This paper is not to be removed from the Examination Halls

UNIVERSITY OF LONDON

279 0025 ZA
996 D025 ZA

BSc degrees and Diplomas for Graduates in Economics, Management, Finance and
the Social Sciences, the Diploma in Economics and Access Route for Students in the
External Programme

Principles of Accounting

Wednesday, 5 May 2010 : 10.00am to 1.15pm

Candidates should answer FOUR of the following SEVEN questions: QUESTION 1 of

Section A, QUESTION 2 of Section B, ONE question from Section C and ONE further
question from either Section B or C. All questions carry equal marks.
Workings should be submitted for all questions requiring calculations. Any necessary
assumptions introduced in answering a question are to be stated.
Extracts from compound interest tables are given after the final question on this paper.
8-column accounting paper is provided at the end of this question paper. If used, it must be
detached and fastened securely inside the answer book.
A calculator may be used when answering questions on this paper and it must comply in all
respects with the specification given with your Admission Notice. The make and type of
machine must be clearly stated on the front cover of the answer book.

University of London 2010

UL10/0013
D01

PLEASE TURN OVER

Page 1 of 13

SECTION A
Answer question 1 from this section.

1.

(a)

Accounting standards are prepared by regulators in order to assist both preparers and users of
financial statements.
REQUIRED: Explain the advantages and disadvantages of compulsory accounting
standards.
(6 marks)

(b)

Calando plc operates a perpetual inventory system. The following transactions relate to one
line of goods for resale during the period from 1st January to 31st March 2010.

Opening stock
1st January
Purchases
10th January
25th January
15th March
Sales
5th February
31st March

Units

Price per unit

1,000

5.00

3,750
2,500
1,500

6.30
6.50
13.00

4,500
2,600

20.00
21.00

REQUIRED:
i.

Calculate the gross profit for the three months to 31st March 2010 using the first-in,
first-out (FIFO) method.

ii.

Calculate the gross profit for the three months to 31st March 2010 using the last-in, firstout (LIFO) method.

iii.

Show how your answer to i. would differ if 50% of the goods purchased on 15th March
were damaged and had a net realisable value of 7.00 per unit.
(6 marks)

(question continues on next page)

UL10/0013
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(c)

Pavlova plc manufactures a range of decorative china ware. The marketing manager has
proposed that they launch a new product, a commemorative mug, at the time of the football
World Cup. Sales of the mug would only occur in the three months surrounding the
competition in 2010.
If mugs are sold at 10 each, the marketing manager predicts sales of 20,000 but admits that
they could range from 15,000 to 25,000 depending on how the football teams progress.
The following cost data has been prepared:
Materials (Note 1)
Skilled labour (Note 2)
Unskilled labour (Note 3)
Lease of machine (Note 4)
Development cost to date

3.50 per mug

50,000 per annum
1.50 per mug
33,000
15,000

Notes:
(1)
(2)
(3)
(4)

The materials used are those usually purchased and used by the company.
The skilled workers would only be employed if the mug is made and would be
guaranteed employment for one year.
Unskilled labour can be hired easily as required.
The machine would be needed only for the mugs and the minimum lease is one year.

REQUIRED:
i.

Define break-even point.

ii.

Calculate the break-even volume of sales for the commemorative mug.

iii.

Calculate the margin of safety at the marketing directors predicted sales level.

iv.

Briefly explain the limitations of cost volume profit analysis.

(question continues on next page)

UL10/0013
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Page 3 of 13

(6 marks)

(d)

Bannock plc manufactures satellite navigation systems. The manufacturing facility has three
departments. Departments A and B are production and Department C is a service support
department. Bannock plc operates a full absorption costing system.
The following data relates to the month of June:
(1)

(2)

Overheads are allocated on the following basis.

Overhead

Allocation basis

Supervisors salaries
IT Support staff cost
Property rent
Plant depreciation
Maintenance

Number of employees
Number of employees
Floor area
Plant cost
Actual spend

Cost for June

250,000
180,000
160,000
210,000
40,300

Relevant data
Dept A
50
10,000
300,000
28,000
30,000
100,000

Employees (Number)
Floor area (sq.m)
Plant costs ()
Maintenance spend ()
Direct labour hours
Machine hours

Dept B
150
6,000
100,000
12,300
200,000
40,000

Dept C
50
4,000
-

(3)

Department C works approximately 60% for Department A and 40% for Department B.

(4)

Hourly overhead absorption rates are based on either direct labour hours or machine hours
depending on which is larger for each department.

(5)

The top-range satnav system provided by Bannock has total direct costs per unit of 198.50
and uses the following resources:

Labour hours per unit

Machine hours per unit

Dept. A
1
2

Dept B
3
1

REQUIRED:
i.

Calculate the overhead absorption rates for Department A and Department B.

ii.

Calculate the full absorption cost of a top-range satnav system unit.

UL10/0013
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Page 4 of 13

(7 marks)

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

Baklava plc is a company which supplies specialist materials to the bakery industry. The
bookkeeper has extracted the following balances from the accounting records for the year ended
31st March 2010. The totals of the debit and credit balances did not agree.

Leasehold property, at cost

Plant, vehicles and equipment, at cost
Stocks, at cost at 31st March 2010
Debtors
Cost of sales
Distribution costs
Administration costs
Loan interest paid
Ordinary dividends paid
Share capital
Ordinary shares of 1 each
8% Preference shares of 1 each
Retained earnings at 1st April 2009
10% loan stock
Creditors
Bank overdraft
Accumulated depreciation/amortization
Leasehold property
Plant, vehicles and equipment
Sales

660,000
4,410,000
724,000
336,000
3,630,000
846,000
573,000
15,000
16,000
990,000
100,000
1,382,000
300,000
584,000
12,000
165,000
1,977,000
5,940,000

The following information is available:

(1) The accountant of Baklava plc discovered a number of errors and omissions in reconciling the
overdraft in the cash book with the bank statement. These were as follows:
(i) A vehicle was sold on 1st April 2009 for 11,000 and the cheque for the proceeds was
banked. The vehicle had been purchased on 1st April 2006 for 30,000. No entries in
the cash book or other accounting records have been made for the sale.
(ii) An electronic bank credit for a refund from a supplier of 240,000 was received by the
bank in January 2010. This was correctly recorded in the purchases account but no
other entry had been made in the accounting records.
(iii) No entries have been made in the accounting records for a standing order for equipment
rental of 1,000 per month, which had started on 1st April 2009, or for bank charges of
8,000 on the bank statements over the year. These expenses were classified as
administration costs.
(iv) Cheques for goods purchased before the year end for 160,000 had not been presented
to the bank for payment before 31st March 2010. These cheques had been correctly
entered in the accounting records.
After necessary adjustment for these items the total debit and credit balances agreed.
(question continues on next page)

UL10/0013
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Page 5 of 13

(2)

No provision has been made at the year end for the following;
(i) depreciation on plant, vehicles and equipment at 10% on the straight line method.
There are no fully depreciated assets in this category, and
(ii) leasehold amortization on the straight line method over the 12 year lease term.
Depreciation and amortization charges are classified as 50% cost of sales and 25% to
each of distribution and administration costs. Any profits or losses on disposals are to
be shown as separate items.

(3) Provision is required at the year end for;

(i) outstanding loan interest and preference dividends,
(ii) auditors remuneration of 15,000 which is classified as administration costs, and
(iii) corporation tax on the profits for the year of 140,000.
REQUIRED

3.

(a)

Prepare a profit and loss account for Baklava plc for the year ended 31st March 2010 and a
balance sheet as at that date in a form suitable for the directors.
(21 marks)

(b)

Briefly explain and contrast the characteristics of ordinary shares and preference shares.
(4 marks)

The following are the financial statements of Eccles Foods plc for the two years ended 31st March
2009 and 2010.
Balance sheets as at 31st March
Fixed assets
Tangible
Intangible
Investments
Current assets
Inventories
Debtors
Cash

2010
m

2009
m

431
19
82
532

410
23
64
497
401
251
7
659

482
290
3
775

Creditors falling due within 1 year

Total assets less current liabilities
Creditors falling due after 1 year
Loan stock
Capital and reserves
Called-up share capital of 1 each
Share premium account
Retained earnings

(422)

353
____
885

(367)

(181)
704

(213)
576

385
319
704

247
50
279
576

(question continues on next page)

UL10/0013
D01

292
____
789

Page 6 of 13

Profit and loss accounts for the year ended 31st March
2010
m
1,240
(902)
338
(98)
(73)
167
(3)
(4)
160
(90)
70
(30)
____
40

2009
m
990
(704)
286
(81)
(56)
149
(9)
140
(80)
60
(20)
_____
40

Accumulated
Depreciation
m
211

Net

Turnover
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Operating profit
Net interest paid
Exceptional item
Profit before taxation
Taxation
Profit after taxation
Dividend paid
Retained profit for the year
The following further information is available.
(1)

Tangible fixed assets:

Cost
As at 1st April 2009
Additions, at cost
Disposals
Depreciation for the year
As at 31st March 2010

m
621
82
(30)
____
673

(13)
44
242

m
410
82
(17)
(44)
431

The assets were disposed of for cash proceeds of 10 million. Any profit or loss arising is
included in operating profit for the year.
(2)

Intangible fixed assets:

The value of goodwill has fallen during the year and the resulting write down of book value
was treated as an exceptional item in the profit and loss account.

(3)

Fixed asset investments:

Additional shares were purchased for cash. No other changes occurred during the year. The
interest received during the year on these investments was 5 million, this amount is included
in net interest paid.

(4)

Creditors falling due within one year are as follows:

2010
m
110
90
222
422

Trade
Taxation
Bank overdraft
(5)

On 1st May 2009 80 million 1 ordinary shares were issued at 1.10 each. On 1st October
2009 the share premium account was utilised in making a bonus issue of ordinary shares.
(question continues on next page)

UL10/0013
D01

2009
m
130
80
157
367

Page 7 of 13

REQUIRED:
(a)

Prepare a cash flow statement for Eccles Foods plc for the year ended 31st March 2010.
(19 marks)

(b)

A cash flow statement provides information on the financial performance of a company

which is not immediately available from the balance sheet or profit and loss account.
Identify two such items from the cash flow statement of Eccles Foods plc and explain how
they illustrate the above statement.
(6 marks)

4.

De Capo Investments (DCI) is a private equity company which wishes to invest in the winter sports
equipment sector. DCI has identified two potential acquisition targets: Presto plc and Lento plc.
The following are very brief corporate profiles:

Presto plc specialises in high quality equipment and has retail outlets in some of the major
ski resorts. It also sells to the shops in 5-star hotels. The directors of Presto plc have sports
and leisure marketing backgrounds and the company was originally financed by wealthy
individual investors. The key strategy of the company is to develop a leading quality brand
position.
Lento plc sells by distributing to dealerships based in mid-range department stores and
supermarket chains. The directors of Lento plc have general retailing and finance
backgrounds. The strategy of the company is to develop wide ranging markets within a
sound financial framework.

Profit and loss accounts for the year ended 30th April 2010
Presto plc
m
960
(717)
243
(148)
95
(9)
86
(25)
______
61

Turnover
Cost of sales
Gross profit
Other costs
Operating profit
Interest
Profit before tax
Taxation
Profit for the year

(question continues on next page)

UL10/0013
D01

Page 8 of 13

Lento plc
m
1,200
(975)
225
(117)
108
(14)
94
(30)
____
64

Balance sheets as at 30th April 2010

Presto plc
m
m
Fixed assets
Freehold land & buildings
Equipment and vehicles
Current assets
Inventories
Trade debtors
Creditors: amounts due within one year
Trade creditors
Taxation
Bank overdraft

Lento plc
m

548
67
615

274
150
424

210
45
255

240
41
281

(112)
(25)
(128)
(265)

(61)
(30)
(5)
(96)

Net current assets/liabilities

Total assets less current liabilities
Creditors: amounts due after one year
Loans

Capital and reserves

Ordinary share capital (50p shares)
Retained earnings

(10)
605

185
609

605

(150)
459

400
205
605

250
209
459

REQUIRED
(a)

Compute eight accounting ratios for the year ended 30th April 2010 which provide insights
into the financial position and performance of the two companies, as follows:
i.
ii.
iii.

Profitability (Earnings per share and two other ratios).

Working capital control (three ratios).
Financial risk (two ratios)

N.B. Show all calculations. Answers to one decimal place.

(12 marks)

(b)

For each of i. ii. and iii. explain how the ratios illustrate the company profiles given above.
(10 marks)

(c)

Based on the information available briefly evaluate the financial position and performance of
each company from the perspective of the prospective purchaser, De Capo Investments.
(3 marks)

UL10/0013
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Page 9 of 13

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

5.

The Strudel Company makes a single product and has forecast that for the financial year ended 30th
April 2011 it will sell 400,000 units at a price of 40 each.
Below is an extract from the annual budget:
Material
A
B

Labour - Assembly
Variable overhead
Apportioned on assembly labour hours

Total usage
000s kilos
2,000
1,200

Total
000s
8,000
2,400

000s hours
400

1,200

400

For the month of May 2010 the following results were recorded:

Planned production and sales for the month were 40,000 units. In fact, only 36,000 units
were produced and all were sold for a total of 1,512,000.
Total spending on material used was 886,000 of which material A accounted for 690,000.
180,000 kilos of material A were used, material B cost 1.75 per kilo.
46,000 hours were worked for total wages of 128,000.
Variable overhead spend was 38,000.
There are no fixed overheads.

REQUIRED:
(a)

Determine the standard cost and standard profit per unit for the year ended 30th April 2011.
(5 marks)

(b)

Prepare an operating statement reconciling budgeted and actual profit for the month of May
2010 showing a detailed variance analysis.
(15 marks)

(c)

Briefly comment on the sales materials and labour variances and on any possible
interrelationships between them.
(5 marks)

UL10/0013
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Page 10 of 13

6.

Muffin Limited was formed on the 1st January 2007 to produce a single product. Management
profit statements have been prepared for the first three years of operation and show the following
net profit figures:
Year ended 31st December
2007
2008
2009

Profit
Nil
8,000
2,000

These statements are based on absorption of fixed production overheads on the basis of budgeted
annual production with any under or over-absorption being shown as a separate item in the
statements.
The summarized data for the companys operations is as follows:
(1)

Units produced and sold

Year ended 31st December
2007
2008
2009
Units
Units
Units
Production
Budgeted
Actual
Sales

1,000
900
800

1,000
1,100
800

(2)

Selling price per unit was 80 per unit in all years.

(3)

The following costs were incurred in all years.

Variable cost per unit
Fixed production overhead per annum
Selling fixed overhead per annum

1,000
800
1,000

10
40,000
20,000

The directors of the company were surprised at the profit figures given the relative level of
sales over the three years.
REQUIRED:
(a)

Prepare a statement showing the profit figures derived by the company for the three years.
(8 marks)

(b)

Prepare a statement showing the profits for three years based on a marginal costing approach.
(6 marks)

(c)

Reconcile the profits in (a) and (b) above.

(5 marks)

(d)

Explain the rationale behind the approaches adopted in (a) and (b) above.

(6 marks)

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Page 11 of 13

7.

Flapjack plc has incurred 30,000 in patenting a new design of skateboard. The company intends
to start production and sales of the board from 1st January 2011. The marketing director has
advised that in the fast moving skateboard market the product has a five year life and the company
has therefore made the following estimates for the five years:
(1)

Sales and production costs:

Year to 31st December Sales
Units
2011
2,000
2012
4,000
2013
10,000
2014
6,000
2015
4,000

Sale price
per unit
50
60
70
70
70

Variable cost
per unit
40
40
40
40
40

Fixed cost
per annum
75,000
75,000
75,000
75,000
75,000

(2)

Half of the sales are expected to be to a major retailer who will expect a discount on sales
price of 10% for unit sales above 1000 units per annum.

(3)

Initial capital expenditure on machinery of 150,000 would be required. Residual value at

the end of 2015 is estimated at 25,000. Depreciation on the straight line basis is included in
fixed costs.

(4)

Working capital required to set up operations is estimated at 15,000, this should all be
recoverable in 2015.

(5)

The fixed costs would not be incurred if the skateboard was not manufactured.

(6)

The company has a required rate of return of 8%.

(7)

Assume all cash flows except initial costs occur at the end of the respective year.

In October 2010 the company is approached by a major sports company who have offered to
purchase the exclusive rights to manufacture and sell the skateboard. They propose an initial
payment on 1st January 2011 of 50,000 and an annual fee of 5 per board sold payable at the end
of each of the five years. Assume the pattern of sales and prices will be as in (1) above.

REQUIRED:
(a)

Set out in tabular format a calculation of the net present value if the company manufactures
and sells the skateboard.
(14 marks)

(b)

Calculate the net present value of the proposal by the major sports company. State whether
you would recommend acceptance of this proposal giving justification for your
recommendation.
(6 marks)

(c)

Explain the factors which influence the choice of a required rate of return.

UL10/0013
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Page 12 of 13

(5 marks)

Present value of 1
P

%
1
Period
1
0.990
2
0.980
3
0.971
4
0.961
5
0.951
R

%
11
Period
1
0.901
2
0.812
3
0.731
4
0.659
5
0.593

"

0.980
0.961
0.942
0.924
0.906

0.971
0.943
0.915
0.888
0.863

0.962
0.925
0.889
0.855
0.822

0.952
0.907
0.864
0.823
0.784

12

13

14

15

0.893
0.797
0.712
0.636
0.567

0.885
0.783
0.693
0.613
0.543

0.877
0.769
0.675
0.592
0.519

0.870
0.756
0.658
0.572
0.497

6
0.943
0.890
0.840
0.792
0.747

0.935
0.873
0.816
0.763
0.713

0.926
0.857
0.794
0.735
0.681

16
0.862
0.743
0.641
0.552
0.476

17

18

0.855
0.731
0.624
0.534
0.456

0.847
0.718
0.609
0.516
0.437

0.935
1.808
2.624
3.387
4.100

0.926
1.783
2.577
3.312
3.993

9
0.917
0.842
0.772
0.708
0.650

19
0.840
0.706
0.593
0.499
0.419

10
0.909
0.826
0.751
0.683
0.621

20
0.833
0.694
0.579
0.482
0.402

Annuity of 1
%
1
Period
1
0.990
2
1.970
3
2.941
4
3.902
5
4.853

%
11
Period
1
0.901
2
1.713
3
2.444
4
3.102
5
3.696

0.980
1.942
2.884
3.808
4.713

0.971
1.913
2.829
3.717
4.580

0.962
1.886
2.775
3.630
4.452

0.952
1.859
2.723
3.546
4.329

12

13

14

15

0.893
1.690
2.402
3.037
3.605

0.885
1.668
2.361
2.974
3.517

0.877
1.647
2.322
2.914
3.433

0.870
1.626
2.283
2.855
3.352

6
0.943
1.833
2.673
3.465
4.212

16
0.862
1.605
2.246
2.798
3.274

17
0.855
1.585
2.210
2.743
3.199

END OF PAPER

UL10/0013
D01

Page 13 of 13

18
0.847
1.566
2.174
2.690
3.127

9
0.917
1.759
2.531
3.240
3.890

19
0.840
1.547
2.140
2.639
3.058

10
0.909
1.736
2.487
3.170
3.791

20
0.833
1.528
2.106
2.589
2.991