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SCHOOL OF ACCOUNTING
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ACCT 1511:
Accounting and Financial Management 1B
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6
Total
(/75)
FINAL EXAMINATION
November 2007
Time Allowed:
Reading Time:
Total Number of Questions:
3 Hours
10 minutes
7
34,000
3,000
8,000
12,000
57,000
Outflows of cash:
Depreciation expense
Purchase equipment
Cash paid to suppliers
Pay dividends (50% of net profit)
Total outflows
Increase in Cash
50,000
7,000
6,000
30,000
4,000
10,000
13,000
20,000
The CEO explains that the $5,000 expected cost of share buyback was not included
because it would involve only a transaction between the company and its existing
shareholders and would be of no interest to outsiders.
After looking at the schedule, you find that there are serious problems and
inaccuracies. You need to explain to the CEO why his schedule of cash flows is
incorrect and that he will likely need to borrow more than $12,000 to have a $20,000
cash balance at the end of 2007.
Required:
(a) Identify and explain three (3) inaccuracies in the Jackson Corporations schedule
of expected cash flows for 2007. (6 marks)
1.
2.
3.
(b) Give two (2) suggestions which may allow Jackson corporation to maintain its
cash balance of $20,000 at the end of 2007 without increasing the loan of
$12,000. (4 marks)
1.
2.
Coles
2005
$ million
2004
$ million
34,212.0
33,018.0
32,266.8
91.8
71.9
(26,160.8) (25,305.3) (24,059.5)
8,143.0
7,784.6
8,207.3
Woolworths
2006
2005
$ million
$ million
37,849.7
31,481.2
9,444.6
(23,678.9)
7,802.3
1,722.2
(249.7)
1,302.1
(150.1)
1,014.6
1,152.0
(334.8)
817.2
850.9
(98.9)
1,027.2
(55.2)
888.1
(13.5)
752.0
(215.6)
536.4
972.0
(285.9)
686.1
874.6
(258.1)
616.5
627.2
(48.2)
1,163.6
786.6
637.9
692.0
616.5
576.0
1,014.6
816.2
3.62%
2.33%
19.43%
20.23%
12.70%
4.60%
23.53%
1.57%
-5.15%
23.36%
2.08%
10.94%
25.44%
1.91%
21.05%
24.95%
2.68%
12.13%
24.78%
2.60%
1.57%
3.75
2.54
14.91%
2.08%
3.58
2.70
20.09%
1.91%
3.57
2.21
15.10%
2.68%
2.84
3.31
25.19%
2.60%
3.59
4.38
40.82%
Sales growth
Required:
(a) Comment on the sales growth of Coles in 2005 and 2006 in comparison with
Woolworths over the same period. Support your answer by referring to the
relevant financial information. (3 Marks)
(b) Compare the gross profit growth and gross margin for Coles Ltd in 2005 and 2006
to Woolworths over the same period. Support your answer by referring to the
relevant financial information. (3 Marks)
QUESTION 2 CONTINUED:
(c) If the management of Coles was facing a takeover offer in 2006, how might they
persuade shareholders to reject the takeover offer and continue to give the
management a chance to improve the Companys performance? (Hint: you may
refer to the information on page 3, including the Du Pont analysis) (4 Marks)
Required:
(a) Provide a journal entry for the accounting policy reclassification mentioned
above. (2 Marks)
(b) Explain the rationale for treating settlement discounts, rebates and other purchase
allowances as a reduction in cost of sales rather than revenue. (2 Marks)
(c) No disclosure was provided as to the effect of the above accounting policy change
on the 2004 financial statements. As a very diligent financial analyst, you wish to
reconstruct the Income Statement of Woolworths for 2004 for comparative
purposes. Assuming that the effect of reclassification for 2004 was estimated as
$530.7 million against sales, and the same proportion of adjustments was applied
to other revenue, administrative expenses and cost of sales as in 2005, reconstruct
the following subset of the Income Statement for the period ending 2004. (3
Marks)
($ million)
2005
2004
After
Reclassification
2004
Before
Reclassification
Income Statement
Revenue
COGS
Gross Profit
Operating Expenses
EBIT
31,481.2
27,933.9
(23,678.9)
(20,975.5)
7,802.3
6,958.4
(6,500.2)
(5,893.3)
1,302.1
1,065.1
(d) State two (2) ratios, each from a different category (performance, activity,
liquidity or financial structure), that the above adjustment would affect and the
direction of such effect (i.e. increase or decrease). (2 Marks)
(e) Explain whether the above adjustment would affect Return on Equity (ROE) ratio.
(1 Mark)
Required:
(a) State whether each of the directors should be an executive, non-executive, or an
independent director of Company Q. Explain your answer. (3 Marks)
Director 1:
Director 2:
Director 3:
(b) With reference to the ASX Corporate Governance Councils Principles of Good
Corporate Governance and Best Practices Recommendations, explain whether the
three directors should be appointed to the Remuneration Committee of the Board.
(3 Marks)
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QUESTION 4 CONTINUED:
(c) With reference to the ASX Corporate Governance Councils Principles of Good
Corporate Governance and Best Practices, explain whether the three directors
should be appointed to the Audit Committee of the Board. (4 Marks)
12
Required:
(a) Write appropriate journal entries for each of the transactions above. (5 marks)
1.
2.
3.
4.
5.
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(b) Construct the T accounts for Work-In-Process and Finished Goods Inventory
accounts. Clearly identify each items in the T accounts. (5 marks)
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Part B (5 marks)
Sunshine Ltd is a leading manufacturer of the portable solar air cooler units which
have become very popular with the environmentally conscious office workers. The
following data relates to costs incurred by the company for the year ending 30 June
2007.
$
255,000
270,000
82,000
98,000
164,000
184,000
1,724,000
3,000
12,500
134,000
23,000
350,000
2,120,000
183,500
5,500,000
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Required:
Prepare a statement of cost of goods manufactured in the space provided below.
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(b) At the end of the quarter, it has been found that while the sales department was
able to sell 10,000 units of espresso coffee machine, the company fell short of its
profit target of $1,500,000 by $100,000. Prudence has decided that since only one
target was met, there will not be any bonus for sales personnel. Do you agree with
her decision? Explain your answer. (3 marks)
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Part B (6 marks)
Selmac Ltd is a retailer of fashion accessories which have recently become very
popular with trend-conscious university students. The company is looking to increase
the sale of its most popular product ShinyBlue, a bracelet made of created sapphire
and faux platinum. The company is, however, a bit concerned with increasing
incidences of bad debts, and would like to prepare a budget for each of the upcoming
months. The following information was available from Selmac Ltds financial
records for the first 5 months of 2008.
Product ShinyBlue
2008
Collections from customers are normally 70 per cent in the month of sale, 20 per
cent in the month following the sale and 9 per cent in the second month following
the sale.
Selmac Ltd. takes full advantage of the 2 per cent discount allowed on purchases
paid for by the tenth of the following month.
Cash payments for expenses are expected to be $114,400 for the month of May.
Selmac Ltds cash balance on May 1 was $122,000.
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Required
(a) Calculate the projected cash receipts for the month of May. (3 marks)
(b) What is the projected cash payment for the month of May. (3 marks)
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Part C (9 marks)
Barton Ltd manufactures and sells solid timber entertainment centre units, customdesigned for todays ever-growing plasma TV owners. The company plans to sell
400,000 units in July 2007.
Additional Information:
The desired monthly ending inventory in units of finished product is 80 per cent of
the next months estimated sales.
Each unit of finished product requires 4 metres of direct material at a cost of $1.50
per metre.
There are 1,600,000 metres of direct material in the inventory on 30 June 2007.
Required:
(a) Calculate Barton Ltds production requirement in units for the three-month period
ending 30 September 2007. (5 marks)
(b) The company wishes to have direct materials inventory at the end of each quarter
equalling to 25 per cent of the direct material used during that period. If the
company were to produce 1,200,000 units of finished product in the quarter
ending 30 September 2007, calculate the estimated cost of direct materials
purchased for the quarter using appropriate T accounts. (4 marks)
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SOLUTION OUTLINES
QUESTION 1
(a)
1.
$3,000 gain on sale of equipment is not a cash inflow non-cash revenue and
therefore should not be on the CFS.
2.
Depreciation expense is not a cash outflow non-cash expense.
3.
$5,000 cost of share buyback is a cash outflow under financing activities and
should be included in the CFS.
(b)
1.
Maintain cash dividends at the rate of 40% of net profit.
2.
Delay any share buyback until the cash flow position of the company
improves.
3.
Consider buying a cheaper equipment.
QUESTION 2
(a)
Coles seems to have difficulty growing its business compared to Woolworths.
In 2005, sales growth dropped from 19.43% to low single digit 2.33% compared
to Woolworths double digit growth of 12.13%. In 2006 it continues in low single
digit growth of 3.62% compared to Woolworths of 20.23%
(b)
Coles seems to have more trouble passing on cost of goods increases to customers,
or pricing its items slightly lower (or more discounts) than Woolworths to draw in
customers.
Gross profit growth dropped to -5.15% in 2005 and continues to grow only 4.6%
in 2006, compared to Woolworths of 12.13% and 21.05% in 2005 and 2006.
This is confirmed by lower gross margin of around 23.+% in 2005 and 2006 down
from 25.44 in 2004 compared to Woolworths maintaining gross margins in high
24+%.
(c)
Coles management has been able to match and beat Woolworths on Asset
Turnover at 3.75x
Can take steps to improve Net Profit Margin to match Woolworths of 2.68%
Can easily borrow or do share buyback to increase leverage to 3.31 or more.
If so, can obtain ROE of 25.53% (2.68% x 3.75 x 3.31)
Can continue to invest more in supply chain/ logistics to reduce Cost Of Doing
Business
Could reposition businesses to consolidate and re-brand General Merchandise
stores, e.g. Kmart, Target, for which they pay fees to US brand name owners.
Could grow by acquiring more businesses in line with existing businesses in
supermarkets, liquor
Could grow by setting up more stores
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QUESTION 3
(a)
DR
Revenue
$600.9m
CR
Other revenue
$146.5m
CR
Administrative expenses
$36.1m
CR
COGS
$418.3m
or Discounts, rebates and allowances (a Cost of sales adjustment
account)
(b)
See tutors during consultation times
(c)
($ million)
2005
2004
2004
Reclassification
After
Before
Income Statement
Operating revenue
COGS
31,481.2
(23,678.9)
Gross Profit
Operating Expenses
7,802.3
(6,500.2)
EBIT
1,302.1
27,532.7
(20,606.1)
6,926.6
(5,861.5)
1,065.1
27,933.9
(20,975.5)
6,958.4
(5,893.3)
1,065.1
(d)
Performance: any one of the following
Any profit margin
Increase
Activity: any one of the following
Asset Turnover
Inventory Turnover
Creditors Turnover
or any of the above Days version
Decrease
Decrease
Decrease
Increase
(e)
No because it does not affect Net Profit, nor Equity.
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QUESTION 4
(a)
Director 1: Peter, being the current CEO of Company Q, is an executive director. He
cannot an independent director.
Director 2: Leon seems to be a non-executive director. He was formerly the CEO of
Company Q it is unlikely that he can be considered an independent director.
Alternative argument: he may be an independent director since there is no current
relationship with Company Q.
Director 3: Helen does not seem to be a current or former employee of Company Q.
She is the current chairperson of the board and seems to be an independent director.
(b)
ASX Recommendations:
At least 3 members with the majority being independent
Chaired by independent director
All directors could be appointed and still maintain majority being independent (nonexecutive). Chairperson however should not be Peter.
(c)
ASX Recommendations:
At least 3 members
Only the non-executive directors with majority independent
Chairperson by independent director, who is not the chairperson of the board
Should also have a member with a financial expertise
Peter (CEO) should not be on the committee.
Leon can be on the committee.
Helen should be on the committee but should not be the committee chairperson since
she is the board chairperson.
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QUESTION 5
Part A
(a)
1. Dr WIP
Cr Raw materials
380,000
2. Dr WIP
Cr Wages payable
360,000
380,000
360,000
3. Dr WIP
480,000
Cr Overhead control
480,000
4. Dr Finished goods
Cr WIP
940,000
940,000
5. Dr COGS
Cr Finished goods
900,000
900,000
(b)
o/b
Raw materials
Wages
Overhead control
c/b
o/b
WIP
c/b
20,000
380,000
360,000
480,000
300,000
10,000
940,000
50,000
WIP
940,000
Finished Goods
900,000
Finished goods
COGS
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Part B
Statement of Cost of Goods Manufactured
Direct Materials
Direct Labour
Factory Overheads
Indirect materials
Factory supplies
Depreciation - factory
Factory supervision
1,724,000
2,120,000
4,177,000
164,000
184,000
4,157,000
3,000
12,500
134,000
183,500
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QUESTION 6
Part A
(a) See tutors during consultation times
(b) See tutors during consultation times
PART B
(a)
Month
Expected
Sales
$160,000
$178,000
$166,000
March
April
May
Total
Percent
Collection
9%
20%
70%
$14,400
$35,600
$116,200
$166,200
(b)
Expected cash payments
April purchases to be paid in May
Less: 2% cash discount
Net
Cash payments for expenses
Total
$154,000
$3,080
$150,920
$114,400
$265,320
Part C
(a)
July
Projected sales 400,000
Ending inv
336,000
Beginning inv 300,000
Production
436,000
August
420,000
352,800
336,000
436,800
September
441,000
370,440
352,800
458,640
Quarter
1,261,000
370,440
300,000
1,331,440
(b)
o/b
purchases
c/b
DM used
1,800,000
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