4) Operating expenses for the six months amounted to 10% of sales revenue.

Required:

Prepare the Income Statement for Othello Ltd for the six months to 31st December 2011 from the
above information. (6 marks)

(c) Required:

Outline the main purposes and benefits of budgeting. (6 marks)

Question continues on following page.

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(d) Cordelia plc manufactures three spice mixes for catering firms: Mild, Spicy and Hot. The
selling price and the variable costs per unit for each product are as follows:

Mild Spicy Hot

£ £ £
Selling price 30 40 60
Variable cost
Spice A 10 23 25
Spice B 10 5 15

Spice B is in short supply and this year Cordelia is only able to purchase 240,000 kilos at £5 per
kilo. Spice A is plentiful.
The marketing manager predicts that the maximum demand for each product for the year will be:

Units
Mild 80,000
Spicy 16,000
Hot 30,000

The fixed costs for the year are estimated at £300,000.

Required:

i. Calculate, using a contribution based approach, the mix of sales which would enable
Cordelia to maximise profits and the resulting profit for the year. (6 marks)

ii. What technique could be used to determine the optimal mix if Spice A was also in short
supply? (1 mark)

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Questions continue on following page.

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SECTION B

Answer question 2 from this section, and one further question from either Section B or C.

2. Macbeth plc prepares its financial statements for the year ended 31 March. The company has
extracted the following trial balance at 31 March 2012:

£000 £000
6% Loan notes (redeemable 2016) 10,250
Trade payables 8,120
Trade receivables 9,930
Accumulated depreciation at 31 March 2011:
Plant & Equipment 6,460
Vehicles 1,670
Administrative expenses 16,141
Bank 456
Purchases returns 106
Distribution costs 9,060
Dividends paid 5,800
Dividends received 850
Equity shares, 20p each, fully paid 19,000
Interest paid on 6% loan notes 615
Inventories 4,852
Investments,non-current 15,000
Plant & equipment, at cost 27,315
Proceeds from issue of share capital 1,500
Provision for doubtful debts at 31 March 2011 600
Purchases 94,160
Retained earnings at 31 March 2011 14,677
Sales 124,900
Taxation 4
Vehicles, at cost 5,720
________ _______
£188,593 £188,593

The following further information is available:

(1) Non-current assets are to be depreciated as follows:

Plant & equipment 20% per annum straight-line
Vehicles 25% per annum reducing balance

(2) An invoice for telephone charges for the quarter ended 1 May 2012 for £15,000 was received by
the company after the above trial balance was extracted. Telephone expenses are included in
administrative expenses.

(3) The company paid £156,000 insurance premiums for the year 1 November 2011 to 30 October
2012. This amount is included in administrative expenses.

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(4) The closing inventory at 31 March 2012 was £5,180,000.

(5) Subsequent to drawing up the trial balance, the company has been informed that a major
customer owing £348,000 has gone into administration, and Macbeth plc will receive only 25%
of the amount owing. Macbeth plc has also decided to change its provision for doubtful debts to
5% of the remainder of receivables balances.

(6) Tax due for the year to 31 March 2012 is estimated at £30,000. The taxation balance in the trial
balance relates to an overestimate of the tax charge in the year ended 31 March 2011.

(7) On 1 October 2011, Macbeth plc issued 5,000,000 equity shares at 30p each. The proceeds were
credited to the ‘Proceeds from the issue of share capital account’.

(8) The final dividend for the year ended 31 March 2011 of 4p per share was paid in August 2011
and an interim dividend for the year ended 31 March 2012 of 2p per share was paid in November
2011. The final 2012 dividend is proposed at 5p per share. Macbeth plc shows dividends paid
in the Statement of Changes in Equity and does not provide for final dividends.

Required:

(a) Prepare Macbeth plc’s (£000s to one place of decimals):

i. Income Statement for the year ended 31 March 2012. (10 marks)
ii. Statement of Changes in Equity for the year ended 31 March 2012. (4 marks)
iii. Statement of Financial Position at 31 March 2012. (8 marks)

(b) Mrs MacDuff has owned 1,000 Ordinary Shares in Macbeth plc for a number of years. She has
asked you to clarify the following in respect of the dividend income on her shares:

• What was the amount of dividends she should have received in the year ended 31 March
2012?
• If the share price is 200p what was the dividend yield for the year ended 31 March 2012?

Prepare a note which answers her questions. (3 marks)

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3. Falstaff plc’s statements of financial position for the years ended 31 December 2011 and 2010 are
shown below:

Statements of financial position at 31 December

2011 2010
£000 £000 £000 £000
Non-current assets
Property
Cost 2,100 1,725
Accumulated depreciation 700 555
1,400 1,170
Fixtures and fittings
Cost 1,900 1,493
Accumulated depreciation 1,060 840
840 653
2,240 1,823
Current assets
Inventory 620 435
Accounts receivable 290 255
910 690
Total assets £ 3,150 £ 2,513

Equity
Ordinary share capital 1,800 1,500
Share premium 250 -
Accumulated profits 282 187
2,332 1,687
Non-current liabilities
8% debentures 450 360

Current liabilities
Bank 70 222
Accounts payable 248 176
Taxation 50 68
368 466
Total equity and liabilities £ 3,150 £ 2,513

Income Statement extract for the year ended 31 December 2011

£000
Profit before tax 265
Tax 90
Profit for the year £ 175

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The following information is also relevant:

(1) During 2011 the company sold fixtures and fittings, which had originally cost £250,000, for
£30,000. At the date of sale these assets had accumulated depreciation of £204,000.

(2) Further 8% debentures were issued on 1 October 2011. All interest due on the debentures had
been paid up to 31 December 2011.

Required:

(a) Using three examples to illustrate your answer, discuss the difference between a statement of
cash flows and an income statement. (7 marks)

(b) Calculate the following figures, and explain in which part of the statement of cash flows they
would appear:

i. Interest paid
ii. Profit or loss on the disposal of non-current assets
iii. Taxation paid
iv. Payments to acquire non-current assets
v. Change in accounts receivable
vi. Dividends paid (18 marks)

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4. Duncan plc operates a mobile phone network for personal and business customers. The latest annual
report has just been released on the company’s website. The annual report includes the following:

Duncan plc – Extract from the Financial Review for the year ended 31 December 2011.

Highlights for the year:

• A review of operating and administrative systems resulted in investment in non-current assets
with a significant reduction in staffing levels.
• Growth has been offset by competitive pricing due to strong competition.
• Average revenue per personal customer per month (2011= £10.56, 2010= £11.20) has been
affected by increased regulatory pressures on the pricing of mobile phone tariffs.
• Customers registered during 2011 have increased by 7% (2010: 3%).
• £10 million has been spent in 2011 on new advertising and sports sponsorship to boost brand
awareness.

Duncan plc – Income Statement for the year ended 31 December 2011

2011 2010
£m £m
Revenue 2,695 2,610
Cost of sales (1,295) (1,495)
Gross profit 1,400 1,115
Selling and distribution costs (190) (215)
Administrative expenses (150) (145)
______ ______
Profit from operations 1,060 755
Finance costs (75) (80)
Profit before taxation 985 675
Tax (395) (230)
Profit for the year 590 445

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Duncan plc – Statement of Financial Position at 31 December 2011

2011 2010
£m £m £m £m
ASSETS
Non-current assets
Property, plant and equipment 2,500 1,530
Intangibles 4,615 5,390
7,115 6,920
Current assets
Inventories 15 95
Trade receivables 460 450
Cash and cash equivalents 620 190
1,095 735
Total assets 8,210 7,655

EQUITY & LIABILITIES

Equity
Issued capital – 50p ordinary shares 1,335 1,330
Share premium 2,600 2,590
Other reserves 270 235
Retained earnings 1,015 790
Equity 5,220 4,945
Non-current liabilities
Borrowings 2,080 2,050

Current liabilities
Trade payables 565 350
Taxation and other liabilities 345 310
910 660
Total equity and liabilities 8,210 7,655

Required:

(a) Compute the following accounting ratios (to one place of decimals) for Duncan plc for 2010 and
2011.

• Return on Capital Employed

• Net profit margin
• Asset Turnover ratio
• Gross profit margin
• Current Ratio
• Quick Ratio
• Gearing (Debt to Capital Employed)
• Earnings per share
• PE Ratio (Assume relevant share prices for 2011 of £3.09 and for 2010 of £2.00)
(12 marks)

(b) Evaluate, using the ratios calculated above and the other information provided, the financial
performance and financial position of Duncan plc. (13 marks)

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SECTION C

Answer one question from this section, and one further question from either Section B or C

5. Ophelia plc operates a chain of furniture stores and is considering its strategy on distribution and
transport. The present position is that distribution is out-sourced to a transport company. The
expected cost for the year ended 30 June 2013 is £250,000. This cost, it is projected, will rise by 10%
per annum over the next five years.

The Directors of Ophelia plc are considering an alternative strategy of acquiring a company owned
and managed transport fleet. The initial cost of the transport fleet on 1 July 2012 would be £750,000
and it is estimated that the fleet would be sold at the end of year 2017 for £150,000.
It is estimated that the following costs would be incurred over the next five years:

Drivers’ Repairs and Other

Year ended Costs Maintenance Costs
30th June £ £ £
2013 33,000 8,000 230,000
2014 35,000 13,000 235,000
2015 36,000 15,000 240,000
2016 38,000 16,000 236,000
2017 40,000 18,000 242,000

The figure for ‘Other Costs’ includes depreciation on the fleet on the straight-line basis. The head
office administration costs of Ophelia plc are expected to be £300,000 per annum and the running of
the fleet would take up approximately 10% of the administrative time. However, the finance director
believes that there is sufficient spare capacity in the head office to carry out the additional work.
You can assume that the fleet will be paid for at the beginning of the project and all income and
expenditure would be incurred at the end of each relevant year.
The project manager for the new fleet also believes that the vehicles will not be fully utilised on
company business and she estimates that the spare capacity could be used for sub-contract work which
would generate £50,000 per annum.
To raise funds for the project the company proposes to raise a loan at 12% interest rate per annum.
You are told that there is an alternative project that could be invested in using the fund raised.
The projected results of the alternative project are:
Payback = 3 years
Net Present Value = £140,000
As funds are limited, investment can only be made in one project.

Required:

(a) Prepare a table showing the incremental cash flows to Ophelia plc for each year over the life of
the transport fleet. (10 marks)

(b) Calculate the following for the transport fleet project:

i. Payback period
ii. Net Present Value (6 marks)

(c) State and explain your recommendations to Ophelia plc in respect of the Transport fleet project.
(5 marks)

(d) Explain the term Internal Rate of Return and why it would not be appropriate to use it as a
decision model in the above example. (4 marks)

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6. Portia Ltd is a specialist manufacturer of components for luxury yachts. A contract has been offered
to Portia by Nerrisa Supermarine plc for the supply over the next twelve months of 400 identical
components, ZK44.

The data relating to the production of each component ZK44 is as follows:

(1) Material requirements:

3 kg material M1 – see note (i) below.
2 kg material P2 – see note (ii) below
1 part No. 678 – see note (iii) below.

Note (i) Material M1 is in continuous use by the company. 1,000 kg are currently held in
stock at a book value of £4.70 per kg but it is known that future purchases will cost £5.50
per kg.

Note (ii) 1,200 kg of material P2 are held in stock. The original cost of this material was
£4.30 per kg but, as the material has not been required for the last two years, it has been
written down to £1.50 per kg scrap value. The only foreseeable alternative use is as a
substitute for material P4 (in current use) but this would involve further processing costs of
£1.60 per kg. The current cost of material P4 is £3.60 per kg.

Note (iii) It is estimated that Part No. 678 could be bought for £50 each.

(2) Labour requirements: Each component would require five hours of skilled labour and five hours
of semi-skilled. An employee possessing the necessary skills is available and is currently paid
£5 per hour. A replacement would, however, have to be obtained at a rate of £4 per hour for the
work which would otherwise be done by the skilled employee. The current rate for semi-skilled
work is £3 per hour and an additional employee could be appointed for this work.

(3) Overhead: Portia Ltd absorbs overhead by a machine hour rate, currently £20 per hour of which
£7 is for variable overhead and £13 for fixed overhead. If this contract is undertaken it is
estimated that fixed costs will increase for the duration of the contract by £3,200. Spare machine
capacity is available and each component would require four machine hours.

Nerrisa Supermarine plc, one of a small number of companies who manufacture luxury yachts, has
offered a price of £145 per component ZK44. The global recession has particularly affected the luxury
yacht market.

Required:

(a) State whether or not the contract should be accepted and support your conclusion with
appropriate figures for presentation to management. Your analysis should explain in full the
figures you have used. (16 marks)

(b) Comment briefly on three factors which management should consider before making a final
decision on the contract. (9 marks)

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7. Cymbeline Ltd manufactures a single product. The company has two production departments, 1 and
2, and a service department. The following are the variable costs per product unit for April:

Direct materials £7.00

Direct labour £5.50
Manufacturing overhead £2.00

The selling price of the product is £36.00 per unit. Fixed manufacturing costs are budgeted to be
£1,340,000 for April. Fixed selling costs are budgeted to be £875,000. Fixed manufacturing costs can
be analysed between the departments as follows:

Production Production Service

1 2 Department
£380,000 £465,000 £265,000

In addition there are budgeted general factory fixed costs of £230,000, these represent space costs, for
example, lighting and heating. Space utilization is as follows:

Production department 1 40%

Production department 2 50%
Service department 10%

In allocating the service department costs it is assumed that 60% of service department costs are
labour related and the remaining 40% machine related.

Normal production department activity is:

Direct labour hours Machine hours Production units

Department 1 80,000 2,400 120,000
Department 2 100,000 2,400 120,000

Fixed manufacturing overheads are absorbed at a predetermined rate per unit of production for each
production department, based upon normal activity.

Costs for the period were as per budget, except for additional expenditure of £20,000 on fixed
manufacturing overhead in Production Department 1. Production and sales were 116,000 and 114,000
units respectively for the period.

Required:

(a) Calculate the budgeted fixed overhead absorption rate per unit and the budgeted total
manufacturing cost per unit for April. (8 marks)

(b) Prepare a profit statement for April using the full absorption costing system described above and
showing each element of cost separately. (10 marks)

(c) Prepare a profit statement for April using marginal costing principles. (7 marks)

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 Present value of £1
P

%
R 1 2 3 4 5 6 7 8 9 10
Period
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621

%
" 11 12 13 14 15 16 17 18 19 20
Period
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402

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

% 11 12 13 14 15 16 17 18 19 20
Period
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991

END OF PAPER

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