SURNAME OF CANDIDATE:

FIRST NAME OF CANDIDATE:

STUDENT ID:
SIGNATURE:

Official Use Only

Q Mark

3
SCHOOL OF ACCOUNTING 4

5
ACCT 1511:
Accounting and Financial Management 1B Total
(/80)

FINAL EXAMINATION
November 2006

Time Allowed: 3 Hours

Reading Time: 10 minutes
Total Number of Questions: 6

Answer ALL questions.

The questions are NOT of equal value.

Answers to Questions 1 to 5 must be written in ink in this booklet.

This paper is NOT to be retained by the candidate.

DO NOT OPEN THIS PAPER UNTIL INSTRUCTED BY THE

EXAM SUPERVISOR
QUESTION 1 (10 MARKS): CASH FLOW STATEMENTS
PART A: (4 MARKS)
The following diagram depicts a typical pattern of cash flows and income for a firm
over its lifecycle.

$
4

1 2
3

0 Time

Required:
(a) Which line in the above graph best represents financing cash flows over the firms
lifecycle? Justify your answer. (3 marks)

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QUESTION 1 CONTINUES ON PAGE 3

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(b) State one of the factors which may explain the difference between net income and
CFO (cash flows from operating activities) of a firm. (1 mark)

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PART B: (6 MARKS)
John Smith is the CEO and majority shareholder of Speed Buy Ltd. Recently, John
submitted a loan application for Speed Buy Ltd to Sydney Commercial Bank. It
called for a $200,000, 11%, ten-year loan to help finance the construction of a new
building and the purchase of store equipment, costing a total of $250,000.
Land costing $40,000 was acquired last year for this purpose. It was financed by the
issuance of shares in the company. The banks loan officer has requested that John
submit a cash flow statement, the most recent income statement, and balance sheets
for the last two years with the loan application.
You are the chief accountant of Speed Buy Ltd, and have prepared the following cash
flow statement for the purpose of the loan application:

Speed Buy Ltd.

Cash Flow Statement For the Year Ended 31 December 2005
Cash flows from operating activities:
Net income $86,400
Add: Depreciation $31,000
Decrease in accounts receivable 11,500 42,500
$128,900
Deduct: Increase in inventory $12,000
Increase in prepaid expenses 15,000
Decrease in accounts payable 13,000
Gain on sale of investments 85,000 125,000
Net cash flow from operating activities $3,900

Cash flows from investing activities:

Cash received from investments sold $130,000
Less: Cash paid for purchase of store 51,000
equipment
Net cash flow from investing activities 79,000

Cash flows from financing activities:

Cash paid for dividends $40,000
Net cash flow used for financing activities (40,000)

Increase in cash $42,900

Cash at beginning of the year 27,500
Cash at end of the year $70,400

After reviewing the cash flow statement, John was puzzled and telephoned you to
seek help. John raised the following three questions and concerns:

1. Issuing shares for the land is not listed in the statement. Wouldnt this
transaction affect both the cash flows from investing and financing activities?
2. Why does the bank need this statement anyway? They can calculate the increase
in cash from the balance sheets for the last two years.
3. Would this cash flow statement enhance our chance of obtaining the loan from
the bank?

4
Required:
What are your responses to the three questions raised by John Smith?

1.

2.

3.

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QUESTION 2 (13 MARKS): FINANCIAL STATEMENT
ANALYSIS

You have recently been promoted to Partner at one of the most prestigious law firms
in Sydney. With your BCom/LLB degrees from the University of New South Wales,
you have always been very interested in participating in the Australian Stock Market.

Finally having the financial resources to do so, you are now analysing the financial
information of Woolworths Ltd in order to consider whether to purchase its shares.

Required:
(a) Using the information from Woolworths 2006 preliminary financial statements
and the 3-year summary of key financial information provided on pages 9 12,
calculate the missing ratios in the boxes provided below. Note that ratio
formulae are provided on page 9. (6 marks)

Trend analysis 2006 2005 2004

Sales growth
(2005 to 2006)
EBIT growth
(2005 to 2006)

Profitability Ratios
Gross Margin
24.78% 24.91%

DuPont Analysis
Net Profit Margin
2.59% 2.46%
Asset Turnover
4.22 4.64
Leverage
4.38 4.46
ROE
47.47% 50.95%

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 Today we are proud to report a net profit increase of 24.3% to $1,014.6m which is at
the top end of our earnings guidance. The result is the outcome of consistent delivery
against our strategies which commenced with Stage 1 of Project Refresh in 1999. The
result reflects strong underlying operating performance, strong cost control and
maintenance of our focus on the customer. This was achieved despite undertaking
significant transforming business changes, incurring one-off costs in our core
supermarkets business associated with the transition to our new supply chain, and the
focus on integrating our recent acquisitions. Roger Corbett (CEO Woolworths)
News Release 21 August 2006
(b) Using the ratios calculated in part (a), as well as the above quote by the CEO of
Woolworths Ltd, and any general information about Woolworths and the sector in
which it operates, discuss the following for Woolworths Ltd in 2006. (5 marks)

Sales growth vs. EBIT growth:

Gross Margin:

Asset Turnover:

Net Profit Margin vs. Sales Revenue

Leverage:

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(c) Despite the strong performance, Woolworths Ltds ROE dropped in 2006 from
2005. Why do you think this is the case? (2 marks)

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Ratio Formulae:

Return on Equity (ROE) = Net Profit After Tax / Average Shareholders Equity
Return on Assets (ROA) = Earnings before Interest & Tax / Average Total Assets
Net Profit Margin = Net Profit After Tax / Sales Revenue
Gross Profit Margin = Gross Profit / Sales Revenue
Asset Turnover = Sales Revenue / Average Total Assets
Inventory Turnover = COGS / Average Inventory
Days Inventory on Hand = 365 / Inventory Turnover
Debtors (receivables) Turnover = Credit Sales / Average Trade Debtors
Days in Debtors = 365 / Debtors Turnover
Creditors Turnover = Purchases (or COGS) / Average Accounts Payable
Days in Creditors = 365 / Creditors Turnover
Cash Flow Cycle = Days in Inventory + Days in Receivables Days in Creditors
Current Ratio = Current Assets / Current Liabilities
Quick Ratio = (Current Assets Inventories) / Current Liabilities
Interest Coverage = EBIT / Interest Expense
Debt to Equity Ratio = Total Liabilities / Total Shareholders Equity
Debt to Assets = Total Liabilities / Total Assets
Leverage = Total Assets / Total Shareholders Equity

Woolworths Ltd
3-year Summary of Key Financial Information
2005 2004 2003
$m $m $m
Income Statement
Sales 31,481.2 27,933.9
COGS (23,678.9) (20,975.5)
Gross Profit 7,802.3 6,958.4

EBIT 1,302.1 1,065.1

Interest (150.1) (47.3)
Interest WIN (42.9)
NPBT 1,152.0 974.9
Tax Expense (334.8) (286.7)
NPAT 817.2 688.2
NPAT attributable to outside shareholders (1.0) (0.4)
NPAT attributable to shareholders 816.2 688.2

Balance Sheet
Inventory 1,969.6 1,847.0 1,843.1
Total Current Assets 3,064.5 2,776.4

Total Assets 8,775.2 6,145.4 5,886.4

Accounts Payable 2,916.1 2,176.3 2,078.9

Total Current Liabilities 3,780.7 3,229.0
Total Liabilities 6,775.0 4,092.9
Shareholders Equity 1,974.2 1,464.3 1,235.4
Total Equity 2,002.2 2,052.5

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QUESTION 3 (17 MARKS): ACCOUNTING POLICY CHOICE
AND PROFESSIONAL ETHICS (Note that parts of this question
may not be relevant in S2 2009)

Innovamatics Ltd is a software technology company which commenced its operations

at the beginning of 2006. It plans to list on the Australian Stock Exchange in 2008.
The company believes that it can start selling its software programme from 2007
(Sales forecasts are in the Income Statement below).

The software programme is to be sold and delivered (i.e. downloaded) via the
Internet, thus allowing the company to avoid product sales and delivery costs. The
Chief Technology Officer (CTO) believes that the company needs to carry out
research and development activities throughout its lifecycle to keep up with the
ever-changing computer technologies. The following schedule provides the expected
expenditure on research and development.

Expected expenditure: ($000s)

2006 2007 2008 2009
Research 1,000 600
Development 600 600

The companys current accounting policy for research and development costs is as
follows:

Research Immediate expensing

Development 3 years straight line amortisation

The summary forecast income statement is as follows:

Summary Forecast Income Statement

($000s)

2006 2007 2008 2009

Sales 0 500 1,000 2,000

Less:
Operating Expenses 200 300 400 500
Expenses relating to:
Research 1,000 600
Development 200 200 400

Total Expenses 1,200 500 1,200 900

Net profit before tax (1,200) 0 (200) 1,100

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PART A: (9 MARKS)

The Chief Financial Officer (CFO) notices that as the company is expected to make a
loss in 2008, it would be difficult to go for a public listing in 2008. He therefore asks
you, the new graduate recruit who has recently joined the company, to change the
accounting policy on research and development costs: research costs expected to be
incurred in 2008 and onwards will be capitalised and amortised over 3 years, and
development costs expected to be incurred in 2007 and onwards will be immediately
expensed.

Required:
(a) Re-calculate the summary forecast Income Statement to reflect the change in
accounting policy for research and development. Provide your answers in the
boxes below. (2 marks)

Forecast Income Statement

($000s)

2006 2007 2008 2009

Sales 0 500 1,000 2,000

Less:
Operating Expenses 200 300 400 500
Expenses relating to:

Research 1,000

Development

Net profit before tax (1,200)

(b) According to the AASB Framework and AASB138 Intangible Assets, what is the
appropriate treatment for research costs in 2008? (2 marks)

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QUESTION 3 CONTINUED:

(c) According to the AASB Framework and AASB138 Intangible Assets, what is the
appropriate treatment for development costs in 2007? (3 marks)

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(d) Discuss the cash flow implications of the proposed accounting policy changes for
the year 2007 only. (2 marks)

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QUESTION 3 CONTINUED:

PART B: (8 MARKS)

(a) Are the proposed policy changes to research and development costs in compliance
with the AASB Framework and AASB138? (2 marks)

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(b) You are rather concerned about the request from the CFO to change the
accounting policy regarding research and development costs. Apply the Code of
Ethics for Professional Accountants to identify, evaluate and respond to this
situation. (6 marks)

Identify:

Evaluate:

Respond:

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QUESTION 4 (20 MARKS): CVP ANALYSIS
Part A: (11 marks)
Applecrumble Ltd specialises in expensive gourmet desserts. It manufactures three
products: Apple Pie, Baklava, and Cheesecake. The companys chief accountant has
just received a preliminary sales forecast for 2007. The preliminary budgeted
information for 2007 is as follows:

Apple Pie Baklava Cheesecake

Sales mix 25% 25% 50%
Unit selling price $28.00 $36.00 $48.00
Variable manufacturing cost per unit $13.00 $12.00 $25.00
Variable selling cost per unit $5.00 $4.00 $6.00

For 2007, Applecrumbles fixed manufacturing overhead is budgeted at $2,000,000

and the companys fixed selling and administrative expenses are forecast to be
$600,000. Budgeted sales are 200,000 units in total (i.e., sales of Apple Pie, Baklava
and Cheesecake combined should be 200,000 units in total for 2007). Applecrumble
Ltd. has a tax rate of 40%.

Required:
(a) Determine Applecrumbles budgeted net profit after tax for 2007. Show all
working including the contribution margin calculations. (4 marks)

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QUESTION 4 CONTINUED:

(b) Assuming sales mix remains as budgeted, determine how many units of each
product must be sold in order to break even in 2007. (5 marks)

(c) Assume that the management has decided to sell Apple Pies only. It believes this
will halve its fixed costs. How many units of Apple Pie will need to be sold in
order to achieve its targeted net profit after tax of $500,000? (2 marks)

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QUESTION 4 CONTINUED:

PART B: (9 marks)
Selected data concerning the past years operations of Khlamwong Ltd are presented
below:
Inventories
Beginning Ending
$000s $000s
Raw materials 142 162
Work in process 160 60
Finished goods 180 220
Other data:
Direct materials used 652
Total manufacturing costs charged to production 1,372
during the year*
Cost of goods available for sale 1,652
Selling and administrative expenses 63

* Includes direct material, direct labour, and manufacturing overhead applied at a rate
of 60% of direct labour cost

Required:
(a) What was the cost of raw materials purchased during the year? (2 marks)

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(b) What was the direct labour cost charged to production during the year? (3 marks)

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QUESTION 4 CONTINUED:

(c) What was the cost of goods manufactured during the year? (2 marks)

(d) What was the cost of goods sold during the year? (2 marks)

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QUESTION 5 (20 MARKS): BUDGETING FOR PLANNING AND
CONTROL
PART A: (15 marks)

Y-Not Ltd manufactures a variety of custom-made classroom desk-and-chair sets

which are sold to universities throughout New South Wales. Tony Giovanno, who is
the companys chief accountant, is currently preparing a budget for the first quarter of
2007. The following sales forecast for 2007 has been made by the companys sales
manager, Leia Maxwell.

Sales forecast:
January 2007 5,000 desk-and-chair sets
February 2007 6,000 desk-and-chair sets
March 2007 7,500 desk-and-chair sets
April 2007 7,500 desk-and-chair sets
May 2007 10,000 desk-and-chair sets

The previous forecast for December 2006 sales was 4,500 desk-and-chair sets and at
the end of December 2006, the company still had 1,000 desk-and-chair sets to be sold.
It also held 5,200 metres of pine planks.

Each desk-and-chair set requires 10 metres of Queensland pine planks and 1.5 hours
of direct labour. Each set is expected to sell for $500. Pine planks cost $0.50 per
metre and the company ends each month with enough planks to cover 10 per cent of
the next months production requirements. The company incurs a cost of $20 per
hour for direct labour wages. The company also ends each month with enough
finished goods inventory to cover 20 per cent of the next months forecasted sales.

Required:
Prepare the following operating budget schedule for the first quarter of 2007:

(a) Sales budget (2 marks)

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(b) Production budget (5 marks)

(c) Direct materials budget (5 marks)

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QUESTION 5 CONTINUED:

(d) Direct labour budget (3 marks)

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QUESTION 5 CONTINUED:

PART B: (5 marks)

Rory Crane, a senior manager at Specks Ltd which manufactures blue-and-gray

sunglasses, recently attended a seminar sponsored by The University of New South
Wales on how to manage organisational performance through planning and control
processes. He was very impressed with some of the suggestions raised at the seminar
regarding how to improve divisional performances through the implementation of
management control systems. He also became aware of how budgets can aid in
determining the acquisition and allocation of resources within the organisation.

Upon returning from the seminar, Rory started preparing a report to his CEO to
advocate the advantages of implementing budgets throughout the divisions of Specks
Ltd. In his report, he plans to include two reasons why the implementation of
appropriate budgets would improve the performance of all divisions. Rory has asked
you, a recent graduate of The University of New South Wales, for some clarification
regarding the concept of budgeting.

Required:

(a) What would determine the effectiveness of a budget? (2 marks)

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(b) Which budget(s) would aid in improving the performance of the manufacturing
division? Why would these budget(s) improve the divisions performance? (2 marks)

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(c) Are there any other divisions which may benefit from the introduction of a
budget? Explain your answer. (1 mark)

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SOLUTIONS TO QUESTION 1
Part A (4 marks)

(a) Line #1 is represents financing cash flows.

During the inception and growth stages, cash has to come from external financing
since cash from operating is unlikely to be strong enough to finance the capital
expenditure required, and therefore, CFF will likely be positive.

At maturity, as cash from operating is strong and capital expenditure low, the need
for external financing will be low. CFF will likely decrease.

At its declining stage, since the firm is divesting rather than investing, it will pay
off its external debts and distribute excess cash back to its shareholders. Thus
CFF will likely be negative.

(b) The gap observed between net income and CFO is mainly due to the non-cash
items that affect net income but not CFO e.g. depreciation and amortisation
expenses, gain/loss on sale, timing differences.

Part B (6 marks)

See tutors during consultation times.

SOLUTIONS TO QUESTION 2

(a)

Trend analysis
Sales growth 2006 over 2005 20.23% (or 20.35% if using revenue from sales)
EBIT growth 2006 over 2005 32.26%

Profitability Ratios
Gross Margin 24.95% (or 25.03% if using revenue from sales)

Dupont Analysis
Net Profit Margin 2.68
Asset Turnover 3.42
(or 3.69 if using Du Pont analysis i.e.
Leverage 3.13 average total assets and total equity)
(or 33.81% if using Woolworths
ROE 32.80% members equity only)

(b)
See tutors during consultation times.

(c)
See tutors during consultation times.

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SOLUTIONS TO QUESTION 3

(a)
$'000 Forecast
2006 2007 2008 2009
Sales 0 500 1,000 2,000
Operating Expenses (200) (300) (400) (500)
Research (1,000) (200) (200)
Development (600) (600)

Net profit before tax (1,200) (400) 400 700

(b)

Research costs must be expensed.

In research phase of project, it is presumed that it cannot be demonstrated that an
intangible asset exists that can generate probable future economic benefit.

(c)

Development costs may be capitalised if it meets the recognition criteria.

If capitalised, as it is an asset with finite life, it should be amortised based on the

estimate of useful life.

(d)

Accounting policy choices have no cash flow implications other than that on income
tax (which is the year after). In 2007 there are no reported profits under either
scenario; no tax cash flow impact.

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SOLUTIONS TO QUESTION 4
Part A:
(a)
A B C
Revenue $1,400,000 $1,800,000 $4,800,000
(50,000 x $28) (50,000 x $36) (100,000 x $48)
Variable costs $900,000 $800,000 $3,100,000
(50,000 x ($13+5)) (50,000 x ($12+4)) (100,000 x ($25+6))
Contribution Margin $500,000 $1,000,000 $1,700,000
$10/unit $20/unit $17/unit
Total contribution margin 3,200,000 $16/unit

Less Fixed costs 2,600,000 (2000k + 600k)

Net profit before taxes 600,000
Tax @ 40% (240,000)
Net Profit $360,000

(b)
A B C
Sales mix 0.25 0.25 0.5
Unit cont. margin 28 - 18 = $10 36 16 = $20 48 31 = $17
WACM 10 x 0.25 =2.5 $20 x 0.25 = 5 17 x 0.5 = 8.5
WACM = $16

Break-even total Total fixed cost/WACM = 2,600,000/$16 = 162,500

units
Break-even per 40,625 units 40,625 units 81,250 units
product (162,500x0.25) (162,500x0.25) (162,500x0.5)
(c)
Required pre-tax profit = 500,000 / (1-0.4) = $833,333.33
Fixed costs = 2,600,000/2 = 1,300,000
Required units = (833,333.33 + 1,300,000) / 10 = 213,334 units

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Part B
(a) Raw material:
Beginning inventory ................................................................ $142 000
Add: Purchases ........................................................................ ?
Deduct: Raw material used ...................................................... 652 000
Ending inventory ..................................................................... $162 000

Therefore, purchases for the year were.................................... $672 000

(b) Direct labour:
Total manufacturing cost ......................................... $1 372 000
Deduct: Direct material............................................ 652 000
Direct labour and manufacturing overhead ............. $ 720 000

Direct labour + manufacturing overhead = $720 000

Direct labour + (60%) (direct labour) = $720 000
(160%) (direct labour) = $720 000

$720 000
Direct labour =
1.6

Direct labour = $450 000

(c) Cost of goods manufactured:

Work in process, beginning inventory ........................ $ 160 000
Add: Total manufacturing costs.................................. 1 372 000
Deduct: Cost of goods manufactured ......................... ?
Work in process, ending inventory ............................. $ 60 000

Therefore, cost of goods manufactured was ............... $1 472 000

(d) Cost of goods sold:

Finished goods, beginning inventory............................. $ 180 000
Add: Cost of goods manufactured ................................. 1 472 000
Deduct: Cost of goods sold ............................................ ?
Finished goods, ending inventory .................................. $ 220 000

Therefore, cost of goods sold was ................................. $1 432 000

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SOLUTIONS TO QUESTION 5

PART A

(a) Sales budget

January February March Quarter

Sales (in sets) 5,000 6,000 7,500 18,500
Sales price per set $500 $500 $500 $500
Sales revenue $2,500,000 $3,000,000 $3,750,000 $9,250,000

(b) Production budget

Y-Not Ltd
Production budget for the first quarter of 2007
January February March Quarter
Sales 5,000 6,000 7,500 18,500
Add: Desired ending
inventory 1,200 1,500 1,500 1,500
Total requirements 6,200 7,500 9,000 20,000
Less: Projected beginning
inventory 1,000 1,200 1,500 1,000
Planned production 5,200 6,300 7,500 19,000

(c) Direct materials budget

Y-Not Ltd
Direct Materials Budget for the first quarter of 2007
January Feb March Quarter
Planned productions (sets) 5,200 6,300 7,500 19,000
Direct material required per set 10 10 10 10
(metres)
Direct material required for 52,000 63,000 75,000 190,000
production (metres)
Add: Desired ending inventory of 6,300 7,500 8,000 8,000
direct material (metres)
Total requirements (metres) 58,300 70,500 83,000 198,000
Less: beginning inventory of 5,200 6,300 7,500 5,200
direct material (metres)
Planned purchase of direct 53,100 64,200 75,500 192,800
materials (metres)
Cost per board foot $0.50 $0.50 $0.50 $0.50
Planned purchases of direct $26,550 $32,100 $37,750 $96,400
material (dollars)

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(d) Direct labour budget

Y-Not Ltd
Direct Labour Budget for the first quarter of 2007

January February March Quarter

Planned production (sets) 5,200 6,300 7,500 19,000
Direct labour hours per set 1.5 1.5 1.5 1.5
Direct labour hours required 7,800 9,450 11,250 28,500
Cost per hour $20 $20 $20 $20
Planned direct labour cost $156,000 $189,000 $225,000 $570,000

Part B

Refer to lecture notes and see tutors during consultation times.

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