HERIOT-WATT MANAGEMENT PROGRAMME

ACCOUNTING STAGE 1
For Official Use Only

December 2005
Name . No A ! Ma"r#c$%a"#o& No . C D Co$r'e .. Da"e .. Declaration I certify that I have read the Examination Regulations (see back cover) and understand that I am re uired to abide by them! "tudent#s "ignature$%%%%%%%%%%%%%%%%%%%%! Mark

INSTRUCTIONS TO STUDENTS theensure start ofthat the you exam ensure that all you have written all the details required above. 11. At the start of 1. %. the At exam have written the details required above. 2. Read the instructions on page 2. 12. Read the instructions &. on page 2. 3. tart each 13. tart each question '. on a newquestion page. on a new page. !. should Roughbe wor"ings should confined to the left hand pages. 1!. Rough wor"ings (. confined to thebe left hand pages. #. be $his boo" be handed in entire and unfolded. 1#. $his boo" must 1). handed inmust entire and unfolded.

PART I

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Accounting tage 1 ,eb. /ecember 2))#

E(AMINATION INSTRUCTIONS
$he duration of the examination is ) *o$r'. $he mar"s value of each section is shown below. 0ou may allocate your time as you see fit. 1n the multiple choice questions2 no mar"s are deducted for wrong answers. $he paper is in four sections 34$156 A7 !) mar"s 34$156 87 2) mar"s 34$156 47 2) mar"s 34$156 /7 2) mar"s A&'+er A,, 'ec"#o&'34$156 A7 is a multiple choice section and you should indicate your response on the answer grid provided in 9art 11. 6o mar"s are deducted for wrong answers. Answer A:: questions in this section. 34$156 87 Answer EITHER ;uestion 81 OR ;uestion 82. 34$156 47 Answer EITHER ;uestion 41 OR ;uestion 42. 34$156 /7 Answer EITHER ;uestion /1 OR ;uestion /2 P,EASE NOTE THIS E(AMINATION DOCUMENT IS IN TWO PARTSPar" I is the question boo"let. Par" II is the answer boo"let2 which also contains the A6 ,3R <R1/ for the multiple choice questions and the ,5R= *33$ for ;uestion 82 and ;uestion /2. 9lease ensure that !OTH PARTS are returned at the end of this examination.

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Accounting tage 1 ,eb. /ecember 2))#

SECTION A ./0 mark'0 "ection & contains multi'le choice uestions( )hich are not made available to students!

*eriot+,att -niversity

Accounting tage 1 ,eb. /ecember 2))#

SECTION ! .20 mark'0 A&'+er EITHER 1$e'"#o& !1 OR 1$e'"#o& !21$e'"#o& !1 0our friend is a shareholder in A84 :td a small retail company. he has approached you as the only student accountant she has ever "nown and as"ed for your help. he explains that she has heard that it is possible to carry out a >ratio analysis> of the financial statements of her investment. he has prepared a list of her queries as below7 Re2$#re3 ,rite a brief response to each of your friend?s following questions7 @aA ,hat are three main reasons for underta"ing a ratio analysis exerciseB @3 mar"sA @bA ,hat are three main types of accounting ratiosB @3 mar"sA @cA ,hat do each of the three main types of accounting ratios you mentioned in part @bA measureB @3 mar"sA @dA ,hat do you mean by >wor"ing capital>B @1 mar"A @eA ,hat are two examples of liquidity ratios and how are each of them calculatedB @2 mar"sA @fA ,hy do we use two liquidity ratiosB @2 mar"sA @gA *ow is the cost of sales ratio computedB @1 mar"A @hA *ow would you "now if a company had improved its cost of sales ratio over a period of timeB @1 mar"A @iA *ow could a company improve its cost of sales ratio2 provide two suggestions. @2 mar"sA @CA ,hat does the >debtors turnover ratio> implyB @1 mar"A @"A *ow can 1 calculate the debtors turnover ratio from the financial statementsB @1 mar"A $otal 2) mar"s

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Accounting tage 1 ,eb. /ecember 2))#

1$e'"#o& !2 $he $rial 8alance of R $ :td as at 31 /ecember 0ear ' was as follows7 Administration expenses 8an" 8ad debt provision 4reditors and accruals /ebtors /elivery vehicles + cost /elivery vehicles + depreciation /ividend paid Dactory + cost Dactory + depreciation <as and electricity + factory 1nterest :oan + Repayable in 0ear 1# 5ffice equipment + cost 5ffice equipment + depreciation 9lant and machinery + cost 9lant and machinery + depreciation 9rofit and loss 9urchases of raw materials ales elling and distribution expenses hare capital toc" as at 31 /ecember 0ear & ,ages + production staff ,ages + sales staff ,ages + clerical '000 133 33 !)1 3)) 1)) 1& 12)!! 1'( #& & !%) &) 3# 3%# 13( 1%% %)( 12((& !&# &)) 131 23# (% #2 !2)2# '000 11 22'

!2)2#

6otes7 1. toc" was counted at 31 /ecember 0ear ' and was valued at E!'2))).

2. $he company has received an amount of E1#2))) from a customer as an advance payment for goods which will be delivered to the customer in Debruary 0ear (. $he amount is included in sales. 3. A rates bill for E!2))) was paid on 1 April 0ear ' for the year to 31 Farch 0ear (. $his payment is included in Administration expenses.

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Accounting tage 1 ,eb. /ecember 2))#

!. Dollowing a successful credit control policy during the year and a review of debtors at 31 /ecember 0ear ' it was decided7 @aA to write off one debt of E12))) as bad. @bA to ma"e a general provision of 2G on debtors at 31 /ecember 0ear '. #. An independent valuation of the factory was carried out on 1 Huly 0ear '. $he directors decided to incorporate the revaluation of E12#))2))) in the financial statements although no entries have been made so far. $he factory is expected to have a useful remaining life of 2# years. %. /uring the year an item of plant which had cost E#)2))) and had been depreciated by E3)2))) was sold for E222))). 6o entries have been made in respect of this sale apart from the credit for the sale proceeds which was made in error to the factory aggregate depreciation account. &. /epreciation is to be calculated as follows7 Dactory 9lant and machinery 5ffice equipment .ehicles traight line over remaining useful life 2)G of cost 1)G of cost 2#G of boo" value

A full yearIs depreciation is to be charged in the year of acquisition and none in the year of sale. '. $he directors propose to pay a final dividend of E!)2))) for the year. Re2$#re3 T*e +ork'*ee"' #& PART II o4 "*e e5am#&a"#o& a&'+er book '*o$%3 be $'e3 +*e& a&'+er#&6 "*#' 2$e'"#o&@aA 9repare a 9rofit and :oss Account of A84 :td for the year ended 31 /ecember 0ear '. @1) mar"sA @bA 9repare a 8alance heet as at 31 /ecember 0ear '. @1) mar"sA $otal 2) mar"s

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Accounting tage 1 ,eb. /ecember 2))#

SECTION C .20 mark'0 A&'+er EITHER 1$e'"#o& C1 OR 1$e'"#o& C21$e'"#o& C1 9aradise 9rinting :td is a small printing company2 established # years ago to supply all "inds of printing Cobs to a wide range of satisfied customers. $he directors are "een to ta"e on more wor" and have spent a lot of time and effort on mar"eting the services they offer such as letterheads2 business cards2 promotional leaflets and company logos. $he company is located in rented premises in a modern industrial estate and has two vans for deliveries and promotional wor". $he directors have been approached by Riccarton Ramblers Dootball 4lub @RRD4A to ta"e over all responsibility for the design printing and distribution of its match day promotional programmes @the Jprogrammes?A which are sold on match days. 1n return2 9aradise 9rinting will pay a fixed percentage @#GA of the sales revenue to RRD4. $he directors have also gathered the following information regarding this proCect7 1. RRD4 has two home games per month over a seven+month season. :ast year it budgeted for the sale of 32#)) programmes over the season the same number as the immediately preceding season. 2. $he directors have made three different designs for the RRD4 programme with an estimate of the variable costs per programme as follows7 S$7er * 2.#) 1.#) 1.)) S"a&3ar3 * 2.)) 1.!) 1.)) !a'#c * 1.#) 1.2) 1.))

9rinting cost7 :abour Faterials /istribution costs @per programmeA

3. <etting this contract would entail the use of other resources of 9aradise 9rinting for the seven+month season which have the following annual costs7 * Rent of property 32%)) alary Far"eting director 212))) alary <raphics designer 122))) $he directors estimate that 2)G of these resources would be used on the proCect during the seven+month season.

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Accounting tage 1 ,eb. /ecember 2))#

!. 9aradise 9rinting has one large industrial printing machine @the ,unda9rint machineA on which the programmes would be printed. $his machine is in almost continual use. $he following production times are estimated for the use of the ,unda9rint machine7 6umber of minutes per programme uper 3 tandard 2 8asic 1

$he directors? estimate that for each match in the seven month season there will be ! hours and 1) minutes of machine time available for the RRD4 programmes. #. RRD4 has also retained the right to fix prices for these programmes. 1t has suggested the following7 uper E1).)) tandard E'.)) 8asic E%.))

$he maximum demand for programmes regardless of the design used and price charged is expected to be 32))) per season. %. 1f 9aradise 9rinting accept this contract it will be for the forthcoming season only with the option of extending the contract for future years. Re2$#re3 @aA Advise the directors of 9aradise 9rinting :td on which type of match day promotional programme if any would be the most profitable one. @' mar"sA @bA 4alculate7 @iA @iiA the brea"+even level of activity for your selected programme2 and2 the safety margin @assume brea"+even level of sales plus 2)GA @! mar"sA @cA tate the assumptions you have made and comment on the results obtained. @' mar"sA $otal 2) mar"s

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Accounting tage 1 ,eb. /ecember 2))#

1$e'"#o& C2 *eatIn3at :td manufactures a single product + $he *eatIn3at microwave oven. $he manufacturing operation is based in cotland but its product is widely sold around the world. $he accountant has extracted the following ledger balances for the year ended 31 /ecember 2))K /irect labour /istribution costs Dactory rent *eat2 light and power 1ndirect labour 1nterest expenses Fiscellaneous factory overhead ales ales salaries * 12!!)2))) %%2))) ##2))) 212))) #2)2))) 132#)) !(2#)) 22#))2))) 22'2)))

$he accountant has also compiled the following information notes7 1. 9urchases of raw materials7 1%2))) units each L E3).)) 1)2))) units each L E2#.)) 2. 9roduction7 2#2))) units 3. ales7 2)2))) units each L E12#.))

!. Raw materials stoc" 1 Hanuary 2))K7 22))) units each L E2#.)) #. $he D1D5 method was used in valuing raw materials stoc" %. 3ach unit of finished goods requires one unit of raw material &. ,or"+in+progress 1 Hanuary 2))K7 32))) units costing E1(#2))) '. ,or"+in+progress 31 /ecember 2))K7 #2))) units costing E3#)2))) (. Dinished goods 1 Hanuary 2))K7 #2))) units each L E().))
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Accounting tage 1 ,eb. /ecember 2))#

1). Dactory machinery7 4ost E3))2))) /epreciation charged at 1)G per year 11. 5ffice equipment7 4ost E1))2))) /epreciation charged at 'G per year. $he accountant has become increasingly concerned with production costs and is proposing the preparation of a schedule of cost of goods manufactured to assist with an analysis of *eatIn3at production costs. Re2$#re3 @aA 9repare a schedule of cost of goods manufactured for *eatIn3at :td for the year ended 31 /ecember 2))K. @11 mar"sA @bA @iA @iiA @iiiA 3xplain the purpose of the schedule of cost of goods manufactured. @3 mar"sA 3xplain its usefulness for analysing costs. @3 mar"sA 4omment on the level of *eatIn3at :tdIs production costs. @3 mar"sA $otal 2) mar"s

1)

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Accounting tage 1 ,eb. /ecember 2))#

SECTION D .20 mark'0 A&'+er EITHER 1$e'"#o& D1 OR 1$e'"#o& D21$e'"#o& D1 Recent publicity from - and -= financial scandals has brought the role of the auditors to the attention of the general public. 0ou have been invited to give a short presentation to $he 5uter ,heel 1nvestment 4lub to explain the responsibilities and regulation of auditors. 6one of the members of the club have any particular financial s"ills but all are "een to hear what you have to say. $hey have specifically as"ed that you cover7 @aA the responsibilities of -= auditors under the 4ompanies Act 1('#M and2 @bA the framewor" for regulating auditors in the -= to ensure that they carry out their responsibilities. Re2$#re3 9repare a summary of your tal" covering the following two issues2 in the form of an information sheet which could be handed out to your audience at the end of your tal". @aA $he responsibilities of -= auditors under the 4ompanies Act 1('#. @1) mar"sA @bA $he framewor" for regulating auditors in the -= to ensure that they carry out their responsibilities. @1) mar"sA $otal 2) mar"s

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Accounting tage 1 ,eb. /ecember 2))#

1$e'"#o& D2 $he new accountant of <oodDood :td a small fast food company has prepared the 9rofit and :oss Account for the year ended 31 /ecember 2))% and 8alance heet as at that date. -nfortunately he is struggling badly with the 4ash Dlow tatement and has as"ed you to help. *is 9rofit and :oss Account and 8alance heet are detailed below together with some notes he has made which he thin"s may help you. Pro4#" a&3 ,o'' Acco$&" 4or "*e 8ear e&3e3 )1 December 2009
* ales 4ost of sales <ross profit elling and distribution costs Administrative expenses 5perating profit 1nterest received 1nterest paid 9rofit on ordinary activities before taxation $axation 9rofit on ordinary activities after taxation /ividends Retained profit for the year * 2#!22#% ('23(' 1##2'#' 13%232# 1(2#33 !%& 233 23! 1(2&%& 321%( 1%2#(' !2'1& 112&'1

11'2&!# 1&2#')

Co&"#&$e3:;

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Accounting tage 1 ,eb. /ecember 2))#

Goo3<oo3 ,"3 !a%a&ce S*ee" a' a" )1 December 2009

* <#5e3 a''e"' :and and buildings 9lant and equipment Dixtures and fittings 1nvestments C$rre&" a''e"' Raw material ,or" in progress Dinished goods /ebtors 8an" C$rre&" %#ab#%#"#e' 8an" loan @short+termA $ax payable /ividend payable 4reditors 22!1% 22('1 32!!3 3!2)'( !22(2( @1!2&&1A &22'%% ,o&6 "erm %#ab#%#"#e' 8an" loan @long termA Ca7#"a% hare 4apital hare premium 9rofit and loss account 1)) &22&%% 12&(' &21%( %32&(( &22&%% &&& '2# 22%2# '2(2) 1#2)11 2'21#' * 2))% * 3)2%!% 1'23'% 3#2(33 '!2(%# 22%&2 '&2%3& 2))# * 3121(1 1'2!'3 312(1% '12#() 12)&3 '22%%3 (3' '!( 22&)) &2313 %2%%( 1'2!%( 12#)2 !2)1% 22'21 3)2!'% 3'2'2# @2)23#%A %223)& 12%3# %)2%&2 12&(1 %2'%3 #22)1' %)2%&2

6otes7 1. 9urchases of assets by cheque during the year were as follows7 :and and buildings 9lant and equipment Dixtures and fittings E 1222& #2!#2 (23%( 1%2)!'

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Accounting tage 1 ,eb. /ecember 2))#

1. $he boo" value of assets sold during the year were as follows7 :and and buildings 9lant and equipment Dixtures and fittings E '&( 12132 !) 22)#1

$hese were sold for a total of E1''% cash 3. /epreciation charged for the year was7 8uildings 9lant and equipment Dixtures and fittings !. E '(3 !2!1& #2312 1)2%22

hare capital with a nominal value of E&2))) was issued at a premium of E3)%2)))

Re2$#re3 T*e +ork'*ee"' #& PART II o4 "*e e5am#&a"#o& a&'+er book '*o$%3 be $'e3 +*e& a&'+er#&6 "*#' 2$e'"#o&Dor the year ended 31 /ecember 2))%7 @aA 9repare a Reconciliation of 5perating 9rofit to 6et 4ash Dlow from 5perating Activities. @% mar"sA @bA9repare a 4ash Dlow tatement using the indirect method. @' mar"sA @cA 9rovide two reasons to explain the usefulness to the shareholder of showing a companyIs operating cash flow a&3 its net profit after tax in the financial statements. @% mar"sA $otal 2) mar"s

END O< PAPER

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Accounting tage 1 ,eb. /ecember 2))#

E(AMINATION REGU,ATIONS
4andidates are subCect to the regulations governing examinations which are published by the -niversity. $he main points are summarised below. 1. A candidate shall not bring written2 printed or any other material into the examination room except such as may be authorised by the examiners. 8riefcases and other similar containers2 the main purpose of which is to carry papers2 shall not be brought into the examination room. 2. A candidate shall not communicate with2 receive assistance from or copy from the paper of another candidate during an examination. 3. A candidate shall not leave the examination room less than half an hour after the start of an examination2 except with the permission of the invigilator. !. At the end of the examination a candidate must return the answer boo" or boo"s to the invigilator together with any other material on which heNshe has written or drawn during the examination. -nder no circumstances should a candidate remove an answer boo"2 used or unused2 from the examination room.

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