Answer To Homework Questions

PRINCIPLES OF ACCOUNTING
Answers to Homework questions - TOTAL 102 PAGES

Lecture 1
Q1
(a)10,700
(b) 23,100
(c) 4,300
(d) 3,150
(e) 25,500
(f) 51,400
Q2
Wrong Assets : Loan from C Smith, Creditors;
Wrong Liabilities: Stock of goods, Debtors.
Q3
Assets : Motor 2,000; Premises 5,000; Stock 1,000; Bank 700; Cash 100 = total
8,800.
Liabilities: Loan from Bevan 3,000; Creditors 400 = total 3,400.
Capital : 8,800 3,400 = 5,400.
Q4
A Foster
Statement of Financial Position as at 31 December 20X8
Non-current assets
Fixtures
Motor vehicles
Total non-current assets
Current assets
Stock of goods
Debtors
Cash at bank
Total Current Assets
Total Assets
Current liabilities
Creditors
Equity
Total Liability & Equity
5,500
5,700
11,200
8,800
4,950
1,250
15,000
26,200
2,450
23,750
26,200
Q5
C Sangster
Statement of Financial Position as at 7 May 20X8
Non-current assets
Fixtures
Motor vehicles
Total non-current Assets
Current assets
Stock
Debtors
Bank
Cash
Total Current assets
Total Assets
Current liabilities
Creditors
4,500
4,200
8,700
5,720
3,000
5,450
400
Equity
14,570
23,270
2,370
20,900
23,270
Q6
General Journal
Details
1
3
4
5
6
Wages Expense
Cash
Accounts Receivable
Sales
Debit
$
7,800
Credit
$
7,800
15,000
15,000
Electricity Expense
Cash
4,500
Stationary Expense
Cash
100
Office Supplies
Accounts Payable
1.000
Cash
Accounts Receivable
5,000
4,500
100
1,000
5,000
Q7
Details
1
2
3
4
5
6
7
8
9
Purchases
Accounts Payable
Accounts Payable
Cash
Debit
$
10,000
10,000
1,000
1,000
Cash
Accounts Receivable
500
Drawings
Cash
700
500
700
Cash
Sales
2,000
Furniture
Bank
1,800
Wages
Cash
Cash
Loan
Motor Vehicle
Capital
Credit
$
2,000
1,800
900
900
3,000
3,000
10,000
10,000
Question 8
It is generally accepted that accounting should serve the following functions:
I.
Recording and Classification: accounting systems supply a means of
recording and classifying data so as to enable the production of summarized
financial statements relating to the entitys results and current state of affairs.
Records also enable one-off requests for data to be complied with.
2.
Measuring: accounting tries to assist in the measurement of the
economic results of the entitys activities, usually with a view to sharing out the
results among the various interested parties (e.g. government (taxes),
employees (wages), shareholders (dividends).
3.
Stewardship: accounting provides a record of how the funds entrusted
to managers have been used by them, and to what ends.
4.
Monitoring, planning and control: accounting should provide sufficient
information on the results of past activities to enable management to monitor
the results and take action if necessary, and to formulate plans for the future.
5.
Performance evaluation and compensation: accounting systems
provide information on the performance of different individuals and parts of the
business in order to determine how much managers and employees should be
rewarded.
6.
Information For Decisions: accounting should assist investors, for
example, in deciding how to allocate their limited resources.
7.
Communication: accounting should communicate information to both
internal and external users. (Financial statements are the main tools used to
achieve this function for external users.)
Answer to Homework Questions Lecture 2

Q1 (a)
Collected amount due from a customer (increase cash,

decrease receivables). Purchased land for cash (increase land
and decrease cash).
(b)
Paid amount due a creditor (decrease cash, decrease accounts

payable).
(c)
Owner withdrew cash (decrease cash, decrease owner's

capital). Paid rent (decrease cash, decrease owner's capital).
Reflected supplies expense (decrease supplies on hand,
decrease owner's capital).
(d)
Borrowed money from a bank (increase cash, increase notes

payable).
Q2
(a) No effect
(e) Increase
(b) Decrease
(f) Increase
(c) Decrease
(g) Increase
(d) No effect
Q3
$400,000 Assets - $160,000 Liabilities

= $240,000 Owners' Equit
Less : 200,000 (Capital)
= $40,000 (Retained Earnings)
Answer : Retained Earning = $40,000
Q4
a) Increase assets (Office

Equipment)
Decrease assets (Cash)
b) Increase assets (Accounts
Receivable)
Increase owners equity
(Capital)
c) Decrease assets (Cash)
Decrease owners equity
( Capital)
d) Increase assets(Cash)
Increase owners equity
( Capital)
e) Increase Assets
( Cash),
Decrease Assets
( Debtors)
f) Increase assets (Supplies
Increase liabilities (Accounts
payable)
g) Decrease assets (Cash)
Decrease owners equity
( Capital)
h) Decrease liabilities (Accounts
Payable)
Decrease assets (Cash)
i) Decrease owners equity
( Capital)
Decrease Assets(Cash)
5 (a)
Blaney Painters
Statement of Financial Position
As at End of Current Year
Non-current assets
Equipment
Current assets
Stock
Accounts Receivable
Total current assets
Total Assets
Current Liabilities
Accounts payable
Capital
8,500
12,000
6,500
18,500
27,000
500
26,500
27,000
Use the concept of the capital account to answer parts b), c).
Capital at the end of year = capital at the beginning of year + additional
Capital contributed + net profit Drawings
5b)
26,500 = 18,000 + 0 + net profit 17,000
Net Profit = 26,500 18000 + 17000 = 25,500
Answer : 25,500
5c)
26,500 = 18,000 + 4,000 + net profit 17000
Net profit = 26,500 18,000 4,000 + 17,000 = 21,500
Answer : 21,500
Q6
a)
Sunshine Delivery Service

Income Statement
for the month ended March l9XX
Revenue : Delivery Fees
$16 200
Less : Expenses
Rent Expense
Advertising Expense
Supplies Expense
Salaries Expense
Insurance Expense
Miscellaneous Expense
$1 800
300
2 700
5 600
100
200
10 700
$ 5 500
Net Profit

b)
Sunshine Delivery Service

As at End of March 19XX
Current assets
Cash
Accounts Receivable
Supplies on Hand
Prepaid Insurance
Total Assets assets
Less current Liabilities
Accounts payable
Note payable
Total Current Liabilities
Capital*
14,600
11,300
6,500
1,100
33,500
4,000
10,000
14,000
19,500
33,500
*Note: This could be reconciled as: capital at beginning + Net profit less
drawings
= 15,000 + 5,500 1,000 = 19,500
Q7
Entry
to
Increase
Account
Type
Professional Fees
Revenue
Credit
Accounts
Receivable
Asset
Debit
Accounts Payable
Liability
Credit
Cash
Asset
Debit
Adams, Capital
Owners
Equity
Credit
Advertising
Expense
Expanse
Debit
Supplies on Hand
Asset
Debit
Adams, Drawing
Owners
Equity
Debit
Question 8
These refer to the systems and procedures that ensure the accuracy and
reliability of the accounting records and to safeguard the assets of the
business.
A good system of internal control will have the following objectives:
The business receives the revenues it is entitled to.
All transactions are properly recorded in the appropriate period.
All expenditure properly authorised
All assets properly recorded and safeguarded.
The accounting records provide a reliable basis for the preparation of

financial statements.
Error and fraud are detected and dealt with promptly.

Question 1
Cash
Furniture
Capital
Creditors
Drawings
Sales
Purchases
Electricity
Wages
Advertising
Debit
+12000+20000-10000
-100+7000-200+6500
-2000-500-800
+2000
Frank- Second Hand Car Dealer

Trial Balance
As at 30 April 2013
Account
Cash
Furniture
Capital
Drawings
Sales
Purchases
Electricity
Wages
Advertising
Credit
+12000+20000
+2000-2000
+800
+7000+6500
+10000
+500
+200
+100
$
31,900
2,000
$
32,000
800
13,500
10,000
500
200
100
$45,500
$45,500
10
Question Two
Account
Cash
Accounts Receivable
Purchases
Computer
Accounts Payable
Capital
Sales
Wages
$
+50000-15000
-600+8000+500
-5000
+2000-500
+30000
+5000
Kelly Venice
Trial Balance
As At 30 June 2013
Account
Cash
Accounts Receivable
Purchases
Computer
Accounts Payable
Capital
Sales
Wages
+15000+5000-5000
+50000
+8000+2000
+600
$
37,900
1,500
30,000
5,000
15,000
50,000
10,000
600
$75,000
$75,000
Question 3
A
Opening Capital = 2800
Closing capital = 4000
Use equation:
1) Capital = Assets less liabilities
2) Opening capital + additional capital + revenue expenses
drawings = closing capital
2800+ 600 + a 3200-400 = 4000.
Solving for a
A= 4000-2800-600 +3200+ 400
Therefore a = 4200
11
B
Opening capital + additional capital + revenue expenses drawings =
closing capital
6000 + 1500 + 5200 3600 500 = Closing capital
Therefore closing liabilities = 10000 8600 = 1400 (b)

closing capital
12500 + c + 6000 3800 1200 = 16000
c = 16000 12500 6000 + 3800 + 1200 = 2500
D

closing capital
Opening capital + 3500 + 15000 10000 1500 = 17000
Opening capital = 17000- 3500 15000 + 10000 + 1500 = 10000
Therefore Assets = 10000 + 6000 = 16000. (d)
12
Question 4
Parker Packaging Service
Parker Packaging Service
Financial Position as at
31 December
This Year
Non-current assets
Equipment
Buildings
Land
Total
31 December
Last Year
24 000
32 000
10 000
66 000
28 000
35 000
10 000
73 000
18 000
56 000
2 400
600
77,000
$143 000
12 000
48 000
2 600
400
63,000
$136 000
2 000
2 400
52 000
55 000
89 000
$143, 000
78 600
$136,000

Current Assets
Cash
Accounts Receivable
Supplies on Hand
Prepaid Insurance
Total Current assets
Total Assets
Current Liabilities
Accounts Payable
Non-current liability
Mortgage Payable
Owner's Equity
Parker, Capital
(b)
Parker, Ending Capital
Parker, Beginning Capital
Increase
Add: Drawings
Less: Contributions
Net Profit, This Year
$89 000
78 600
10 400
9 000
19 400
6 000
$13 400
13
Question 5
Original bank balance
Less: Dishonoured cheque
Corrected bank balance
2,600
(70)
2,530
Corrected bank balance

Add: Unpresented cheques
Less: Uncleared receipts
2,530
395
(230)
Balance per bank statement
2,695
Question 6
The three main books of prime entry:
Cash book
Used to record every cash payment that the business makes and every cash receipt.
Sales day book
Used to record every credit sale that the business makes.
Purchases day book
Used to record every credit purchase of stocks.
Control Accounts are found in the general ledger and contains the summary totals of the balances in the
subsidiary ledgers.
Example of control accounts are debtors and creditors control accounts.
On a monthly basis, the closing balance carried forward on the control accounts are checked against the
separate totals for all the individual customers and suppliers from the debtors and creditors ledgers.
This reconciliation process will identify differences between the information in the books of prime entry and
the balances in the debtors and creditors ledgers. This will enable a business to identify and investigate
some possible errors.
14
Question 7
(a)
Original creditors ledger control account
Credit note for purchase return not accounted for
Error in returns outwards day book
Corrected creditors ledger control account
321,700
(3,600)
3,000
321,000
15
(b)
List of individual creditors' balances
Debit balance wrongly listed as Cr balance
Credit note for purchase return not accounted for
Cash payment wrongly recorded
Purchase omitted
Payment omitted Balancing figure
Corrected creditors ledger control account
330,800
(3,400)
(3,600)
270
600
(3,570)
321,100
16
Question 8
Accounting Bases refer to the various possible methods of applying accounting
concepts in preparing financial statements.
Accounting policies refer to the specific methods chosen to account for the
various transactions.
For example, to account for depreciation the possible bases may be the straight line or
line or the reducing balance method, but the firm may choose to use the
reducing balance method as the selected accounting policy.
17
Answer To Homework Questions Lecture 4

Question 1
Annual Depreciation:
$
Machinery:
100,000 X 20%
20,000
Vehicles
(300,000 153,000) X30%
Total
44,100
64,100
Question 2
ACCOUNTS
1) Land Account 10/15 X $12 million = $ 8 million
2) Building Account 5/15 X 12 million =$ 4 million
3) Parking Lot = $2 million + $150,000 = $2,150,000
4) Store Equipment = $21,000 + $1,000+ $1,000 = $23,000
Notes
1) The $12 Million paid for land & building has to be split separately to the
land & building account as the land is not depreciated but the building
is subject to depreciation. The relative valuation is used to split the total
cost of $12 million to the land & building account.
2) The parking lot should be shown as a separate account and not part of
the building.
3) The store equipment account should include all incidental cost such as
delivery and installation.
Question 3
Situation 1
Net Book Value
= $15,000
$20,000 less $5,000
Cash proceeds
= $18,000
Gain on disposal
= $ 3,000
18
Situation 2
a) Balance at 30 June 2013
Cost =
Accumulated depreciation =
( $110,000 X0.25) X 3 years
Net Book Value
Cash Proceeds
Loss on disposal
$110,000
$ 82,500
$27,500
$20,000
$ 7,500
b) Balance at 30 June 2013

Cost =
Accumulated depreciation =
( $110,000 X0.25) X 3.5 years
Net Book Value
Cash Proceeds
Gain on disposal
$110,000
$ 96,250
$13,750
$20,000
$ 6,250
Situation 3
Cost of New machine
100,000
Consideration given up
Old Machine NBV
Cash
Total
Gain on disposal
(100,000-55000)
40,000
15,000
55,000
45,000
19
Question 4
Cost of vehicle
Accumulated Depreciation
20,000 (20,000X0.8X0.8)
Net Book Value
Cash
Loss on disposal
= $20,000
= $7,200
=$12,800
$ 5,000
$ 7,800
Non- current assets

Motor Vehicles at cost
($120,000-$20,000)
$
100,000
Accumulated depreciation
(43,000 7,200 + 12,840* )
Net book Value
48,640
51,360
* This represents the depreciation expense on the remaining vehicles for the
current year.
Cost of remaining vehicles = $100,000
120,000-20,000
Accumulated depreciation = $35,800
(43,000-7,200)
Net book Value
= $64,200
X Rate
X 20%
Depreciation
$12,840
Question 5
1) Polishing Machine
Cost as at 1/1/11
Residual Value
Depreciable Amount
Depreciation each year (1/10 X
95000)
100,000
5,000
95,000
9,500
New Polishing Machine

Cost as at 1/1/13
Residual Value
Depreciable Amount
Depreciation each year (1/10 X
114,000)
120,000
6,000
114,000
11,400
20
2) Grinding machine
Cost
2011 Depreciation 30%
30,000
9,000
21,000
6,300
14,700
4,410
10,290

3) Sale of polishing machine 1 January 2013

Cost 100,000 Acc depn 19,000 = 81,000 NBV
Sold For
45,000
Loss on sale
36,000
Extracts from the Income Statement for the year ended 21/12/13
Depreciation of equipment
(Polishing machine 9,500 + 11,400+
Grinding machine 4,410)
25,310
Loss on sale of equipment
36,000
Extracts from the Statement of Financial Position as at 21/12/13

Non Current Assets
Polishing machine
Grinding Machine
COST
ACC DEPN
220,000
30,000
250,000
39,900
19,710
59610
NET BOOK
VALUE
180,100
10,290
190,310
b) The following 4 points are relevant to the question:

I. Depreciation is an allocation of cost ( matching concept) less expected
residual value over the assets useful life (it is like a prepayment)
II. Because the process of depreciation is based on cost, the amount in the
Accumulated balance does not accumulate to a figure needed to replace
the fixed assets in the future as the future price of the asset may
increase
III. The amount of depreciation expense is considered a non cash
expense. Therefore depreciation does not effect cash flows.
21
IV. The choice of the method for depreciation depends on:

a)Ease of Use
b) The method chosen should reflect the benefit pattern from the use of
the asset. For example, of more benefits are expected from use of the
assets in its earlier years, then the reducing balance method should be
used.
Gain/ Loss arises because the residual and useful life are only
estimates and as long as these do not equal the actual amounts, a
gain/loss may arise.
22
Question 6
(a) Entries in the Income Statement
accounts:
2004
2005
Depreciation
Fixtures and fittings
Motor vehicle
Loss on disposal of motor

vehicle
2,900
4,000
6,900
(25k1.8k)/8
(0.25*16k)
4,800
4,625
9,425
2.9k+(15.2/8)
(0.25*18.5k)
8,800
(320012000)
NBV@disposal= 16k-4k
=12k
(b) Extracts of financial

Position:

Motor vehicle

Motor vehicle
Cost
25,000
16,000
41,000
Cost
40,200
18,500
58,700
Accm depn
2,900
4,000
6,900
<----------@30 Sept 2004----------->

NBV
22,100
12,000
34,100
Accm depn
7,700
4,625
12,325
<----------@30 Sept 2005----------->

NBV
32,500
13,875
46,375
23
Question 7
Galleon Ltd Income Statement account for years ended 30th September (Extract)
Depreciation expense
2007: 6,900 [(25,000 1800) + (16,000 x 25%)]
8
Depreciation expense 2008: 9,425
(4,800 + 4,625)
Plant: (25,000 1800) + (15,200) = 4,800
8
8
Vehicle: (18,500 x 25%) = 4.625
Loss on disposal of vehicle 2008: 8,800
Sales Proceeds NBV of asset sold
= 3,200 (16,000 x (1-0.25)] = - 8,800 (loss)
Galleon Ltd
Statement of Financial Position as at 30th September (Extract)
Cost
2007
Non-current assets
Plant and equipment
Motor vehicles
2008
Non-current assets
Plant and equipment
Motor vehicles
Acc Depn
NBV
25,000
16,000
41,000
2,900
4,000
6,900
22,100
12,000
34,100
40,200
18,500
58,700
7,700
4,625
12,325
32,500
13,875
46,375
24
Answers to Homework Question Lecture 5
Question 1
A)
a) FIFO = (4000 X $6) + (16000 X $8) = $152,000
b) LIFO = ( 4000 X $5) + (16000 X $6) =$116,000
B) $7 is the net reliasable value(NRV) of the stock . Need to apply the
prudence rule of the lower of cost and NRV and there new ending stock
valuation:
a) FIFO = (4000 X 6) + (16000 X $7)= $136,000
b) LIFO no change as cost is below the NRV
Question 2
Closing stock is the latest stock values for FIFO method.
Units of closing stock = Purchases sales = (20+40+20+10+10) (25 + 40)
= 35 units
Thus value = (10 x 1200) + (10 x 700) + (15 x 1,100) + Transport $2500 (additional
cost of November items not sold yet) = 38,000
Cost of sales is based on earliest cost multiplied by sales units; Thus value = (20 x
1000) + (40 x 900) + (5 x 1100) = 61,500.
The closing stock figure should be written down by 6,000 to net realisable value.
However, this amount should not be included as cost of sales but reflected in the
profit and loss account as an exceptional charge. This is because the event that caused
the value to erode is an exceptional event. Under normal circumstances, reduction in
value due to the lower of cost and NRV rule should be taken to Cost of Sales.
Question 3
A
Profit after customer costs

Net profit margin
73,000
11.4%
51,000
12.75%
63,000
19.7%
Workings
ABC
Profit for A = [(80000 x 8 x (100% - 5% - 20%)] (80000 x 5) 7000
Net profit margin = 73000 / (80000 x 8)
Same principle applies to Products B and C
Commentary from Examiner:
25
The gross profit figures simply show that the largest sales produce the highest gross
profit, but the picture becomes more complex when the customer related expenses are
included. A, the largest customer, still produces the highest profit, but not the best
margin, as B and C are higher. In fact, C the smallest customer produces the highest
margin
Question 4
Closing stock units for both FIFO & LIFO:
20 + 40 -25 +20+10 +10 -40 = 35 Units
FIFO
Closing stocks =
( 10 X 1,200)+ (10 X 700) + (15 X 1,100) = 35,500
Cost of sales
(20 X 1,000) + (40 X 900 )+ (5 X1,100) = 61,500
LIFO
Closing stock =
(10 X1,200)+ (5 X900) + (20 X 1,000)= 36,500
Cost of sales =
( 25 X 900) + (10 X700) + (20 X1,100) + (10 X900)= 60,500
Question 5
Situation 1
Damage goods:
Cost : $5,000
NRV : $5,500
Stock loss = $0
Hence closing stock at original $300,000
Situation 2
Damage goods:
Cost :
$10,000
NRV :
$7,000
Stock loss = $3,000
Hence closing stock at original $500,000 - $3,000 = $497,000
26
Situation 3
Stock at cost = $400,000
$800,000/2
Damage goods:
Cost :
$4,000
NRV :
$1,500 - $500 = $1,000
Stock loss = $4,000 -$1,000 = $3,000
Hence closing stock at cost $400,000 - $3,000 = $397,000
Situation 4
Wheels : 5,000 Units X $5(lower cost)
= $25,000
Barrels: 1,000 Units X $4(Lower NRV*) = $ 4,000

Total stock value
= $29,000
* NRV = $6 - $2 = $4
Situation 5
Original stock Valuation at cost
810,000
Stock destroyed by fire: Lower NRV

Cost : 40,000
NRV: 0
(Not expected to any compensation
from insurance co.)
0**
Damaged stock
Cost :
30,000
NRV:
12,000
Stock loss 18,000
Closing stock valuation
(18,000)
792,000
**Why 0?The stock was completely destroyed by fire, hence not counted in the
original value of 810,00. Its NRV is 0 also as no compensation expected.
(Interesting question!)
27
Answers to Homework Question Lecture 6

QUESTION 1
Burt Inc
Income Statement for the year ending 30 June 2001
Sales
Less Sales returns
89,000
11,000
78,000
Less Cost of Sales

Opening Inventory
Purchases
24,000
45,000
69,000
30,000
Less Closing Inventory
39,000
39,000
1,500
Gross Profit
Add Interest received on
Investment
40,500
Less Expenses
Advertising
Rent Expense
Telephone expense
Wages
9,000
90,000
800
25,000
Net Loss
124,800
84,300
Burt Inc
Statement of Financial Position as at 30 June 2001
$
$
Non Current Asset
Delivery Vehicle
25,000
Current Assets
Cash at Bank
Debtors
Inventory
Stationary
Total Assets
Current Liability
Trade Creditors
Owners equity :
Closing Capital
Total Liabilities and equity
78,000
10,000
30,000
400
118,400
143,400
9,000
134,400
143,400
28
Question 2
a)
Universal Retailers
Income Statement
For the year ended 30 June 2006
Sales
Less: Cost of Sales
Opening stock
Add Purchases
Less: Closing Stocks
Cost Of Sales
Gross Profit
Less: expenses
Bad Debts expense
Office Expense
Office Salary
Rent
Utilities(3,400+200)
Depreciation
Advertising
Wages
Insurance(428 X 12 months)
Total Expenses
Net profit
205,000
22,000
119,000
(25,000)
116,000
89,000
1,245
3,975
28,000
18,000
3,600
1,000
3,469
10,500
5,136
74,925
14,075
29
b)
Universal Retailers
Non-current Assets
Fixtures & Fittings Net
Current Assets
Bank
Trade Debtors
Inventory
Prepaid Insurance
Total Assets
Current Liabilities
Trade Creditors
Utilities Payable
Owners equity
Opening Capital
Add:Net Profit
Closing Capital
93,000
6,750
21,054
25,000
856
53,660
146,660
12,000
200
12,200
120,385
14,075
134,460
Total liability and equity

146,660
c)
1) Income statement shows the performance of the company, can judge
the effectiveness of management strategy.
2) Statement of Financial Position reflect the financial position, liquidity,
solvency of the company.
30
Question 3
Amir & Daughters
Income Statement
For the year ended 31 December 2006
Sales
Less: Cost of Sales
129,000
39,000
Gross Profit
Less: Expenses
Rent ( 16,500+1,500)
Stationary
Telephone
Wages
Insurance Expense
Depreciation
90,000
Total Expenses
39,600
Net profit
Part c)
Amir & Daughters
18,000
700
500
15,000
2,400
3,000
50,400

As at 31 December 2006
Non current Assets
Motor Car
Less: Acc Depn(3,000+3,000)
Net Book value
Current Assets
Bank
Trade Debtors
Inventory
Prepaid Insurance (2,600-2,400)
Total assets
Current Liabilities
Trade Creditors
Rent payable
Owners equity
Opening Capital
Add Net Profit
Closing Capital
Total liability and equity
30,000
6,000
24,000
82,000
8,000
32,000
200
122,200
146,200
7,000
1,500
8,500
87,300
50,400
137,700
146,200
Part a & d
Opening capital
87,300
Part d
Adjustments are necessary due to the accrual accounting principle
which requires that revenues earned be matched with expenses
incurred in the same period.
31
Question 4
a)
Kiasu & Company
Income Statement
For the year ended 30 June
2008
Sales
Less: Cost of Sales
Cost Of Sales
Gross Profit
Less: Expenses
Salary
Rent
Utilities
Repairs
Depreciation
Insurance Expense
Interest Expense
Total Expenses
Net profit
$
420,000
149,000
271,000
37,000
22,000
5,600
3,000
22,000
2,400
1,500
93,500
177,500
b)
Kiasu & Company

As at 30 June 2008
Non-current Assets
Equipment
Less: Accumulated Depreciation
Net Book Value
Current Assets
Bank
Debtors
Inventory
Prepaid Insurance
Total Assets
Current Liabilities
Creditors
Loan Payable
Interest payable
Opening Capital
Add Net Profit
Closing Capital
220,000
44,000
176,000
10,000
58,000
32,000
2,400
102,400
278,400
15,000
30,000
1,500
46,500
54,400
177,500
231,900
278,400
32
Question 5
a)
Forest Trees
Income Statement
Sales
Less: Cost of Sales
Gross Profit
Less: Expenses
Rent
Wages
Utility(7000+300)
Advertising
Depreciation
Total Expenses
Net profit
b)
Forest Trees
Balance Sheet
As at 31 December 2008
Non-current assets
Equipment
Less: Acc Depn(76000+19000))
Net Book value
Current Assets
Bank
Trade Debtors
Stocks
Total Assets
Current Liabilities
Trade Creditors
Utility payable
Opening Capital
Add Net Profit
Closing Capital
Total Liabilities & Equity
$
1,420,740
1,014,380
406,360
33,000
85,000
7,300
125,200
19,000
269,500
136,860
$
190,000
95,000
95,000
43,150
230,720
127,920
401,790
496,790
120,190
300
120,490
239,440
136,860
376,300
496,790
33
Question 6
Accounting Equation
Assets = Liability Plus Equity
Or
Assets less Liability = Equity
Assets are valuable resources controlled by the business
Which yield economic benefits. Example, debtors of cash.
Liabilities are potential sacrifice of economic benefits that the firm
is presently obliged to make. Example, creditors.
Owners equity refers to the residual interest in the assets after
the claims the creditors have been met.
Link Between Income Statement and The
An increase in profits will lead to an increase in equity. To balance the
accounting equation, this will lead to either an increase in assets or a
reduction in liabilities.
34
Answer to Homework Question Lecture 7

Question 1
Bank : 50,000(1) 20,000(2) 1,500(3) +1,000(5) -1,200(6) 890(8) 2,000 (9)
Ending Total = 25,410
Motor Vehicle : 45,000(1)
Capital : 95,000(1)
Plant & Equipment: 60,000(2)
Long Term Bank Loan: 40,000(2) 490(8) = 39,510
Prepaid Rent : 1,500 (3)
Debtors: 6,000 (4)
Sales : 6,000 (4)
Unearned Revenue: 1,000(5)
Wages & Salary : 1,200(6)
Supplies: 1,300(7)
Creditors: 1,300(7)
Interest expense : 400 (8)
Drawings: 2,000(9)
35
Part 1
George Business
Unadjusted Trial Balance
As at end of transaction 9
Accounts
Bank
Motor Vehicle
Capital
Plant & Equipment
Long Term Bank Loan
Prepaid Rent
Debtors
Sales
Unearned Revenue
Wages & Salary
Supplies
Creditors
Interest expense
Drawings
Total
Part 2
Accounts
Bank
Motor Vehicle
Capital
Plant & Equipment
Long Term Bank Loan
Prepaid Rent
Debtors
Sales
Unearned Revenue
Wages & Salary
Supplies
Creditors
Interest expense
Drawings
Total
Rent Expense
Salary payable
Supplies Expense
Electricity & Telephone Expense
Electricity & Telephone Payable
Debit
25,410
45,000
Credit
95,000
60,000
39,510
1,500
6,000
6,000
1,000
1,200
1,300
1,300
400
2,000
142,810
Debit
25,410
45,000
142,810
Credit
Adjustment
95,000
60,000
39,510
1,500
6,000
-500
6,000
1,000
1,200
1,300
+1000
-1000
+800
-800
1,300
400
400
142,810
500
142,810
800
800
150
150
36
George Business
Income Statement
For the year ended 31 March 2010
$
Sales
Less: Operating Expenses
Wages & Salary
Rent Expense
Supplies Expense
Electricity & Telephone Expense
Total Operating Expense
Profit Before Interest Expense
Less: Interest Expense
Net Profit
$
7,000
2,000
500
800
150
3,450
3,550
400
3,150
George Business
Statement of financial position
As at 31 March 2010
$
Non-current Assets
Motor Vehicle
Plant & Equipment
Total non-current assets
Current Assets
Cash at Bank
Debtors
Prepaid Rent
Supplies On Hand
Total assets
Current Liabilities
Creditors
Salary payable
Electricity & Telephone Payable
Long Term Liabilities
Long Term Bank Loan
Equity
Opening Capital
Add:Net Profit
Less: Drawings
45,000
60,000
105,000
25,410
6,000
1,000
500
32,910
137,910
1,300
800
150
2,250
39,510
95,000
3,150
2,000
96,150
137,910
37
Question 2
Neon Lights Inc
Income Statement
As at 30/4/02
$000
Sales
Less: Cost Of Sales
Opening Stock
Add: Purchases
Less:Purchase Returns
$000
13,500.00
700.00
9,500.00
3.00
797.00
Cost Of Goods Sold
9,400.00
Gross Profit
Add: Gain On Disposal
Other Income
4,100.00
19.00
32.35
4,151.35
Less: Expenses
Depreciation Expense(106+127.9)
Interest Expense
Salary & Wages
Light & Power
Insurance
Administration & Distribution
Bad Debts
Total Expenses
Net profit for the year
233.90
280.00
1,715.00
210.00
60.00
390.00
150.00
3,038.90
1,112.45
38
Neon Lights Inc

As at 30/4/02
Non-Current Assets
Freehold Land
Building
Fixtures & Fittings
Total
Current Assets
Trade Debtors
Less:Prov For Doubtful Debts
Net Debtors
Stocks
Prepaid Insurance
$000
Cost
2,000.00
5,300.00
2,170.00
9,470.00
$000
Acc Depn
1,166.00
1,018.90
2,184.90
$000
Net Book Value
2,000.00
4,134.00
1,151.10
7,285.10
1,590.00
55.65
1,534.35
797.00
8.00
2,339.35
Total Assets
Current Liabilities
Bank Overdraft
Trade Creditors
Interest Payable
Wages payable
9,624.45
365.00
1,097.00
280.00
25.00
1,767.00
Non-current Liabilities
7% Loan
4,000.00
Equity
Capital
Retained Profit
(195+1,112.45-150)
Total Equity
2,700.00
1,157.45
3,857.45
9,624.45
39
Question 3
Tip Interior
Income Statement
$
Sales
Less: Cost Of Sales
Opening stocks
Add: Purchases
144,600
997,700
127,420
Cost of Goods Sales
1,014,880
Gross Profit
Less: Expenses
Rent & Rates(54440+3000)
Wages & salary
Electricity
Transport
Sundry
Audit fees
Bonus
Advertising
Bad Debts
Doubtful Debts
Depreciation(4000+3000+32000)
$
1,420,740
405,860
57,440
85,000
17,510
30,060
60,190
5,000
20,000
12,000
5,000
6,772
39,000
337,972
Profit Before Interest & tax

Less: Interest expense
Profit before tax
Less: Tax Expense
Net Profit for the year
67,888
2,400
65,488
40,000
25,488
40
Tip Interior
As at 31 March 2006
Non Current assets

Premises
Delivery Vans
Shop Fittings
Total
Current Assets
Bank
Debtors (230720 -5000)
Less: Provision For DD(3 % X 225720)
Stocks(127920-500)

Total Assets
Current Liabilities
Trade Creditors
Tax Payable
Unearned Fees
Audit fees Payable
Interest payable(40000X 12% X0.5)
Acc
Cost
Depn
$
$
200,000 4,000
160,000 96,000
30,000 15,000
390,000 115,000
43,150
225,720
6,772 218,948
127,420
389,518
664,518
120,190
40,000
2,000
5,000
2,400
169,590
Non-current liabilities
Long Term Loan
Total Liabilities
Shareholders Equity
Share Capital
Reserves:
Share Premium(40-20+160)
Retained profits(59440+25,488-10,000)
General Reserves
Total Shareholders equity
NBV
$
196,000
64,000
15,000
275,000
40,000
209,590
180,000
180,000
74,928
20,000
454,928
664,518
41
Tip Interior
Statement of Changes In Equity
Balance as at 1/4/05
Add/ (Less) :
Shares Issued
Cost of shares issued
Transfer to General Reserves
Net Profit for the year
Balance as at 31/03/06
Share
Capital
$
100,000
Share
Premium
$
40,000
80,000
160,000
(20,000)
180,000
180,000
General
Reserve
$
10,000
Retained
Profit
$
59,440
10,000
(10,000)
25,488
74,928
20,000
42
Question 4
Shakespeare Ltd
Income Statement
For the year ended 30 June 2006
Sales
All figures in thousands of pound sterling

18,900.00
Less: Cost Of Sales

Opening Stocks
Add: Purchases
Cost Of Sales
Gross Profit
Add: Other Income
Income From Investment
Total
Less: Operating Expenses
Distribution Cost
Bad Debts
Directors Remuneration
Heating & Lighting
Administration expenses
Marketing & Selling Expense
Rent
Wages & salaries
Loss On Disposal
Depreciation(756+175)
Doubtful Debts Expense
Audit Fees
1,206.00
11,160.00
-1,395.00
10,971.00
7,929.00
30.00
7,959.00
441.00
72.00
495.00
252.00
153.00
270.00
675.00
3,150.00
9.00
931.00
63.00
26.00
6,537.00
1,422.00

Profit Before Tax
75.60
1,346.40
Less: Tax Expense
540.00
Net Profit
806.40
43
Shakespeare Ltd
As at 30 June 2006
Non-Current Assets
Equipment
Vehicles
Total
Long Term Investments
Total Non current Assets
Current Assets
Bank
Trade Debtors
Less: Provision For Doubtful
Debts(72+63)
Net Debtors
Stocks
All figures in thousands of pound sterling

Cost
Acc Depn
NBV
3,780.00
2,124.00
1,656.00
700.00
530.00
170.00
4,480.00
2,654.00
1,826.00
252.00
2,078.00
63.00
2,700.00
-135.00
2,565.00
1,395.00

Total Assets
Current Liabilities
Trade Creditor
Audit fees Payable
Interest payable
Tax Payable
4,023.00
6,101.00
621.00
26.00
75.60
540.00
Non Current Liability

Long Term Loan @ 12%
Share capital
Share Capital
Reserves
Retained Profit(1188+806.40-36)
1,262.60
630.00
2,250.00
1,958.40
Total Shareholder's Equity
4,208.40
6,101.00
44
Part (b)
1) Straight Line depreciation is a depreciation method that allocates and
equal amount of depreciation expense to each period of benefit.
2) It assumes that equal amounts of benefit are received from the use
of the non-current assets over the useful life of the asset.
3) The alternative to straight line depreciation will be the reducing balance
method.
4) The choice of the method will depend on the pattern of benefit expected.
5) If more benefits are expected to be received when the assets is new,
Then the reducing balance method should be used.
6) On the other hand, for simplicity and if equal benefits expected, then straight
line should be used.
45
Answer to Homework questions lecture 8

Question 1
Estimated Retained profits For the year ending 31 December 2006
220,000 X 0.03
200,000
Net Profit
193,400
Less: Dividends Proposed

Preference shares
440000 X 2 X0.04
Ordinary Shares
1,000,000 X 0.05
Retained Profits at 31/12/06
6,600
35,200
50,000
108,200
Share capital & Reserves Section

as at 31 December 2006
Share capital
Ordinary shares
1,000,000X0.5
Reserves
Share Premium
0.4 X1,000,000
Retained Profits at 31/12/06
Total Shareholder's equity
Workings
Amount of Loan Stock
Amount needed
Less: Issue of shares
1 Milllion share @0.9
500,000
400,000
108,200
1,008,200
2,000,000
900,000
Preference shares
440000X 2
880,000
Balance
220,000
46
Question 2
a) Simplified Financial Position
Non current Assets

Current Assets
Total Assets
Current Liabilities
Non Current liability
Capital & Reserves
Ordinary shares
Share Premium
Retained Profits
Total Equity
b.
Annual Earnings
0.15 X 1300
Less: interest
Net Earnings
No. Of shares
EPS
Share
Issue
900
700
1,600
Loan Issue
900
700
1,600
300
300
300
1000
100
200
1300
1,600
800
0
200
1000
1,600
195
195
195
-24
171
1,000,000
800,000
0.20
0.21
Gearing ratio
0.00
20.46%
Comments:
Alternative 1 produces a lower EPS but no gearing risk and hence
is a low risk, low return alternative.
Alternative 2, produces a higher EPS because the return on assets
exceeds the borrowing rate, but the risk is higher due to the higher
47
Question 3
Pelham PLc
Shareholders Equity
As at 30 April 2006
Ordinary Shares of 1 each
[1m+ (1m/5)*1]+[1.2m/3]
Share Premium
[(1m/5)*1.5]-300k
Retained profits
[1.5m+500k+600k-100k]
1,600,000
2,500,000
4,100,000
48
Answer to Homework Question Lecture 9 & 10

Question 1
Birds Pte Ltd
Statement of cash flow
$000
$000
Cash Flow from operating activities

Profit before taxation
84
Add: Depreciation expense

Interest expense
Decrease stocks
Increase debtor
Increase creditor
64
6
10
-23
15
Cash generated from operations
156
Less; Interest paid

Taxes paid (28+21-39)
-6
-10
Net cash from operating activities

Cash flow from investing activities
Purchase of non-current assets
(600+64-514)
Net cash flow from investing activities
Cash flow from financing activities
Loan repaid
Share Issue
(320-260)
Dividends paid
140
-150
-150
-20
60
-100
Net cash flow from financing activities
-60
Net increase in cash & cash equivalents

Cash & cash equivalent at beginning of period
Cash & cash equivalent at end of period
-70
185
115
1 Advantage
1) Cash flow statement can highlight cash flow problems
that may not be apparent from analysing the income
statement or financial position.
49
Question 2
Lincoln Plc
$000
$000

240

Interest expense
Interest Income
Gain on disposal
Increase stocks
Decrease debtor
Increase prepayment
Increase creditor
60
8
-60
-30
-25
16
-40
115
284
Less; Interest paid

Taxes paid
-8
-100

Disposal of non-current assets
Purchase of investments
Interest received
Loan repaid
Share Issue
Dividends paid
176
-230
100
-50
60
-120
-20
100
-80
0
56
24
80
50
Question 3
Sloop PLc
$mil
$mil

Interest expense
Interest Income
Gain on disposal
Increase stocks
increase debtor
Increase prepayment
Decrease creditor
Less; Interest paid
Taxes paid
660
150
36
-30
-20
-242
-18
-60
-20
456
-34
-280

Disposal of non-current assets
Purchase of investments
Interest received
Loan repaid
Share Issue
Dividends paid
142
-324
160
-36
30
-170
-64
76
-160
-148

-176
-196
-372
51
(b)
The argument proposed is that cash flow statements are more reliable than
accruals-based financial statements.
Cash flow statements are more objective as there is no necessity to make
subjective adjustments to the accounts as compared with the profit and loss
account and the balance sheet. This makes the cash flow statement
comparatively more reliable in terms of accuracy of numbers.
However, it is necessary for information to be relevant as well as reliable. For
relevance to decision making, information has to have the quality of being
able to be used to project future information. Accruals based profit and other
information is more reliable in being able to provide a better indication of
future than cash flow information.
52
Answer to Homework questions Lecture 11

Question 1
a) Computation of Purchases
Opening Bal Creditor + Purchases less closing balance of creditors =
Payment
7,400 + P 8,900 = 103, 300 ( 101,500 + 1,800)
Therefore Purchases = 103,300 7,400 + 8,900 =104,800
Total Purchases = 104,800
Less : drawings = 600
Net Purchases = 104,200
b)
T lambert
Income Statement
Year ended 31 December 2011
$
Sales
Less; Cost of sales
Opening stocks
Purchases
Less Closing stocks
$
128,000
8,600
104,200
16,800
Cost of sales
(96,000)
Gross Profit
32,000
Less:
Labour (1200+ 6620)
Rent(5040+300-420)
Delivery
Electricity(1390+160-210)
Total expenses
Net Profit
7,820
4,920
3,000
1,340
(17,080)
14,920
53
T Lambert
As at 31/12/X1
$
Current Assets
Bank
Cash
Debtors
Stocks
Prepayments
Total Assets
1,650
330
4,300
16,800
420
23,500
Current Liabilities
Creditors
Accruals
8,900
160
9,060
Opening capital
Add :Net Profit
Less: Drawings*
Total Equity
7,850
14,920
8,330
14,440
23,500
*Cash Drawings = 7730

Goods taken
Total
= 600
8,330
54
Question 2
Opening stock
+ Purchases
- COS
= Closing Stock
5,900
31,760
(24,240)
13,420
W1.
Closing debtor
-Opening Debtor
+ Receipts from debtors
= Cr Sales
2,000
(1,550)
39,950
40,400
COS = 60% * Sales 40,400 =
24,240
W2.
Closing Bank balance
-Opening Bank balance
+ Cash paid
= Receipts from debtors
750
(500)
39,700
39,950
(0.8*39,700 cash payments)

W1
W2
55
Question 3
Ashton plc
Income Statement for the year ended 31 March 2005
Sales
Less: Cost of sales
Opening Stock
Purchases
Less: Closing Stock
Cost of Sales
Gross Profit
Income from investments
Less: Operating expenses
Depreciation
- Equipment (20%*1,260,000)
- Vehicles [25%*(240,000-120,000)]
Auditors' remuneration
Administration costs (84,000-9,000)
Heating and lighting (145000+2000)
Increase in prov for doubtful debts (45000-24000)
Distribution costs
Directors' remuneration
Marketing and selling costs
Rent
Wages and salaries
6,300,000
402,000
3,720,000
465,000
3,657,000
2,643,000
12,000
252,000
30,000
36,000
75,000
147,000
21,000
90,000
165,000
51,000
225,000
1,074,000
2,166,000
Net profit before interest and tax

Less: Loan interest (10%*210,000)
489,000
21,000
Net profit before tax

Less: Taxation expense
468,000
180,000
Net profit
288,000
56
Wodehouse Plc
Statement of Financial Position as at 31 March 2006
Non current Assets

Equipment
Vehicles
Cost
Accm
Dep'n
NBV
1,260,000
708,000
552,000
240,000
150,000
90,000
1,500,000
858,000
642,000
Long-term investments
84,000
Current assets
Bank balance
Trade debtors
21,000
900,000
less: provision for bad debts (5% x 900000)
45,000
Stock
855,000
465,000
Prepaid insurance
9,000
1,350,000
Total Assets
2,076,000
Current liabilities
Trade creditors (198,000+9000)
Audit fee payable
interest payable (0.1*210000)
Tax payable
207,000
36,000
21,000
180,000
444,000
Non current liabilities

10% long term loan
210,000
Share capital and reserves

Share capital: 750,000 shares at 1 each
Retained profits (396,000 + 288,000-12000)
750,000
672,000
1,422,000
2,076,000
57
Answer to Homework Question- Lecture 12

Question 1
(a)
RATIO
FORMULA
(i)
Return on Net
Assets
Operating profit before

interest
Net assets
(ii)
Gross profit
ratio
(iii)
Operating
profit ratio
(iv)
Asset turnover
Gross profit
Net sales
Operating Profit before
interest
Net sales
Net sales
Average assets
2000
1999
110/520
= 21.15%
135/510
= 26.47%
260/650
= 40%
285/580
= 49.14%
110/650
= 16.92%
135/580
= 23.28%
650/520
= 1.25
580/510
= 1.14
(b)
Points to consider and discuss.
Rate of return from assets employed has declined from 26.47% in 1999 to
21.15% in 2000. This is not a good sign.
Gross profit margin is declining. This is a not good sign.
Operating profit margin has declined from 23.28% in 1999 to 16.92% in

2000.
Asset turnover has increased from 1.14 to 1.25.
This information indicates that the decline in ROA has resulted from a decline
in the net profit ratio. The decline has been mitigated by improved utilisation
of assets employed to generate sales.
58
Question 2
Working capital refers to investment in stock, debtors, creditors and represents the
cash tied up in the business.
Working capital from financial statement standpoint may also refer
To sum of current assets less current liabilities.
Importance to manage working capital to ensure sufficient liquidity to
fund all required short -term obligations such as payment to creditors, workers.
If too much cash is tied up in the business, then firm may not be able to
Take advantage of other business opportunities.
Good working capital management calls for appropriate stock control, good credit
control over debtors and maintaining good relations with suppliers.
59
Question 3
Part A
Ratios
2005
2004
Profitability
Operating Profit Margin
(Operating Profit/Sales)
43813/206470X 100%
21220/210619 X 100%
Return On Capital Employed
(Operating Profit/Capital Employed)
43813/159783 X100%
21220/97070 X100%
21.2%
10.1%
27.8%
21.9%
Working Capital Ratios

Current Ratio
(Current Assets/Current Liabilities)
45763/15470
44610/16290
3.0
2.7
Quick Ratio
(Current Assets- Stocks)/ Current Liabilities
45763-14278/15470
44610-14550/16290
2.0
1.8
Financial Risk
Debt to Equity Ratio
Long Term Debt/ Shareholder's equity
30000/129783
23.1%
Nil
Interest Coverage Ratio

Operating Profit/Interest expense
43813/3000
14.6
Nil
60
Part b
Comments
Changes In Operations
1) The operating profit margin has improved significantly in 05 as compared to 04.
2) This is probably due to the switch to the high quality products as well as
better control over expenses in 2005.
3) The ROCE has also improved significantly in 2005, hence implying that the new
investment strategy is a success.
4) The success of the investment strategy is also supported by the fact that the
profit before tax has nearly doubled in 2005.
Working Capital
1) Both the current & Quick Ratio have improved in 2005, signalliing lower
solvency risk in 2005.
2) The cash balance has also increased significantly in 2005, highlighting enhanced
liquidity.
3) Directors should consider investing part of this cash or paying it out as dividends.
Financial Risk
1) The financial risk has increased in 2005 as 30 million of loans were raised.
2) This will increased equity risk to shareholders who will require a higher return.
3) This risk is mitigated by the higher growth potential in 2005 as Return on Equity
has improved and lower dividend pay-out.
Conclusion:
Changes have improved profitability and financial position of the company
in 2005.
In light of the higher risk to shareholders, efforts should be taken to enhance
shareholder value for example by share buy backs, etc.
61
Question 4
Major Limited
Statement Of Financial
Position
As at 30 April 2007
Non Current Assets
Current Assets
Cash in hand
Debtors
1/12 X220000
Stocks
0.5/12 X 209000
Total Assets
Current Liabilities
Trade Creditors
Long Term Debt
0.5 X 82000
Total Liabilities
Equity
Ordinary Share capital
Retained Profits
45,400+6600)
Total Equity
Workings
Sales
2 X 110,000
110,000
5,958
18,333
8,708
33,000
143,000
20,000
41,000
61,000
30,000
52,000
82,000
143,000
220000
COGS
0.95X220000
Gross Profit
5% X 220000
209000
Expenses
2% X 220000
Profit
4400
11000
6600
62
Question 5
EPS
DPS
Dividend yield
Dividend cover
PE ratio
640.7/2200
360/2200
0.1636/7.99
640.7/360
7.99/0.2912
Reagan
Averages
0.2912
0.1636
2.05%
1.78
27.44
3%
2
20
a
b
c
a. Reagan's dividend yield is lower due to its higher market price.

b. Reagan's dividend cover is lower due to its higher dividend payout.
c. Higher PE ratio indicates that the market considers that Reagan's future prospect are expected
to be better than the average for the sector.
Question 6
Cash operating cycle is the length of time that it takes to recover cash that is tied up in working capital.
It is equal to stock holding period + debtor payment period - creditor payment period
Example strategies to minimise the cycle:
- Reduce stock holding level through approach such as 'Just-in-time'
- tighter credit control such as close monitoring of outstanding balances, increased collection efforts
- better stock control eg. better purchasing decision, monitoring of aging stock
- reduce credit terms to customer
- negotiate for longer credit terms from suppliers
63
Answer To Homework Questions Lecture 13

Question 1
Consolidated Financial Statements are statements that incorporate
the assets, liabilities, equity of companies under common control.
Consolidated Financial statements are a required where one company owns
more than 50% of the issued common shares of the other company.
The Statement of Financial Position and the Income Statements of these companies
under common control are simply added together on a line to line basis.
There are also adjustments to remove inter-company transactions between
companies.
The major purpose of the consolidated financial statements is to reflect
the economic substance of the relationship, that is the fact the two
entities, even though are separate legal entities are actually subject to common
control.
64
Question 2
Two different types of external user of financial report present and
potential shareholders and lenders.
Shareholders use the financial reports to make investments decisions
regarding the shares of the company such as whether to hold, buy, or
sell the shares. Shareholders also use the report to assess the
stewardship of management to determine how well the managers have
performed in managing their funds.
Lenders use the report to determine the credit worthiness of the company.
They need to assess the management ability to meet repay loans and
service interest.
b) Relevance information refers to information that is useful for decision
making. It has predictive value, providing feedback about past prediction
of performance.
Reliable information refers to verifiable information which is free from
error and bias and which faithfully represents economic reality.
The two users above need information that is both relevant and reliable
as both characteristics impact on the quality of the financial reports.
Question 3
Tangible non-current Asset refer to asset that have physical substance.
Intangible assets refer to non current assets which do not have physical
substance but are still assets because they fit the definition of assets.
Tangibility is not a necessary criteria under the asset definition.
Examples of intangible assets include patents, trademark, purchased
goodwill.
The key issue to be dealt with in the recognition of such intangible assets
are that there must be an existence of cost or transactions or economic
benefits that can be measured reliably and that the potential economic
benefits are certain or probable. Otherwise, such items should not be
recognised as assets.
65
Answer to Homework question- Lecture 14

Question 1
Actual Overhead
Allocated
Reallocation:
Canteen
Maintenance
Actual Overhead
Filling
74,260
Sealing
38,115
Maintenance Canteen
25,050
24,375
14,265
18,900
107,785
7,800
7,290
54,015
1,950
(27,000)
0
(24,375)
0
(a) Predetermined Overhead absorption rates:
Budgeted Overheads
/Budgeted direct labour cost
Filing
110,040
Sealing
53,300
13,100
10,250
Overhead rate
8.40
Overhead absorbed
8.40 X 12,840
5.20 X 10,075
107,688
Actual Overhead
Under absorbed
107,785
97
5.20
53,920
54,015
1,625
(b) Product W2
Direct cost
Overhead:
Filling 2 X8.40
Sealing 4 X5.20
Profit 20%
Selling price
Profit for the year
1,500 X 12.32
24.00
16.80
20.80
61.60
12.32
73.91
18,480
66
Question 2
Allocated
Allocation of general Factory
Share of service department
Labour related cost (60%)
Machine related cost(40%)
Total
Unit of output
Overhead rate per unit
Prodn
Dept 1
380
92
Prodn
Dept 2
465
115
Service
Dept
265
23
76.8
57.6
606.40
120
5.05
96.0
57.6
733.60
120
6.11
(172.80)
(115.20)
General
Factory Total
230
1,340
(230)
1,340
(a) Calculation of total manufacturing cost per unit

Direct materials
Direct labour
Variable overheads
Fixed overhead: Department 1
Total Manufacturing cost
7.00
5.50
2.00
5.05
6.11
25.66
(b) Absorption costing profit statement

Sales 114,000 X 36
Cost of Sales 114,000 X 25.66
Add: Under-absorption of overheads
Department 1 (20,000+(4000X5.05)
Department 2 (4,000 units X6.11)
Total cost of Sales
Gross Profit
Less: Operating expense
Non manufacturing cost
Net Profit
4,104,000
2,925,240
40,200
24,440
2,989,880
1,114,120
875,000
239,120
Note that the under-recovery of fixed overheads consists of 20,000 arising from
actual overheads exceeding estimated overheads plus 4,000 times the fixed overhead
rate because actual volume was 4,000 units less than estimated volume.
67
QUESTION 3
a.
Total
Fabrication Finishing
340,000 120,000
140,000
82,000 24,000
32,000
Indirect labour
Coonsumables
Heating &
Lighting
24,000
8,000
Rent & Rates
36,000 12,000
Depreciation
60,000 30,000
Supervision
48,000 24,000
Power
40,000 18,000
Total
630,000 236,000
Canteen(number
of employees)
33,600
Maintenance(mtce
hours)
46,400
Total
630,000 316,000
Canteen
30,000
20,000
Maintenance
50,000
6,000
9,600
14,400
24,000
18,000
16,000
254,000
2,400
3,600
2,000
3,000
2,000
63,000
4,000
6,000
4,000
4,000
4,000
77,000
25,200
(63,000)
4,200
34,800
314,000
(81,200)
b.
Fabrication labour hours = 12,640
Rate = 316,000 /12,640 = 25 per labour hour
Finishing machine hours = 15,700
Rate = 314,000 /1,570 = 200 per machine hour
c.
Batch cost
Direct materials
Direct labour
Overheads
Fabrication
Finishing
Total
Cost per window 8,140/200 units
Mark up
Selling price
3,000
1,040
2,500
1,600
8,140
40.70
16.28
56.98
d.
Direct material cost percentage
This method is best used when the price of materials is constant and there is a direct
relationship between the materials and labour costs incurred to manufacture the
product. Consider the following example:
68
Materials
Labour
Job A
250
100
Job B
100
100
Budget
15,000
92,000
The overheads charges to a job will be distorted. Job A is charged with a greater
proportion of overheads than Job B even thought the labour costs were the same.
In the case of Oriel the production uses a range of materials and this method would be
inappropriate.
Direct wages cost percentage
This method is best used when the wages rates are the same throughout the company
and the same for each job.
In the case of Oriel the production involves differing hourly rates and this method
would be inappropriate.
Prime cost percentage rate
This method combines the faults of the direct materials cost percentage and the direct
labour cost percentage rates.
Labour hours method could have been used in the Finishing department. But on the
basis of the labour hours and machine hours for this department it is obviously
machine-intensive and therefore, machine hours should be used.
69
Answers to homework questions Lecture 15

Question 1
Cost Volume profit analysis refers to break-even analysis and
the computation of the level of output to achieve target profits.
It is also used to quantify the effects of changing cost and selling price
on the business and for decision
making.
Assumptions of cost volume profit
analysis
1) Cost and revenues pattern are known with certainty.
2) All cost can be classified as being either fixed or
variable.
3) Both cost and revenues are linear over the relevant
range, that is fixed cost, variable cost and selling price is
constant.
4) Volume is the only factor affecting
cost.
Question 2
Proposal 1
Current Contribution per unit=
Revised unit contribution =
Revised break-even point=
8
6
83,333
Workings
(20-7-4-1)
8-(10%*20)
(200,000+300,000)/6
Based on current sales of 50,000 units, sales have to increase by

(83,333-50,000)/50,000 =
67%
Proposal 2
Revised unit contribution =
Increased sales=20%*50,000 units=
Additional contribution =
Additional fixed cost =
Additional profit
7
10,000 units
70,000
50,000
20,000
Workings
8-1
Proposal 2 will contributes additional profit of 20,000 which will reduce current loss to 80,000.
70
Hence, proposal 2 is better provided the additional production capacity can

be achieved.
Question 3
(a)Variable costs per unit= 300000/1m
0.3
Contribution per unit= 0.5-0.3 =
0.2
BEP in units= 100,000/0.2 = 500,000 Units

(b) Margin of safety in units= 1 mil -500,000 units = 500, 000 units
(c) Additional units = 0.6 X 1 mil = 600,000 units
Revised Variable costs per unit = 1.1 X0.3 = 0.33
Revised Contribution per unit =0.5 -0.33 =0.17
Required profit from new investment = 10,000
Total required profit= 100000+10000 =110,000
Total fixed cost = 100,000+50,000 = 150,000
Total contribution required= Fixed cost + profit = 260,000
Total required units to sell=(150000+110000)/0.17
= 1,529,412 units
Total capacity with extension= 1.6*1m= 1,600,000 units
The proposed extension provides enough capacity to maintain current profit
& earn the additional 10,000.
71
Question 4
a) Break even Point
3400/300-110-32-8
22,667
b) Break even Point

3400/280-110-32-8
26,154
c) CM Per Unit
280-110-32-8
X Units
Total CM
Less: Fixed Cost
Profit
d) Break even Point
7480/280-156
130
30,000
3,900,000
3,400,000
500,000
60,323
Revised Profit
d) CM Per Unit
280-156
X Units
Total CM
Less: Fixed Cost
Profit
124
60,000
7,440,000
7,480,000
-40,000
72
Question 5
(a) Break even units (BEP) = Fixed costs / Contribution per unit
Fixed costs
Direct labour
question)
Machine lease costs
Other fixed costs
Total
30,000 (usually variable but fixed in this

25,000
45,000
100,000
Variable cost = Materials 60,000/10,000 = 6

Thus contribution = 18 6 = 12
BEP = 100,000/12 = 8,333 units
Margin of safety (MOS) = Expected units BEP = 10,000 8,333 = 1,667
units
(b) BEP if new machine is leased
Fixed costs
Direct labour
Machine lease costs
Other fixed costs
Total
30,000
55,000
45,000
130,000
Variable cost = Materials 3

Thus contribution = 18 3 = 15
BEP = 130,000/15 = 8,667units
Margin of safety (MOS) = Expected units BEP = 10,000 8,667 = 1,333
units
The break-even point is higher (8,661 units) and margin of safety is lower
(1,333 units). At 10,000 units the current and proposed machines give the
same total cost and profit figures. Thus, there is no compelling financial
support for the leasing of the new machine.
73
Answer to homework questions lecture 16

Question 1
Incremental costs are those which will change with respect to the
decision being made. These will be relevant to the decision and
included in any computations of outcomes. Costs which will not
change whatever decision is made are not incremental and not
relevant.
(b)Sunk costs are costs which have been incurred prior to the decision
being made. They will not change whatever decision is made. They
are therefore not relevant and will not be included in computations of
outcomes
(c)Opportunity costs are defined as the cost of the next best opportunity
foregone. These costs may be incurred if certain decisions are made.
They may be relevant and included in computations of appropriate
outcomes.
Question 2
Hours to satisfy max
demand
(40000 X 1)+(30000 X 1.5)+(50000 X
2)
Available hours
Short
Selling Price
Variable cost
Contribution Margin
Hours per unit
185000
140,000
45,000
A
2
0
8
1
2
1
C
30
20
40
30
10
1.5
10
2
CM per hour
1
2
6.67
Ranking
74
Optimal
Mix
Products
A
B
C
Satisfy
Deman
d
40000
30000
27500
Hrs per
unit
1
1.5
2
Total
Hours
40000
45000
55000
Total
140000
CM Per
unit
12
10
10
Total
CM
480000
300000
275000
Profit
Products
A
B
C
Deman
40000
30000
27500
Total
Less: Fixed Cost
Profit
105500
0
500000
55500
00
Question 3
Contribution per unit
=
XZ usage per unit
Contribution per kg of XZ
Ranking
Type
C
A
B
Total
A
30-VC 21
9
B
45- VC 34
11
2
4.50
2
3
3.67
3
No. of units
5,000
2,000
333
No. of kg of XZ
5,000
4,000
999
C
20- VC 15
5
1
5.00
1
Contribution
per kg
5.00
4.50
3.67
Total
contribution
25,000.00
18,000.00
3,663.00
Fixed cost
Net profit
46,663
40000
6,663
9,999
75
Question 4
Cost of making 360,000 cartons
Direct materials
Electricity
Variable overhead
Direct labour
Total for 360,000 cartons
84,000
4,500
3,000
18,000
109,500
Cost of buying-in the cartons

(360000/1000 X325 +9000)
126,000
Differential cost
16,500
Conclusion:
Cheaper to make the cartons.
Assumptions
- Depreciation is a fixed cost of production
- Fixed production overheads remain unchanged regardless of the
decision made
-Direct Labour is a variable cost
76
Question 5
Accept
Reject
Net cash Flow
1,000
(1,000)
1,000
4,000
400
0
0
4,000
400
4,400
Inflow
Scrap Value of material
Net cash Outflow
Outflow
Material
Variable Overheads
Net cash Outflow
Net cash Outflow
5,400
Therefore Minimum Price = $5,400

Reasons & assumptions
a.
The original historical cost of the material in stock is a sunk cost and not relevant.
The relevant is the opportunity cost of the saving foregone on on the other materials
which now have to be purchased for $4,000. The materials could have been used
elsewhere.
a.
The workers would be paid even If the contract is not undertaken. There is thus no
opportunity cost as the department is already working below capacity.
a.
The variable overhead is assumed to be an incremental cost. They are included

in the minimum price, as it is assumed they are specifically incurred in conversion
work.
a.
Depreciation is not a cash flow and is therefore not relevant. Depreciation Apportions
the original cost of the machine, a cost which was sunk eight ago. There is no
indication of the current resale value of the machine and so it is assumed that
there is no intention of selling it. It is also assumed that there is no opportunity cost
involved in its use for this contract, as it would not be needed elsewhere.
a.
The foreman is already being paid. Therefore his salary is not an Incremental cost.
It is assumed that there is no opportunity cost associated with the use of his time
for this contract.
a.
It is assumed that general fixed overhead will not increase a result of this contract,
therefore absorbed overhead is not relevant.
a.
Scrap revenue foregone will be an opportunity cost, if the product is Converted rather
than sold as scrap.
77
Question 6
Calculation of BE price
Components Y,Z
(75-22)
Component W
Direct Labour
1.5 X 0.75X 24
1.5 X0.25 X12
Per
Copier
53
34
27
4.5
Total Relevant Cost

X 100 Copiers
118.5
100
Total
Add: Travelling time
10 hrs X 24
Extra Machine
11850
Total Relevant Cost
240
800
12890
Explanation of the figures

used
Component X is a sunk cost which has already been paid for, is
obsolete for future purposes and has no resale value.
Component W is an additional cost of this special
order.
The standard cost would have charged for 50 hours but only 10
will actually be incurred. The cost per hour is assumed to be
unchanged.
Labour costs need to reflect the lower number of hours and the
use of trainees
The overheads are fixed and so not relevant costs.
The opportunity cost of using the special machine is the loss of
the resale value.
78
(b)Factors to be considered in setting a

price.
customer. This price gives a contribution of 2,110 which
represents a 16% margin of safety on the estimated costs.
This reduces the financial risk of accepting the order.
The cost estimates on a one-off special order do contain an
element of risk.
With a change in manufacturer would it be a better strategy to
cease
Will there be enough staff for the job and the introduction of new
copiers? Is it sensible to have trainees working on old types of
copier?
If this is a large customer would we lose goodwill if we refused
The upgrade? Could this damage future relationships and other
sales possibilities?
79
Answers to Homework Questions Lecture 17

Question 1
Eden Limited
(a) Profit Statements
(i) Marginal costing
Sales revenue
Opening stock
Production costs:variable
Closing stock
Selling and distribution costs
Variable
Total marginal cost
Contribution
Fixed costs
Production
Selling and distribution
Administration
Profit
JanMarch(Q1)
AprilJune(Q2)
000
2,700
1,155
-165
990
000
4,050
1,650
1,650
-330
1,485
90
1,080
1,620
135
1,620
2,430
-100
-20
-30
-100
-20
-30
1,470
2,280
(ii) Absorption costing
JanMarch(Q1)
AprilJune(Q2)
000
000
Sales
2,700.00
4,050.00
Opening stock
177.50
Total production costs
1,242.50
1,775.00
Closings stock(17.75perunit)
-177.50
-355.00
1,065.00
1,597.50
Under-absorption of overhead
12.50
Over-absorption of overhead
-25.00
1,077.50
1,572.50
Total selling and distribution costs
110.00
155.00
Fixed administration costs
30.00
30.00
Total costs
1,217.50
1,757.50
Profit
1,482.50
2,292.50
(b)The difference in profits of 12,500 for the first quarter is due to the
inclusion in absorption cost of fixed overhead of 1.25 per unit in the
10,000 units in stock at the end of the quarter. These costs have been
carried forward as part of closing stock and not expensed. Under marginal
costing all of the fixed production costs are seen as a periodic cost and as
80
an expense of the first quarter.
Question 2
The following factors should be considered when deciding whether to
use full (Normal) costing or marginal costing:
1)Full costing involves a greater degree of subjectivity than marginal
costing, and is thus more open to misstatement or manipulation
2)By taking account of all costs involved in production, prices based on
a calculation of full cost should enable the business to earn a profit
3)If prices are steady, marginal costing gives an approximate
replacement cost, tying in with the economists concept of short-run
marginal cost. Many would argue that marginal costing is, therefore,
more useful for decision-making purposes in the short term
4)Stock valuations and, therefore, also the financial position value of
net assets are lower with marginal costing than with full costing
5)Because stock valuations also affect reported gross profit, when
stock levels change from year to year, gross profit reported under
marginal costing will be different to that reported under full costing
6)For financial reporting purposes in the UK, companies are required
to use full costing.
81
Question 3
a.
2007
64
(40)
24
(4)
000
2008
64
(40)
24
4
2009
80
(50)
30
(8)
20
20
28
20
22
20
2007
64
8
56
60
(4)
000
2008
64
8
56
60
(4)
2009
80
10
70
60
10
2007
0
000
2008
8
2009
2
-4
-16
-8
+4
+16
(4)
(4)
10
Sales
Cost of Sales
(under) over
absorption
Fixed selling and
admin
Profit
b. Contribution = 70 per unit

Sales
Variable cost
Contribution
Fixed cost
Profit(loss)
c.
Absorption profit
Less: Fixed
production
overhead in
closing stock
Add: Fixed
production
overhead in
opening stock
Marginal costing
profit/loss
Fixed overhead absorption rate per unit = 40,000/1,000 units = 40 per unit.
82
Question 4
Allocated
Allocation of
general factory
Share of
service
department
Labour related
cost(60%)
Machine
related cost
(40%)
Total
Unit of output
Overhead rate
per unit
000
Production Production Service
Depart 1
Dept 2
Dept
380.0
465.0
265
General Total
Factory
230
1,340
92.0(40%)
115.0(50%)
(230)
76.8
96.0(10/18) (172.8)
57.6
57.6
606.4
120
5.05
733.6
120
6.11
23(10%)
(115.2)
0
(a) Calculation of total manufacturing cost per unit
Direct materials
7.00
Direct Labour
5.50
Variable Overhead
2.00
5.05
Department 2
6.11
Manufacturing cost
25.66
(b) Absorption costing profit Statement
Sales:114,000 units x 36
Cost of sales 114,000 units x 25.66
2,925,240
Add: Under-absorbed of overhead:
Department 1(20,000 + (4,000 x 5.05)
40,200
Department 2 ( 4,000 units x 6.11)
24,440
Total cost of sales
Gross Profit
Less: expenses
Net Profit
4,104,000
(2,989,880)
1,114,120
(875,000)
239,120_
Note that the under-recovery of fixed overheads consists of 20,000 arising

from actual overheads exceeding estimated overheads plus 4,000 times the
fixed overhead rate because actual volume was 4,000 units less than estimated
83
volume.
(c)
Marginal costing profit statement

Sales:114,000 units x 36
Variable cost of sales 114,000 units x 14.50
Contribution
Less: Fixed Cost
Fixed Manufacturing cost(1,340+20)
Net Profit
4,104,000
1,653,000
2,451,000
1,360,000
(875,000)
216,000_
84
Answers to homework Questions Lecture 18

Question 1
Cash budget for May, June and July 1999
Bank-start
May
June
July
5,000
28,225
(13,325)
223,250
205,000
241,250
RECEIPTS
Debtors (see Debtors schedule below)
Machine sale
TOTAL
500
228,250
233,725
227,925
125,400
136,800
135,600
PAYMENTS
Creditors (see Creditors schedule
below)
Council rates
Salaries
5,200
58,500
Loan Interest
Office expenses
Drawings
75,000
63,000
12,400
14,625
18,750
15,750
1,500
1,500
1,500
Machine-deposit
1,300
Machine-instalment
1,300
1,300
200,025
247,050
222,350
28,225
(13,325)
5575
TOTAL
Bank-end
85
Schedule of collections of sales revenue from Debtors

Total Sales May
March
June
July
200,000
Cash (15%)
Credit (80% & 5%)
April
30,000
160,000
10,000
230,000
Cash (15%)
34,500
Credit (80% & 5%)

May
184,000
11,500
195,000
Cash (15%)
29,250
Credit (80% & 5%)

June
156,000
9,750
250,000
Cash (15%)
37,500
Credit (80% & 5%)

July
200,000
210,000
Cash (15%)
31,500
Credit (80% & 5%)

TOTAL
223,250
205,000
241,250
86
Schedule of payment of inventory purchases

Total
May
June
July
Purchases
April (60% of sales)
cash (60%)
138,000
82,800
credit (40%)
May (60% of sales)
55,200
117,000
cash (60%)
70,200
credit (40%)
June (60% of sales)
46,800
150,000
cash (60%)
90,000
credit (40%)
July (60% of sales)
60,000
126,000
cash (60%)
75,600
credit (40%)
TOTAL
125,400
136,800
135,600
87
Question 2
Prepare for the months of October, November and December 1999:
(a)
A schedule of collections from debtors

SALES
August
September
October
November
December
(b)
October November Decembe

r
12,800
44,000
17,600
140,000
40,000
16,000
126,000
36,000
113,400
196,800
183,600 165,400
A schedule of payments to creditors.

September
October
November
December
(c)
160,000
220,000
200,000
180,000
162,000
August Septembe
r
112,000
32,000
154,000
PURCHASES
132,000
120,000
108,000
97,200
October November December

105,600
24,000
96,000
21,600
86,400
19,440
129,600
117,600
105,840
A cash budget
Cash at start
Sales Revenues
Courier Revenues
TOTAL CASH
October November December

(13,950)
(57,250) (427,700)
196,800
183,600
165,400
20,000
21,000
182,850
146,350 (241,300)
Purchases
Shop rent
Staff wages
Tax
Loan
Drawings
Insurance
Courier service start
Courier service on-going
TOTAL EXPENSES
129,600
66,000
40,000
117,600
105,840
32,400
4,500
36,000
110,950
160,000
4,500
240,100
100,000
45,000
574,050
4,500
22,000
100,000
45,000
309,740
Cash at End
(57,250)
(427,700)
(551,040)
88
(d)
In the absence of evidence to the contrary, it is assumed that a

business will continue to operate indefinitely into the future. Thus its
assets generally are assumed that they are not held for resale, nor
valued accordingly, but valued on the historical cost principle. If data
suggests that continued existence will be a problem, then the
accounting record has to indicate this fact. This means that financial
reports then are prepared based on expected sales or market values
of assets. Solvency refers to the capacity of a business to met it s
debts as they become due. Liquidity refers to the speed with which a
businesss assets can be turned into cash, without an appreciable
loss of value. The cash budget shows that the firm does not have
enough cash to satisfy its obligations and planned purchases for
December. As a result, it will not be able to conduct its normal
operations and may be forced into liquidation.
89
Question 3
Cash Budget for the first 3 months of the 2006/2007 financial year
July 2006
Aug 2006
Sept 2006
Opening cash balance
100,000
230,380
288,580
Cash receipts
Receipts from sales (W1)
510,000
432,000
518,400
216,000
160,620
0
0
3,000
0
0
0
379,620
252,000
118,800
0
0
3,000
0
0
0
373,800
360,000
158,400
40,000
15,000
3,000
60,000
280,000
8,400
924,800
Net cash inflow / (outflow)
130,380
58,200
-406,400
Closing cash balance
230,380
288,580
-117,820
Cash payments
Purchases (W2)
Fixed and variable expenses
Cash dividends
Advertising
Equipment replacements
Tax
Repayment of bank loan
Interest expense (12%*100k*3/12)
May 2006
(W1)
Sales
Receipts:
60% of current month
30% of previous month
9% of the month before previous
Total
(W2)
Cost of sales
+ Closing stock
- Opening stock
= Purchases
600,000
July 2006
216,000
252,000
216,000
252,000
June
2006
800,000
Aug
2006
252,000
360,000
252,000
360,000
July
2006
Aug
2006
Sept
2006
360,000
420,000
600,000
216,000
240,000
54,000
510,000
252,000
108,000
72,000
432,000
360000
126000
32400
518,400
Sept
2006
360,000
324,000
360,000
324,000
Oct
2006
324,000
(0.6*540k)
90

Question 1
Price Variance
(0.4 - 0.42)X 7,150
Usage Variance
(6,960 - 7150)X 0.4
Total Material Variance
143 (U) (b)
76 (U) (b)
219 (U) (a)
91
Question 2
Formula
Price Variance = (Budgeted Price - Actual Price) X actual Quantity Purchased/Used
Efficiency variance = (Budgeted Usage - Actual usage) X Budgeted price
Computation
Price variance
(5- 5.2) X 1,100
-220.00
Adverse
Efficiency variance
(5 X 250 -1,100)X 5
750
Favourable
Total variance
530
Favourable
Possible Reasons:
1) Price variance- more expensive materials used causing lower
spoilage and hence favourable efficiency variance.
2) Efficiency variance - More experienced workers who are
able to reduce spoilage.
Question 3
Benefits of budgeting
1) Forces planning and improves co-ordination.
2) Improves communication between departments and subordinates.
3) Improves control because highlights problem areas so that corrective
action can be taken.
4) Enhances motivation and employees are clearly directed to targets and
given
appropriate feedback.
Limitations:
Dyfunctional behaviour may result if :
1) Budgets may not be taken seriously if they are deemed unrealistic.
2) Responsibility not assign fairly.
3) No timely feedback given to staff.
92
Question 4
A limiting factor is a factor or constraint that
prevents indefinite expansion
or unlimited profits.
Examples:
- labour, material, equipment and factory space may be in short supply.
- firms cannot sell unlimited quantities of output without reducing price
Master budgets are the budgeted profit and loss account, balance sheet
and the cash budget.
Purposes of budgeting:
- Allow regular examination of organisations goals & basic policies
- strengthen cohesiveness of management
- Forces management to plan ahead
- Optimises utilization of resources
Flexible budgeting is the adjustment of original budgets to reflect
fluctuations in activity level.
- Provide a yardstick with which the performance can be compared and
assessed against
- Allow superior to control and monitor the performance of subordinates
through the computation of variances such as material, labour
and overhead variances.
93
Question 5
Operating statement - April 2007
Budgeted profit (500x36)
Sales variances:
Volume
Price
Fav
Unfav
(i)
(ii)
1,440
-
3,240
Price
Efficiency
(iii)
(iv)
1,100
-
400
Labour:
Price
Efficiency
(v)
(vi)
400
160
Variable overhead:
Price
Efficiency
(vii)
(viii)
400
-
100
Fixed overhead:
Spending
Volume
(ix)
(x)
960
2,460
2,000
3,060
Cost variances
Materials:
Actual profit
18,000
1,800
16,200
600
15,600
94
(i)
(540-500)*36
(ii)
540*(126-(64800/540))
Flexible
budget
@540
units
Materials
Labour
Actual
20,900
9,200
Var OH
Fixed OH
5,100
14,000
(iii)
(v)
Price
var
(1,100)
400
AQ*SP
22,000
8,800
(vii)
(ix)
(400)
2,000
5,500
12,000
(iv)
(vi)
Eff
var
400
160
SQ*SP
21,600
8,640
(viii)
(x)
100
(960)
5,400
12,960
(b)
95
Answers to Homework Questions Lecture 20 & 21

Question 1
a)
Depreciation
(100000-20000)/5 year = 16,000
Payback Period
Project P
Year
Cash Flow
Cumulative
Cash Flow
(100,000)
(50,000)
(10,000)
+20,000
0
(100,000)
1
50,000
2
40,000
3
30,000
4
20,000
Payback period = 2 1/3 = 2.33 years
Project Q
Year
Cash Flow
0
(100,000)
1
20,000
2
20,000
3
28,000
4
32,000
Payback period 4 years
Cumulative
Cash Flow
(100,000)
(80,000)
(60,000)
(32,000)
0
b)
Disadvantages :
-Ignores Time Value of Money.
Ignores Cash Flows after Payback Therefore Bias Against Long Term
Projects
Question 2
Contribution per year
Fixed cost
Yearly subsidy
Annual net profit
(520-400)*220
Year 0
200,000
Closing NBV
Ave NBV
AROR
=
26,400
-44,000
40,000
22,400
Year 1
Year 2
160,000
180,000
120,000
140,000
22,400
180,000
12.4%
22,400
140,000
16.0%
96
Question 3
000
Sales
Equipment
Stock`
W Capital
Overheads
Materials
Variable
Cost
Cash Flow
D Factor
Present
Value
2009
Start
2009
2010
2011
2012
2013
2014
800
800
800
400
(16)
(480)
(16)
(480)
(19.2)
(480)
(19.2)
(384)
640
80
60
40
(19.2)
(240)
(580)
1
(80)
576)
0.893
(80)
224
0.797
(80)
220.8
0.712
(64)
332.8
0.636
(40)
520.8
0.567
400
0.507
(580)
(514.4)
178.5
157.2
211.7
295.3
202.8
(480)
(60)
(40)
NPV = (48,900)
A negative NPV project should be rejected.
97
Question 4
Accounting Rate of Return is the ratio of the average annual profit to the
investment amount for a project.
Advantages:
1) Relatively simple to use as data readily available.
Disadvantages:
1) Does not account for time value of money.
2) Uses subjective accounting profit instead of objective cash flows.
3) Ignores the absolute size of the investment outlay.
4) It is not an absolute measure, difficult to say if ARR of 30% is good or bad.
Question 5
Project A
Cash Flow
Cumulative
Cash
Flow
Year
0
1
2
3
4
5
Payback Period
-75,000
30,000
20,000
15,000
10,000
10,000
-75,000
-45,000
-25,000
-10,000
0
10,000
4 years
Payback Period
140000/45000
3.11
Years
iii) Net Present Value

Project A
Year
0
1
2
3
4
5
Cash Flows
-75,000
30,000
20,000
15,000
10,000
10,000
PVIF @6%
1.000
0.943
0.890
0.840
0.792
0.747
Total
Present
Value
-75,000
28,290
17,800
12,600
7,920
7,470
-920
98
Project B
Present Value of inflows
45000 X PVIFA 6% 5
years
189,540.00
Less: Initial Investment
140,000.00
Net Present value
49,540.00
Project A
Cash Flow
Cumulative
Cash
Flow
Year
0
1
2
3
4
5
Payback Period
-75,000
30,000
20,000
15,000
10,000
10,000
-75,000
-45,000
-25,000
-10,000
0
10,000
4 years
Payback Period
140000/45000
3.11
Years
iii) Net Present Value

Project A
Year
0
1
2
3
4
5
Cash Flows
-75,000
30,000
20,000
15,000
10,000
10,000
PVIF @6%
1.000
0.943
0.890
0.840
0.792
0.747
Total
Present
Value
-75,000
28,290
17,800
12,600
7,920
7,470
-920
99
Project B
Present Value of inflows
45000 X PVIFA 6% 5
years
189,540.00
Less: Initial Investment
140,000.00
Net Present value
49,540.00
b. Notes
Payback Method
1) Refers to the number of years it takes to recover initial investment. The shorter
the payback, the better.
2) Disadvantage is that it does not account for the time value of money and
ignores cash flows after payback period.
Net Present Value
1) Refers to the absolute increase in shareholder's wealth and is the most conceptually
sound technique.
2) Accounts for the time value of money.
IRR
1) Refers to the minimum return for the project to be acceptable.
2) Gives the same accept/reject decision as the NPV for individual project.
3) Accounts for the time value of money.
4) Conceptually, IRR is problematic as there potential for multiple IRRs.
Recommendation:
Company should use the NPV method as is the most conceptually
sound technique.
The Payback could be used as an initial screening device.
Question 6
The payback period of investment appraisal focus on the payback
period.
The payback period refers to the number of years it takes to recover
the initial investment. Objective is to select the project with the shortest
payback period.
For example if a project requires an initial investment of $100,000
and produces cash inflows of $20,000 per year for the next 8 years,
its payback period is 5 years.($100,000/$20,000)
100
Advantages of payback
1) Simple to use
2) Uses objective cash flow instead of subjective accounting profit.
Disadvantages:
1) Ignores the time value of money.
2) Ignores the cash flow after the payback period.
QUESTION 7
a) NPV
Description
Initial Investment
Building Cost
Apartment sales
300000 X 6
300000X3
Net Cash Flow
X PVF @12%
Present Value
NPV
YEARS
0
-900,000
-1,000,000
1,800,000
-600,000
-900,000
1
800,000
0.893
900,000
300,000
0.797
-900,000
714,400
239,100
53,500
b) To get the % increase in Auction

price, simply use the following
formula
= NPV / Auction Price
I) Auction Price
= 53500/953,000 = 5.61%
increase
Therefore auction price
= 1.0561 X 953,000 = 1,006,500
953,000
ii) % reduction in sales price

= NPV/ Present value of sales price
Present value of sales Price =
(1,800,000X
.893)+(900000X0.797)
=2324700
% reduction = 53500/2324700
= 2.3% X300,0000 =6,900
sales price can fall by 2.3%
Hence each unit can be reduced by 6,900 for a price of
300,000 - 6,900= 293,100
101
iii) Cost of capital with zero NPV = IRR

Discount rate of 12% = + 53,500
Try discount rate of 17%
a) NPV
Description
Initial Investment
Building Cost
Apartment sales
300000 X 6
300000X3
Net Cash Flow
X PVF @12%
Present Value
YEARS
0
-900,000
-1,000,000
1,800,000
-600,000
-900,000
1
800,000
0.855
900,000
300,000
0.731
-900,000
684,000
219,300
NPV
3,300
5% Reduction = 50200 reduction in NPV

for further 3,300 reduction, increase discount rate by 3,300/50200X5%
0.32
Hence rate = 17% =0.32% = 17.32%
c) Risk of the project is of the project eventually becoming
a negative NPV project when it was first thought to be a
positive NPV project.
Hence the major risk factor is the fall in the price of the
house as it will only take a 2.3% (small) decrease to cause
NPV to be negative.
Because the auction price is paid at the beginning, it can be
factored in to the company's bid.
THE END
102

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PRINCIPLES OF ACCOUNTING

Answers to Homework questions - TOTAL 102 PAGES

Answer to Homework Questions Lecture 2

Collected amount due from a customer (increase cash,

Paid amount due a creditor (decrease cash, decrease accounts

Owner withdrew cash (decrease cash, decrease owner's

Borrowed money from a bank (increase cash, increase notes

$400,000 Assets - $160,000 Liabilities

a) Increase assets (Office

Sunshine Delivery Service

Sunshine Delivery Service

The business receives the revenues it is entitled to.

All transactions are properly recorded in the appropriate period.

All expenditure properly authorised

All assets properly recorded and safeguarded.

The accounting records provide a reliable basis for the preparation of

Error and fraud are detected and dealt with promptly.

Answer to Homework Questions Lecture 3

Frank- Second Hand Car Dealer

Opening Capital = 12500

Closing capital = 17000

Corrected bank balance

Balance per bank statement

Answer To Homework Questions Lecture 4

b) Balance at 30 June 2013

Non- current assets

New Polishing Machine

2012 Depreciation 30%

3) Sale of polishing machine 1 January 2013

Loss on sale of equipment

Extracts from the Statement of Financial Position as at 21/12/13

b) The following 4 points are relevant to the question:

IV. The choice of the method for depreciation depends on:

Loss on disposal of motor

(b) Extracts of financial

Fixtures and fittings

Fixtures and fittings

<----------@30 Sept 2004----------->

<----------@30 Sept 2005----------->

Answers to Homework Question Lecture 5

Profit after customer costs

Barrels: 1,000 Units X $4(Lower NRV*) = $ 4,000

Stock destroyed by fire: Lower NRV

Answers to Homework Question Lecture 6

Less Cost of Sales

Less Closing Inventory

Statement of Financial Position

Total liability and equity

Statement of Financial Position

Statement of Financial Position

Total Liability & Equity

Total Liabilities & Equity

Answer to Homework Question Lecture 7

Cost Of Goods Sold

Neon Lights Inc

Cost of Goods Sales

Total Operating Expense

Profit Before Interest & tax

Non Current assets

Total Current Assets

All figures in thousands of pound sterling

Less: Cost Of Sales

Total Operating Expense