2015 Commentary New

Examiners commentaries 2015

AC1025 Principles of accounting
Important note
This commentary reflects the examination and assessment arrangements for this course in the
academic year 201415. The format and structure of the examination may change in future years,
and any such changes will be publicised on the virtual learning environment (VLE).
Information about the subject guide and the Essential reading

references
Unless otherwise stated, all cross-references will be to the latest version of the subject guide (2015).
You should always attempt to use the most recent edition of any Essential reading textbook, even if
the commentary and/or online reading list and/or subject guide refer to an earlier edition. If
different editions of Essential reading are listed, please check the VLE for reading supplements if
none are available, please use the contents list and index of the new edition to find the relevant
section.
General remarks
Learning outcomes
At the end of this course, and having completed the Essential reading and activities, you should be
able to:
distinguish between different uses of accounting information and relate these uses to the
needs of different groups of users
explain the limitations of such statements and their analysis
categorise cost behaviour, and prepare and contrast inventory valuations under different
costing methods
describe the budgeting process and discuss the use of budgets in planning and control
explain, discuss and apply relevant techniques to aid internal users in decision-making.
What the examiners are looking for
The examination paper covers a range of financial and management accounting topics, all of which
the well-prepared candidate will have studied. The questions are designed to encourage candidates
to think about the theories and principles of accounting and to demonstrate their ability to apply
relevant concepts in a variety of situations or to a given set of information. Where appropriate,
questions are sub-divided to help candidates answer in a logical manner. The examination will
always include questions designed to test candidates ability in interpretation and analysis of
financial information.
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The rubric of the examination paper is set out on the front cover and you should ensure that you
precisely follow these instructions. It is very important that you do not waste time and effort in
answering more questions than is required, as marks will only be awarded to the correct number of
questions. You are advised to read all of the questions before deciding which to answer in each
section. Time allocation is an important factor in accounting examinations. You should decide how
much time to spend on each question, based on the overall marks for the question and for each
section, and you should then adhere to these time allocations. The format of the examination
requires you to answer Question 1 of Section A, which is in four parts. It is important that you
allocate your time on this question so that you attempt all of the four parts. You are then required
to answer Question 2 of Section B, and two further questions, one from Section C and one from
either Section B or C. Please note that failure to comply with these requirements may result in some
of your work not being marked.
The rubric of the examination states that workings must be submitted for all questions requiring
calculations. The importance of this cannot be overstated, as in the absence of workings, simple
arithmetic errors cannot be distinguished from errors of principle and understanding. Thus the
absence of workings will very often lead to an over-penalisation of errors. Of course, arithmetic
errors may in some instances result in some loss of marks, and you should always be careful to check
your calculations. The rubric also states that any necessary assumptions introduced into answering a
question should be stated. If you do not understand what a question is asking (a circumstance the
examiners endeavour to avoid), then you must state any consequent assumptions that you have
made. Even if you do not answer in precisely the way the examiners had hoped, you may get a good
mark providing your assumptions are reasonable. The most frequent reason for failing to do well in
the examination, apart from lack of knowledge, is not answering the question actually set. You
should take time to read each question carefully, and then attempt to answer everything that the
examiner requires. Far too many candidates include every scrap of knowledge they have on a topic
without specifically addressing the question and this can have a disastrous effect on their marks.
Read the question carefully and tailor your answer to precisely what it asks and you should do well.
Accounting is a progressive subject where it is essential to understand a particular topic before you
go on to the next. Make sure that you understand the basic concepts and can apply them in an
appropriate manner so that there is a logical structure to your answers. Do not write something that
you do not understand for, if you do, you are likely to produce a muddled response. In answering
computational questions, think carefully about the layout and logical progression of your answer
before writing and set out your answer in a structured and easily readable format. You will be
rewarded for an appropriate, logical and sensible method even if the figures contain errors. The
subject guide and textbook contain numerous worked examples, which you should have studied
carefully, and practice questions with solutions which should form a key part of your study and
revision.
You will find 8-column accounting paper is incorporated into the answer booklet. It may be
particularly useful where tables of figures are required because it keeps answers neat and saves ruling
lines for different columns. You are strongly advised to practise using it while you are preparing
answers as part of your study of accounting. A sheet is available to download from the AC1025
Principles of accounting page on the VLE and you can print off as many sheets of the paper as
you need.
This subject does not require a lot of reading beyond the core text of Perks, R. and D. Leiwy
Accounting: understanding and practice (Maidenhead: McGrawHill, 2013) fourth edition [ISBN
9780077139131], but it is essential that you adopt an approach of thorough study, plenty of practice
answering questions and an ability and willingness to think logically. All major topics are covered at
the appropriate level in the recommended text by Perks and Leiwy and others are covered in the
subject guide. References presented in the Comments on specific questions for Zone A and Zone B
indicate where certain topics may be found in the current edition of the subject guide (2015), which
is an essential part of the study material for this course. You are also encouraged to read the
financial press, including accounting journals and listen to, or watch, financial programmes and visit
appropriate websites. This will enable you to keep abreast of current issues and help you to develop
your ideas and opinions about them.
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Examination revision strategy
Many candidates are disappointed to find that their examination performance is poorer than they
expected. This may be due to a number of reasons. The Examiners commentaries suggest ways of
addressing common problems and improving your performance. One particular failing is question
spotting, that is, confining your examination preparation to a few questions and/or topics which
have come up in past papers for the course. This can have serious consequences.
We recognise that candidates may not cover all topics in the syllabus in the same depth, but you
need to be aware that examiners are free to set questions on any aspect of the syllabus. This
means that you need to study enough of the syllabus to enable you to answer the required number of
examination questions.
The syllabus can be found in the Course information sheet in the section of the VLE dedicated to
each course. You should read the syllabus carefully and ensure that you cover sufficient material in
preparation for the examination. Examiners will vary the topics and questions from year to year and
may well set questions that have not appeared in past papers. Examination papers may legitimately
include questions on any topic in the syllabus. So, although past papers can be helpful during your
revision, you cannot assume that topics or specific questions that have come up in past examinations
will occur again.
If you rely on a question-spotting strategy, it is likely you will find yourself in difficulties
when you sit the examination. We strongly advise you not to adopt this strategy.
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Important note

references
section.
Comments on specific questions Zone A
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.
Section A
Answer question 1 from this section.
Question 1
(a) Pocket runs a small shop. The accounting year end of his business is 30 June.
On the morning of 29 June 2014 a fire in the shop destroyed all of the inventory
and the computer on which the accounting records were maintained. Pocket is
preparing an insurance claim for the lost inventory and has compiled the
following information from the remaining records:
(1) The balance at bank on 1 July 2013 was 2,000 and cheques totalling
158,800 had been paid out up to the end of 28 June 2014. All takings are
banked and no cash was left in the till on 28 June. The bank balance at that
date was 3,000.
(2) Purchases of books represent approximately 80% of the cheques paid and
there were no opening or closing creditors.
(3) Pocket has one customer who is given credit terms and this customer owed
1,000 on 1 July 2013 and 1,400 on 28 June 2014.
4
(4) The business operates at a consistent gross profit percentage of 25%.

(5) Inventory in hand at 1 July 2013 was 23,600.
Required:
Give calculations to show inventory on hand before the fire on 29 June 2014 as
far as it can be calculated from the above information.
(6 marks)
Reading for this question

Subject guide, Chapter 3.
Perks R, and Leiwy D. (2013) Chapters 2 and 9.
Approaching the question
The ability to prepare accounting information from incomplete information is an important
learning outcome of the course. The question requires the calculation of a missing inventory
figure by reconstructing the Income Statement. A logical approach of working is essential.
Calculation of cost of destroyed inventory as at 29th June 2014
Sales 160,200
Cost of sales:
Opening stock 23,600
Purchases 127,040
150,640
Closing stock
(Bal fig) 30,490 120,150
Gross profit 40,050
Insurance claim = 30,490

Workings
1. Bank account
Opening balance 2,000
Cheques paid out (158,800)
Closing balance (3,000)
Bankings 159,800
2. Purchases
158,800 80% = 127,040
3. Sales
Opening debtor (1,000)
Closing debtor 1,400
Cash banked 159,800
160,200
4. Gross profit
160,200 25% = 40,050
(b) Distinction is often made between financial and management accounting.

Explain the differences between these two types of accounting.
(6 marks)

Subject guide, Chapter 1 (pp.1720).
Perks R, and Leiwy D. (2013) Chapter 13.3.
5

Candidates need to understand the purpose, context and methods used in both financial and
management accounting. This question requires you to demonstrate this by identifying the
differences between the two types of accounting. Answers should not be two lists but should
highlight the key differences between the two types of accounting.
Financial accounting
Is concerned with the preparation of accounting information for the needs of users who
are external to the business.
Prepared on a periodic basis (most companies publish their financial statements only
once a year, in the annual report
Based on past events and historic data
Comprised solely of financial information.
Governed by rules and regulations.
Management accounting
are internal to the business.
Prepared frequently, as and when it is needed (most large businesses will prepare some
information on a monthly basis and many use daily accounting information).
More likely to contain forward looking information (such as forecasts and budgets).
More likely to incorporate non-financial information (such as quantities of products sold
or number of customer complaints).
Not regulated (managers are free to produce whatever information they need in whatever
format is most helpful to them, subject to available data and technology).
(c) The following unit data relate to Barkis Ltd which manufactures four different
products.
Product A B C D
Annual sales (units) 2,000 3,100 2,500 2,750
Price/cost data per unit
Selling price 60 108 58 50
Direct materials 20 40 12 16
Direct labour 24 48 10 24
All four products are produced using the same material that costs 8 per kg
and is currently in short supply. Due to the supply difficulties only 20,000 kg is
available for the period in question. Fixed costs amount to 24,000 for this
period.
Required:
i. Calculate an optimum production plan for the forthcoming year and show
the maximum profit that can be earned.
(5 marks)
ii. Identify two non-financial factors that the management should consider
before finalising the production plan.
(1 mark)
6

Perks R, and Leiwy D. (2013) Chapter 17.
A key learning outcome of this course is to explain and apply decision making techniques
using accounting information. This question tests your understanding of contribution
analysis and limiting factors. It is important that answers calculated the contribution per
unit of limiting factor in reaching the optimum mix of products. Answers to part (ii) needed
to be specific in identifying non-financial factors relevant to the question.
i. Barkis.
Contribution calculations.
Product A B C D

Selling price per unit 60 108 58 50
Less Variable cost per unit:
Direct materials 20 40 12 16
Direct labour 24 48 10 24
44 88 22 40
Contribution per unit 16 20 36 10
Limiting factor
Direct material at 8 / kg 2.5 kg 5 kg 1.5 kg 2 kg
Contribution per kg of Direct material 6.4 4 24 5
Ranking 2 4 1 3
Production Units Quantity of Cumulative Contribution Cumulative
plan Direct quantity of Contribution
material Direct material
kg kg
C 2,500 3,750 3,750 90,000 90,000
A 2,000 5,000 8,750 32,000 122,000
D 2,750 5,500 14,250 27,500 149,500
B 1,150 5,750 20,000 23,000 172,500
Total 20,000 172,500

Less
Fixed costs 24,000
Profit 148,500
ii. Marketing and other implications:
Loss leaders
Sub-contracting
Valued customers
Inter-dependent demand
Loss of range
Image, etc.
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(d) Rudge Ltd makes two products, X and Y, each of which passes through two
production departments. Budgeted production is 50,000 units of each product
and fixed overheads are absorbed on the basis of direct labour hours. The
following budgeted data are available for April 2015:
Department 1 Department 2
Fixed overheads 440,000 300,000
Variable overhead per hour 3.00 2.50
Direct labour hours per unit of X 5 hours 3 hours
Direct labour hours per unit of Y 6 hours 4 hours
The actual production for April 2015 was:

Product X 48,000 units
Product Y 54,000 units
All actual costs and labour hours per unit were as budgeted.
Required:
i. Calculate the total budgeted cost of variable overheads for Department 2 in
April 2015.
(2 marks)
ii. Calculate the budgeted fixed overhead absorption rate for Department 1 in
April 2015.
(2 marks)
iii. Calculate the under or over recovery of fixed overheads for Department 1 in
April 2015.
(3 marks)
The learning outcomes of this module refer to the ability to apply costing methods including
absorption costing. This question requires the calculation overheads, absorption rates and over
recovery. The approach should be to carefully identify the relevant amounts from the data. The
calculations were then relatively straight forward. Care should be taken in reading the
requirements for example (i) related to Department 1 but (ii) and (iii) to Department 2.
Rudge
i. Department 2 budgeted variable overheads

X 3 2.50 50,000 = 375,000
Y 4 2.50 50,000 = 500,000
875,000
ii. Department 1 budgeted fixed overhead absorption rate
440, 000/(50, 000 5 50, 000 6) = 0.80
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iii. Department 1 fixed overhead over recovery

Overhead applied to production
X 48,000 5 0.8 = 192,000
Y 54,000 6 0.8 = 259,200
451,200
Actual 400,000
Over recovery 11,200

N.B. Alternative calculation:
B 550,000 hours
A 564,000 hours
14,000 0.8 = 11,200
Section B
Answer question 2 and not more than one further question from this section.
Question 2
The following is the trial balance of Pickwick plc at 31 January 2015:

Sales 4,958,810
Purchases 2,798,336
Inventories at 1 February 2014 177,610
Distribution costs 225,710
Power 99,174
Telephone 16,266
Bad debt expense 13,274
Provision for doubtful debts at 1 February 2014 8,616
Wages 831,812
Directors remuneration 344,148
Administration expenses 397,276
Dividends paid 50,400
Equity Share capital (1 shares) 400,000
5% Loan stock 250,000
Share Premium 80,680
Retained earnings at 1 February 2014 257,106
Fixtures and Fittings at cost 982,270
Fixtures and Fittings, accumulated depreciation at 1 February 2014 433,750
Motor vehicles at cost 647,740
Motor Vehicles, accumulated depreciation at 1 February 2014 184,730
Trade receivables 577,480
Trade payables 573,240
Bank 16,164
Cash 1,600
7,163,096 7,163,096
Additional information
(1) Inventories at 31 January 2015 are valued at 188,266.

(2) Directors bonuses for the year ended 31 January 2015 calculated at 11,160
have not been accounted for.
(3) Distribution costs include a payment of 37,500 for rent for the three months to
31 March 2015.
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(4) The companys depreciation policies are as follows:
Fixtures and Fittings Straight line over 5 years
Motor vehicles Reducing balance method at 40% per annum
All non-current asset residual values are estimated at zero.
(5) The company reviwed the trade receivables at 31 January 2015 and the
following adjustments are required:
Irrecoverable receivables of 4,534 in addition to those already written off.
Specific provision for doubtful receivables of 6,812.
General provision of 2% against the remaining receivables.
(6) The interest on the loan stock is outstanding at the year end.
(7) A corporation tax refund of 30,000 for the year is estimated to be due to the
company.
(8) The directors propose a final equity dividend for the year ended 31 January
2015 of 4p per share.
Required:
Prepare the following financial statements for Pickwick plc:
(a) Income statement for the year ended 31 January 2015.
(12 marks)
(b) Statement of financial position at 31 January 2015.
(13 marks)
Subject guide, Chapters 4, 5 and 6.
The preparation of final accounts from structured information is a key learning outcome. A trial
balance with several adjusting items has been the format for the compulsory question over recent
years. In answering this type of question a methodical and organised approach is needed. It is
very important that detailed, legible workings are given in order that marks are awarded for all
work which is correct. If figures in the final accounts comprise a number of items, marks will be
awarded accordingly. Without workings one error may result in several marks being lost. The
candidates should allow examiners to award all appropriate marks. The 8-column accounting
paper provided is particularly useful for presenting the financial statements. You should pay
attention to the presentation of your answer, taking care to use the appropriate descriptions of
line items in the income statement and statement of financial position.
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(a) Pickwick plc
Income Statement for the year ended 31 January 2015

Sales 4,958,810
Less: Cost of sales (W1) (2,787,680)
Gross profit 2,171,130
Less: Wages and Salaries (831,812)
Distribution costs (225, 710) (2/3 37, 500) (200,710)
Power (99,174)
Telephone (16,266)
Admin Expenses (397,276)
Directors Remuneration (344,148)
Directors Bonus (11,160)
Bad Debt Expense (13,274 + 4,534) (17,808)
Increase in provision (W2) (9,518)
Depreciation FFF (196,454)
MV (185,204) (2,309,530)
Loss before interest and tax (138,400)
Less: Finance costs (5% 250,000) (12,500)
Loss before Tax (150,900)
Add: Corporation Tax 30,000
Loss for the year (120,900)
(b) Pickwick plc
Statement of financial position at 31 January 2015
Non-current assets [W3] 629,872
Current assets
Inventories 188,266
Trade receivables [W4] 554,812
Prepayments 25,000
Tax refund due 30,000
Cash 1,600
799,678
Total assets 1,429,550
Current Liabilities
Trade payables [W5] 596,900
Overdraft 16,164
613,064
Non-Current Liabilities
5% Loan stock 250,000
Equity
Share capital 400,000
Share premium 80,680
Retained earnings 85,806
566,486
Total equity and Liabilities 1,429,550
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Workings

W1 Cost of sales
Opening Inventory 177,610
Purchases 2,798,336
Closing Inventory (188,266)
2,787,680
W2 Provision for doubtful debts

Specific 6,812
General (2% (577, 48 4, 534 6, 812)) 11,322
Closing provision 18,134
Opening provision 8,616
Increase 9,518
W3
Cost Acc Depn Net
FF 982,270 630, 2041 352,066
MV 647,740 369, 9342 277,806
1,630,010 1,000,138 629,872
1
Acc Depn B/f 433,750
Year (982,270 20%) 196,454
2
Acc Depn B/f 184,730
Year (647, 740 187, 730) 40% 185,204

W4 Receivables
TB 577,480
Written off (4,534)
Provision (18,134)
554,182
W5 Payables
TB 573,240
Bonus 11,160
Loan Interest 12,500
596,900
Question 3
Barnaby Ltd is a UK family business which trades as a wholesaler, importing silk

fabric from the Indian sub-continent and China and selling onto specialist curtain
and upholstery retailers. During the year ended 31 December 2014 the business
entered into a new contract with the local branches of a national retail chain. The
business also expanded its warehouse and automated its office processes in the year.
Summarised financial statements for 2014 and 2013 for the business are shown
below:
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Statements of financial position at 31 December
2014 2013

Non-current assets 130,000 78,750
Current assets
Inventory 24,650 15,600
Accounts receivable 22,850 11,275
Bank and cash 3,750 11,700
51,250 38,575
Total assets 181,250 117,325
Equity 77,760 73,350
Non-current liabilities
5% bank loan, repayable 2019 50,000
Current liabilities
Accounts payable 53,490 43,975
Total equity and liabilities 181,250 117,325
Income statements for the years ended 31 December
2014 2013

Revenue 382,100 289,800
Cost of sales (275,150) (194,170)
Gross profit 106,950 95,630
Administrative expenses 45,235 44,240
Distribution costs 16,430 14,680
Interest 1,875
(63,540) (58,920)
Profit for the year 43,410 36,710
Required:
(a) Calculate the following ratios for Barnaby Ltd, for the financial years ended 31
December 2014 and 2013:
i. Return on capital employed
ii. Net profit margin
iii. Gross profit percentage
iv. Asset turnover
v. Current ratio
vi. Liquid ratio (Quick Assets ratio)
vii. Inventory turnover (in days)
viii. Receivables collection period (in days)
(10 marks)
(b) Using both the summarised financial statements and the ratios from part (a),
produce a report which provides an analysis of the financial performace and
position of Barnaby for the year ended 31 December 2014 in comparision with
the previous year.
(10 marks)
(c) Give details of any two other pieces of information you would require to
improve your analysis of the financial performance of the business, providing
reasons for the requirement.
(5 marks)
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The learning outcomes of this module include the ability to analyse, interpret and communicate
the information contained in financial statements. The most common analytical method is the
use of accounting ratios. This technique is often tested by a mini case study of the type used in
this question. It is important that answers go beyond simply stating that a particular ratio has
gone up or down, the interpretation should use the contextual information given in the question
and make links between different ratios. Good answers will draw conclusions from the ratios and
the background information, which provide insight into the financial position and performance of
the companies.
Excellent answers will use the analysis to draw appropriate conclusions which will be discussed
from the perspective of potential users.
You should carefully read the requirements of the questions which in this case specify the number
and nature of the ratios to be calculated. If you do not follow these instructions your work may
not be marked.
There are no absolute answers to this type of question and you will be rewarded for a logical and
informed analytical approach to the case described in the question.
Answers to (b) which suggested further ratios missed the point of the question and were awarded
fewer marks.
(a)
2014 2013
43,410+1,875
i. ROCE 77,760+50,000 35.4% 50%
43,410+1,875
ii. Net profit % 382,100 11.9% 12.7%
106,950
iii. Gross profit % 382,100 28.0% 33.0%
382,100
iv. Asset turnover 77,760+50,000 3.0 4.0
51,250
v. Current ratio 53,490 0.96 0.88
51,25024,650
vi. Liquid ratio 53,490 0.50 0.52
24,650365
vii. Inventory turnover 275,150 33 days 29 days
22,850365
viii. Receivables collection 382,100 22 days 14 days
(b) Analysis of ratios
Financial performance
ROCE indicates the return the business has generated from the use of its capital. Despite a
large fall in the ratio in 2014, it is still a healthy return, especially if compared to returns in
financial institutions. Both profits and capital increased during the year, but because capital
increased proportionately more (74%), from the new bank loan, this ratio has fallen in 2014,
resulting in a lower return for the owner (the Barnaby family).
This is also the reason for the fall in the asset turnover, despite the large increase in sales.
This ratio shows the value of sales generated per 1 of net assets used in the year, so it can
be used to assess the efficiency of the use of assets during the year. The business has
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invested heavily in assets in 2014, particularly in new non-current assets the warehouse
expansion, the new computer system and this increase has not yet been matched by a
proportionate increase in sales. This may well result in future years once the new assets are
functioning fully.
The net profit % has also fallen, although not by a huge amount. This ratio expresses the
profit the business has earned on its sales, and so the business is generating a lower margin
on its sales in 2014 compared to 2013.
The fall in the asset turnover coupled with the fall in the net profit margin will lead to a fall
in ROCE, given their relationship:
ROCE = Asset turnover Net profit %.
The reduced net profit margin may be through trading issues or levels of overloads, so the
remaining three ratios can be examined to help with this interpretation.
The gross profit % measures the profit earned from the trading activities of the business
the buying and selling of goods. In 2013 for every 100 of sales a profit of 33 was earned.
This fell to 28 in 2014. There are many possible reasons for this for this business, and it
may be a combination of these:
The business reduced its selling prices possibly linked to the new contract with the
national chain, which may exert pressure on its suppliers.
The businesss purchase costs increased is there a change in supplier, have unfavourable
exchange rates caused this, have shipping costs or import duties increased?
The business changed the mix of sales to lower margin goods perhaps the national
chain required fabrics of lower quality
When the fabrics were moved to the new warehouse they got damaged and had to be
written off or sold at lower prices
There has been theft of goods.
A lower gross profit % will result in a lower net profit % depending on the change in
overhead expenses since NP% = GP% Expenses %.
Expenses expressed as a % of sales has fallen substantially in 2014. Although both
admin and distribution costs increased in the year, they did not increase proportionately as
much as sales. This may be quite usual, since many overhead costs are fixed in nature, and
with a growing business economics of scale can take effect. In addition the business
automated some of its processes in 2014, which may have reduced costs such as salaries.
Given that depreciation expenses must have risen in 2014, there may have been considerable
savings in other areas. However, despite these savings in cost levels, they did not counter the
fall in gross profit % sufficiently, and so led to the business showing the fall in net profit %.
Financial position liquidity
For a wholesales the liquidity ratios appear fairly low, with total current assets barely
covering current liabilities. The liquid ratio indicates an even more critical situation
Barnaby and Co is relying on inventory having to be sold and the cash being collected from
the customers in order to meet its current liabilities. The current ratio has improved slightly
in 2014, but the liquid ratio has fallen, indicating that more of Barnabys current assets are
tied up in inventories in 2014. This may be connected to the new contract with the national
retailer, as Barnaby might have to hold different inventories and have them readily available.
The bank loan has not improved the liquidity position of the business, confirming that it
appears to have been used for the acquisition of the new non-current assets.
Financial position working capital management
On a more positive note, Barnabys management of its current assets appears fairly efficient,
with the time between buying and selling inventory being approximately one month, and
the time taken to collect cash from customers being less than 30 days. This will assist in
cash flow and the management of liquidity.
However, both the inventory holding and receivables collection ratios have increased in 2014
both possibly in connection with the new contract the customer may have required a
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longer credit period in order for the contract to be obtained. Barnaby does need to keep an
eye on these ratios, as further increases may cause cash flow difficulties.
Summary
Barnaby is a profitable business and manages its working capital efficiently. It has grown
significantly in size and revenues in 2014, and undertaken some key changes. These have
resulted in the profitability and working capital ratios to fall in 2014, and the business needs
to ensure it does not neglect control of these areas from growing and changing too fast,
although the relative reductions in overheads are encouraging, and the business has more
than adequate profits to service the new bank loan. However, the businesss liquidity
position is relatively low for a retailer, so keeping control of inventories and customers
receipts is vitally important to ensure sufficient cash is available.
(c) Answers might suggest any two of the following and should give reasons:
Cash Flow statements
How much of the increase in sales is from the new contract with the national chain
The pricing structure and payment terms of this new contract
Whether there have been changes in suppliers or suppliers prices
Sales mix over the two years
Changes in exchange rates over the two years
A break-down of overhead costs
A break-down of non-current assets and depreciation charges
Costs relating to the automation of systems and which costs have changed as a result of
this.
Any sensible suggestions together with reasons.
Question 4
The following are summarised financial statements of Dombey plc:
Income Statement for the year ended 31 March 2015
000
Profit before interest and tax 890
Interest 335
Profit before tax 555
Taxation 125
Profit for the year 430
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Statements of Financial Position as at 30 April.
2015 2014
000 000
Non-current assets
Land and buildings: cost 5,800 4,500
Accumulated depreciation (1,345) (1,250)
Fixtures and fittings: cost 2,840 2,670
Accumulated depreciation (1,920) (1,430)
5,375 4,490
Current assets
Inventories 1,110 1,480
Prepayments 245 230
Bank 740
Cash 60 50
4,005 3,430
Total Assets 9,380 7,920
Current liabilities
Bank overdraft 890
Accruals 390 465
Interest payable 30 25
Taxation 60 75
2,020 2,745
8% debentures 4,500 3,750
Equity 2,860 1,425
Additional information:
(1) During the year ended 31 March 2015 the freehold land was revalued by 1.3
million. Fixtures and fittings which had cost 350,000 and had a net book value
of 65,000 at the date of sale were sold for 80,000.
(2) A dividend of 600,000 was paid on 1 January 2015. The balance of the changes
in equity was due to a share issue for cash.
Required:
(a) Explain why a statement of cash flows is useful to users in addition to the other
key financial statements.
(5 marks)
(b) Prepare the Cash Flow Statement for Dombey plc for the year ended 31 March
2015 using only the financial data shown above.
(20 marks)
Subject guide, Chapter 6 pp.11320.
17
This question requires preparation of a cash flow statement (CFS). You should adopt a
systematic approach which will enable you to extract the cash flows from the accruals based
income statement and statement of financial position. The resulting increase or decrease in cash
balances should be reconciled to the relevant figures in the statement of financial position. Good
answers will be well presented, correctly describing the component cash flows with well laid out
workings. Part (a) of the question required explanation of the usefulness of a CFS.
(a) Business cannot survive without cash.

Cash cannot lie.
Statement provides details of all cash inflows and outflows from all sources.
Statement shows why cash and cash equivalent balances at the financial year-end
have changed.
Statement of cash flows directly linked to liquidity.
Objective of financial reporting is to enable users to assess cash flows which an entity
generates.
Income statement prepared on the basis of accruals.
Accounting policies (e.g. depreciation) affect this.
Use of estimates and judgement in profit.
Enables users to understand the liquidity of an equity.
Why current/liquid ratios have varied.
Reconciliation of PBT to operating cash flows particularly useful, as shows how
management of working capital affects liquidity.
(b) Cash Flow Statement for the year ended 31 March 2015
000 000
Cash flows from operating activities
Add back : Interest expense [W1] 335
Add back : depreciation [W2] 870
Less: Profit on disposal of F+F [W3] (15)
Decrease in inventories 1, 110 1, 480 370
Increase in receivables 1, 850 1, 670 (180)
Increased in prepayments 245 230 (15)
Increase in payables 1, 540 1, 290 250
Decreased in accruals 390 465 (75)
2,185
Interest paid [W1] (330)
Tax paid [W4] (140)
Cash flows from operating activities 1,625
Cash flow from investing activities
Purchase of land and buildings (1,300)
Purchase of F&F (2, 880 (2, 670 350)) (520)
Proceeds of sale of F&F 80 (440)
Cash flow from financing activities
Issue of debentures (750)
Dividend paid (600)
Issue of shares 305 455
Net cash inflow 1,640
Cash and cash equivalents at 1/4/14 (840)
Cash and cash equivalents at 31/3/15 800
18
Workings
W1 Interest payable/paid
Per income statement
5/12 8% 3,750 + 7/12 8% 4,500 335
Add: Opening accrual 25
Less: Closing accrual (30)
Interest paid 330
95
W2 Depreciation
Land and buildings 1430
Fixtures and fittings
Opening accumulated depreciation (285)
Less: Accumulated depreciation on assets sold 1,145
Closing accumulated depreciation 1,920
Depreciation expense for year 775
870
W3 Non-current asset disposal

Profit = 80 65 = 15
W4 Tax paid 2014 current liability 75

2015 payment on account 125 60 65
140
W5 Changes in equity 2014 1,425

Revaluation 1,300
Dividend (600)
Profits 430
Issues of Shares (Balance) 305
2,860
Section C
Answer one question and no more than one further question from this section.
Question 5
Pumblechook Ltd is a manufacturing company which uses a marginal costing system

for internal management reports. The companys annual financial statements for
external reporting purposes are based on full absorption costing.
The company makes one single product which sells for 100 per unit.
The following data refer to the years ended 30th June 2014 and 2015:
19
2014 2015

Costs per unit
Direct materials 21 23
Direct labour 19 22
Variable factory overheads 8 10
Variable selling and administrative expenses 2 3
Fixed factory overheads, per annum 170,000 180,000
Units Units
Opening stock 1,500 2,000
Closing stock 2,000 1,500
Sales 20,000 25,000
The normal volume used for the purpose of absorption costing is 28,000 units in
both years.
The company uses the first-in first-out assumption for the calculation of cost of sales.
Required:
(a) Prepare an internal management profit statement for the year ended 30th June
2015 using marginal costing.
(9 marks)
(b) Prepare a draft income statement for the year ended 30th June 2015 using full
absorption costing.
(9 marks)
(c) Give calculations showing why the profits for 2015 are not the same in your
answers to (a) and (b) above. Explain your answer.
(7 marks)
Perks R, and Leiwy D. (2013) Chapter 16 pp.6465.
absorption costing. This question requires calculations of profit using both marginal and
absorption costing. In the marginal costing statement it is important to recognize contribution.
In the absorption costing statement it is necessary to compute the under absorption of overheads.
Part (c) required the reconciliation of the two profit figures together with a brief explanation.
20
(a) Profit statement using marginal costing for year ended 30 June 2015

Sales (25,000 100) 2,500,000
Opening stock (2,000 48) 96,000
Production cost (24,500 55) 1,347,500
1,443,500
Closing stock (1,500 55) (82,500) 1,361,000
Cost of sales 1,139,000
Selling and admin expenses
(25,000 3) 75,000
Contribution 1,064,000
Fixed overhead 180,000
Profit 884,000
(b) Profit statement using absorption costing for the year ended 30 June 2015.

Sales revenue 2,500,000
Opening stock (2,000 54.07) 108,143
Production cost (24,500 61.43) 1,505,000
1,613,143
Closing stock (1,500 61.43) 92,143
Cost of sales 1,521,000
979,000
Under-absorption (3,500 6.43) 22,500
956,500
Selling and admin costs 75,000
Profit 881,500
(c)
Marginal profit 884,000
Fixed overhead B/F in
absorption Stock
2,000 6.07 12,143
Fixed overhead C/F in
absorption Stock
1,500 6.43 9,643
Reduction in absorption profit 2,500
Absorption profit 881,500
The difference in profit figures are caused by the different treatments of fixed production
overheads, which are all written off as period costs in marginal costing systems, while a
proportion is carried forward in stock valuation in absorption costing systems. The above
reconciliation shows why the profit figures differ.
Question 6
Nickleby plc specialises in the manufacture of fitness equipment and has just bought
the rights to make and sell a newly designed heart monitor. A firm of management
consultants has carried a feasibility study for the company at a cost of 96,000. The
consultants have concluded that the company will have a market for the heart
monitor for 5 years before it becomes technically obsolete.
To make the heart monitor, there will be two production stages and the machinery
requirements for assembly are:
i. Machinery for stage 1 of the production will be imported at a cost of 160,000.

It is expected that at the end of 5 years, it will be sold for 40,000.
21
ii. The company already has suitable machinery for the second stage of the
production process. This machinery has a book value of 120,000 while its
original cost was 380,000.
If not used on this project, this machinery would be sold now for 100,000. If it is
used on this project, this machinery will have to be adapted at a cost of 66,000.
This adapted machinery would be sold at the end of the project for 70,000.
If the project goes ahead, maintenance costs would be 32,000 per annum.
Additional working capital of 150,000 would be required at the beginning of the
project, this is expected to be recovered at the end of the project.
Annual marketing costs would be 60,000 per annum for each of the 5 years. All
annual marketing occurs at the beginning of each year.
The heart monitors are expected to sell for 70 per unit and the variable cost per
unit is expected to be 40. Relevant fixed costs per year (excluding depreciation,
machine maintenance and marketing) are expected to be 20,000.
The management consultants have forecast the sales will be:
Year 1 2 3 4 5
Sales (units) 8,000 12,000 10,000 6,000 5,000
The companys cost of capital is assumed to be 12% per annum.
Required:
(a) Determine the Net Present Value and Payback Period of the decision to go
ahead with the heart monitor. (20 marks)
(b) Advise the management of Nickleby plc whether, on a purely financial basis, the
company should make the heart monitor. You should explain your reasoning
and state any assumptions that you make.
(5 marks)
Perks R, and Leiwy D. (2013). Chapter 14.
The application of capital investment techniques is an important element of the syllabus and
learning outcomes for Chapter 12 of the subject guide. The most effective approach to Part (a) is
to construct a columnar table in which relevant cash flows can be inserted. It is important to
give workings of all figures and to clearly explain treatment of all amounts, for example if a cost
is to be treated as sunk and therefore not included as a relevant cost this should be stated.
Having determined the net cash flow for each year these are discounted using the discount factors
taken from the tables provided. Thus a net present value can be arrived at and a decision
recommended and justified. This type of question requires use of a significant amount of data
and it is very important that your work is clearly presented and that al workings are legible and
understandable. The 8-column accounting paper can help in the respect. A suggested
presentation of the answer is given below. The calculation of the payback period shroud be
clearly shown and answers using either discounted or nominal cash flows were accepted.
Part (b) required an evaluation of the financial outcomes revealed in a this required a well-argued
and explained analysis of the figures and a clear recommendation. The assumptions you state
should not simply state that you assume the information given in the question is correct
22
(a) Calculation of NPV

Years
0 1 2 3 4 5
000 000 000 000 000 000
Sales (units) 8000 12000 10000 6000 5000
Contribution (7040) 240 360 300 180 150
Working capital (150) 150

Stage 1 machinery (160) 40
Foregone sale of second (100)
stage machinery
Adaption cost (66) 70
Resale value of adapted
machinery maintenance (32) (32) (32) (32) (32)
Marketing (60) (60) (60) (60) (60)
Fixed costs (20) (20) (20) (20) (20)
Net Cash Flow (53) 128 248 188 68 358
Discount factor 1 0.893 0.797 0.712 0.636 0.567
Discounted cash flow (536) (114,304) 133.856 43,248 202,986

NPV = 156,050.
Ignore feasibility study.
Payback period based on cash flows = 2 years and 160000/248000 i.e. 2 years 7.7 months.
(b) Since the NPV is positive then the project seems worthwhile. We assume there is no
alternative to selling the stage 1 machinery if the project is not undertaken. The payback
period is relatively long at over half way through the project.
We also assume the cash cost for marketing are at the beginning of the year whilst all other
cash outlays are spread throughout the year and subtracted from the contribution.
Hence these cash costs will be discounted for the whole year in which they occur.
We assume there is no concern about cash flow being highly negative in the initial stages of
the project i.e. cash is available and payback period not of a concern.
Question 7
The management of Skimpole plc has decided to carry out a major refurbishment of
the companys manufacturing infrastructure. The production of one of the
companys factories, where a standard product is produced, will be interrupted by
the closure during refurbishment. The management is considering paying a lump
sum to workers laid off during the refurbishment. You have been asked to advise
the management of the effect the closure for refurbishment will have on cash flow.
The following data has been made available:
(1)
Week 1 Week 2 Week 3
Budgeted sales 400 units 500 units 400 units
Budgeted production 600 units 400 units Nil
(2) The closure will commence at the beginning of week 3 and it should be assumed
that it will continue for at least four weeks. Sales at 400 units per week will
continue to be made during the period of the closure until stocks of finished
goods are exhausted. Production will stop at the end of week 2. The current
stock of finished goods is 600 units.
23
(3) The selling price of the product is 60 and the budgeted manufacturing cost is
made up as follows:

Direct materials 15
Direct wages 7
Variable overheads 8
Fixed overheads 18
Total 48
(4) Direct wages are regarded as a variable cost. Direct wages are paid one week in
arrears.
(5) The company operates a full absorption costing system and the fixed overhead
absorption rate is based upon a budgeted fixed overhead of 9,000 per week.
Included in the total fixed overheads is 700 per week for depreciation of
equipment. During the period of the closure direct wages and variable
overheads would not be incurred and the cash expended on fixed overheads
would be reduced by 1,500 per week. It should be assumed that all relevant
overheads are paid for immediately the expense is incurred.
(6) The current stock of raw materials cost 7,500: it is intended that these stocks
should increase to 11,000 by the end of week 1 and then remain at this level
during the period of the closure. All direct materials are paid for one week after
they have been received.
(7) All sales are on credit. 70% of the sales value is received in cash from the
debtors at the end of the first week following the week in which the sale was
made and the remaining 30% at the end of the next week.
(8) The current amount outstanding to material suppliers is 8,000 and direct wage
accruals amount to 3,200. Both of these will be paid in week 1. The current
balance owing from debtors is 31,200, of which 24,000 will be received during
week 1 and the remainder during week 2.
(9) The current balance of cash at the bank and in hand is 1,000.
Required:
(a) Prepare a cash budget for weeks 1 to 6 showing the balance of cash at the end
of each week together with a suitable analysis of the receipts and payments
during each week.
(20 marks)
(b) Comment upon any matters arising from the cash budget which you consider
should be brought to managements attention.
(5 marks)
The preparation of budgets is a key learning outcome of the course. This question provided a
relatively complex scenario which reuired a logical and well structured approach to extracting the
figures and preparing the budgets. A columnar answer was the most effective approach to
presenting this cash budget. Part (b) required you to identify the key management issues which
are evident in this budget.
24
(a) Cash budget for weeks 16.
Week
1 2 3 4 5 6

Receipts from debtors 24,000 24,000 28,200 25,800 19,800 5,400
Payments:
Materials 8,000 12,500 6,000 nil nil nil
Wages 3,200 4,200 2,800 nil nil nil
Variable overheads 4,800 3,200 nil nil nil nil
Fixed overheads
Total payments 24,300 28,200 15,600 6,800 6,800 6,800
Net cash flow (300) (4,200) 12,600 19,000 13,000 (1,400)

Opening balance
(week 1 given) 1,000 700 (3,500) 9,100 28,100 41,100
Closing balance 700 (3,500) 9,100 28,100 41,100 39,700
Workings
1. Debtors
Week
1 2 3 4 5 6
Units sold 400 500 400 300
Sales () 24,000 30,000 24,000 18,000
Cash received 16,800 21,000 16,800 12,000
(70%) 7,200 9,000 7,200 5,400
(30%) 24,000 7,200
Given
Total receipts () 24,000 24,000 28,200 25,800 19,800 5,400
* Sales in week 4 = opening stock (600 units) + production in weeks 1 and 2 (1,000 units)
less sales in weeks 13 (13000 units) = 300 units.
2. Creditors
Week
1 2 3 4 5 6

Materials consumed at 15 9,000 6,000
Increase in stocks 3,500
Materials purchased 12,500 6,000
Payment to suppliers 8,000 12,500 6,000 nil nil nil
(given)
3. Wages
Week
1 2 3 4 5 6

Wages consumed at 7 4,200 2,800 nil nil nil nil
Wages paid 3,200 4,200 2,800
(given)
4. Variable overhead payment = budgeted production budgeted cost per unit.

5. Fixed overhead payments for weeks 12 = fixed overhead per week (9,000) less weekly
depreciation (700). Fixed overhead payments for weeks 36 = 8,300 normal payment less
1,500 per week.
25
(b) Comments
1. Finance will be required to meet the cash deficit in week 2, but a lowering of the
budgeted material stocks at the end of week 1 would reduce the amount of cash to be
borrowed at the end of week 2.
2. The surplus cash after the end of week 2 should be invested on a short-term basis.
3. After week 6, there will be no cash receipts, but cash outflows will be 6,800 per week.
The closing balance of 39,700 at the end of week 6 will be sufficient to finance outflows
for a further 5 or 6 weeks (39,700/6,800 per week).
4. Assumptions underlying the cash flows budget may be subject to significant uncertainty.
5. May be additional costs of plant closure and reopening due to strike.
26

Important note

references
section.
Comments on specific questions Zone B
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.
Section A
Answer question 1 from this section.
Question 1
(a) Jacob had 100 litres of apple juice in inventory on 1 October 2014, purchased at
2 per litre. During the month of 31 October 2014 the following changes
occurred in the inventory position:
Quantity Cost per litre
Date Litres
Purchases 7 October 200 2.50
14 October 300 3.00
21 October 50 4.00
28 October 100 3.50
Sold 4 October 80
11 October 70
18 October 250
25 October 200
27
Required:
i. Calculate the value of the closing inventory of apple juice at 31 October 2014
using each of the following three methods:
First in first out (FIFO)
Last in first out (LIFO)
Weighted average (calculated at the time of each transaction)
(5 marks)
ii. Briefly describe the relative impact on profit in each of the above situations.
(1 mark)
Perks R, and Leiwy D. (2013) Chapter 16 pp.38384 .
This module requires an understanding of different stock valuation costing methods. This
question requires the application of common methods to a data set and a brief explanation
of the impact on profit. Jacob Ltd
i. FIFO
Qty Qty Qty Qty Qty per ltr Total cost

b/fwd 100
4 Oct (80)
7 Oct 200
11 Oct (20) (50)
14 Oct 300
18 Oct (150) (100)
21 Oct 50 4.00 2.00
25 Oct (200)
28 Oct 100 3.50 350
Total value 550
Qty Qty Qty Qty Qty per ltr Total cost

b/fwd 100
4 Oct (80)
7 Oct 200
11 Oct (70)
14 Oct 300
18 Oct (250)
21 Oct 50
25 Oct (100) (50) (50)
28 Oct 100
Remaining 20 2.00 40
30 2.50 75
100 3.50 350
Total value 465
28
WACC
Date litres cost
b/fwd 100 200
4 Oct (80) (160)
20 40
7 Oct 200 500
220 540
11 Oct (70) (172)
150 368
14 Oct 300 900
450 1268
18 Oct (250) (704)
200 564
21 Oct 50 200
250 764
25 Oct (200) (611)
50 153
28 Oct 100 350
Total value 150 503
ii. FIFO greater profit; LIFO less profit; WACC between the two.
(b) Distinction is often made between financial and management accounting.

Explain the differences between these two types of accounting.
(5 marks)

Perks R, and Leiwy D. (2013) Chapter 13.3.
Candidates need to understand the purpose, context and methods used in both financial and
management accounting. This question requires you to demonstrate this by identifying the
differences between the two types of accounting. Answers should not be two lists but should
highlight the key differences between the two types of accounting.
Financial Accounting
are external to the business.
Prepared on a periodic basis (most companies publish their financial statements only
once a year, in the annual report
Based on past events and historic data
Comprised solely of financial information.
Governed by rules and regulations.
Management Accounting
are internal to the business.
Prepared frequently, as and when it is needed (most large businesses will prepare some
information on a monthly basis and many use daily accounting information).
More likely to contain forward looking information (such as forecasts and budgets).
More likely to incorporate non-financial information (such as quantities of products sold
or number of customer complaints).
Not regulated (managers are free to produce whatever information they need in whatever
format is most helpful to them, subject to available data and technology).
29
(c) Cotswold Ltd specialises in producing walking poles for use in outdoor
activities. The company has two production departments, Machining and
Assembly, and two service departments, Administration and Maintenance.
The components for the poles are manufactured in the Machining department,
and then put together in the Assembly department where they are packed
ready for shipping.
The overhead costs for the year ended 31 May 2015 were collected as below:
Cost Centre Assembly Machining Maintenance Administration

Cost of machinery 40,000 30,000 22,000 48,000
During the year ended 31 May 2015, total direct labour hours used in the
Assembly department were 4,800 hours. The Machining department used 6,000
machine hours. Workers are paid a rate of 15.00 per labour hour.
The number of employees in each department was as follows:
Assembly 30
Machining 12
Administration 15
Maintenance 6
Total employees 63
The cost of the machinery in the two production departments is as follows:
Cost Centre Assembly Machining
Allocated overhead costs 70,000 50,000
(1) The Administration department provides services to all other three
departments in the company.
(2) The Maintenance department serves both production departments.
(3) The costs in the service departments should be reapportioned to the
production departments on the following bases.
Administration department Number of employees
Maintenance department Cost of machinery
(4) Overheads are absorbed using an hourly rate for each production
department.
(5) Cotswold Ltd has received an order from one of its regular customers who
requires 20 special walking poles. Each pole will require 2.5 direct labour
hours in the Assembly department and 1.5 hours of machine time from the
Machining department. The direct material costs are 42.00 per pole.
Required:
Calculate the total cost of providing 20 special walking poles for the regular
customer.
(8 marks)


absorption costing. This question requires the allocation of overheads and their application
to cost units. A tabular approach to the allocation would be by far the best approach and it
is important that you show each individual stage of your workings.
30
Cotswold Ltd
Assembly Machining Maintenance Administration
Allocated 40,000 30,000 22,000 48,000
Reallocation
Admin (30:12:5) 30,000 120,000 6,000 (48,000)
Maintenance
(70:50) 16,333 11,667 (28,000)
86,333 53,667
Machine hours 4,800

Labour hours 6,000
Hourly rate 17.99 8.94
Cost of special
Material 42.00
Labour (2.5 15) 37.50
Overhead
Assembly (2.5 17.00) 44.97
Machining (1.5 8.94) 13.41
Cost 137.88
Total cost 20 =
2,757.60
(d) The following data are available for Texel Ltd for April 2015:
Budget Actual
Output 6,000 5,500

Sales 120,000 104,500
Materials (54,000) (18,000 kgs) (48,125) (13,750kg)
Labour (30,000) (3,000 hrs) (24,750) (2,800 hrs)
Fixed overheads (10,500) (12,000)
Operating profit 25,500 19,625
Texel Ltd holds no inventories.
Required:
Give the formula for and compute for Texel Ltd for April 2015 each of the
following variances:
i. Sales price variance
(2 marks)
ii. Materials price variance
(2 marks)
iii. Labour efficiency variance
(2 marks)

31
Standard costing and variance analysis are key elements of the budgeting and control
process. This question required calculations of a number of specfic variances. You should
always give your workings in a clear and logical form so that you gain credit for showing
understanding of techniques and are not overly penalised for arithmetic errors. Thus,if
correct formulae were given but some of the figures used were incorrect then significant
partial marks can be earned.
Texel Ltd
Act Q :5500 X 19 Act Price

i. Sales price variances
- Act Q :5500 x Standard Price 20 (AQ AP) (AQ SP)
5,500120,000
104, 500 6,000
104, 500 110, 000 = 5,500 A

adverse
ii. Materials price variance favour (F)
(AQ AP) (AQ SP)
Use Act
13,75054,000
48, 125 18,000
48, 125 41, 250 = 6,875 A
@@@@
iii. Labour efficiency variances
Price is fixed
(AQ SP) (SQ SP)
Use Stardard
(2, 800 10) (2, 750 10) = 500 A
AQ: 2800
SP=30000/3000hr=$10
Standard Qut 3000 hr
32
Section B
Answer question 2 and not more than one further question from this section.
Question 2
The following is the trial balance of Dorper plc at 31 January 2015:

Equity share capital (50p shares) 200,000
5% Redeemable preference share capital (1 shares) 125,000
Share Premium 40,340
Retained earnings at 1 February 2014 128,553
Plant and equipment, at cost 491,135
Plant and equipment accumulated depreciation at 1 February 216,875
2014
Motor vehicles, at cost 323,870
Motor vehicles accumulated depreciation at 1 February 2014 92,365
Trade receivables 288,740
Trade payables 286,620
Bank 8,082
Cash 800
Sales 2,479,405
Purchases 1,399,168
Inventories at 1 February 2014 88,805
Rent 112,855
Electricity 49,587
Telephone 8,133
Bad debt expense 6,637
Provision for doubtful debts at 1 February 2014 4,308
Wages and salaries 415,906
Directors remuneration 172,074
Administration expenses 198,638
Final equity dividend paid for year ended 31 January 2014 18,000
Interim equity dividend paid for year ended 31 January 2015 7,200
3,581,548 3,581,548
The following additional information needs to be dealt with before the financial
statements are finalised:
(1) Closing inventories are valued at 94,133.

(2) Salesmens commission and bonuses for the year ended 31 January 2015 have
been calculated at 5,580 but not yet accounted for.
(3) The company pays rent quarterly in advance on 1st January, April, July and
October. The rent paid on the 1 October for the period to 31 March 2015 was
18,750.
(4) The companys depreciation policies are as follows:
Plant and machinery Straight-line method over 5 years
Motor vehicles Reducing balance method at a rate of 40%.
The residual value of all non-current assets is estimated as zero.
(5) The company has identified further trade receivables of 2,267 as irrecoverable.
A specific provision for doubtful debts of 3,406 is required at 31 January 2015
with a general provision of 2% being required against the remainder of the
debts.
(6) No dividend has been paid on the preference shares for the year ended 31
January 2015. These shares are to be treated as a liability and not as equity.
(7) The company has estimated it will be able to claim back corporation tax of
15,000 from the government for the year.
33
(8) The final equity dividend proposed for the year ended 31 January 2015 is 2p per
share.
Required:
Prepare the following financial statements for Dorper plc:
(a) Income statement for the year ended 31 January 2015.

(12 marks)
(b) Statement of financial position at 31 January 2015.
(13 marks)
Subject guide, Chapters 4, 5 and 6.
The preparation of final accounts from structured information is a key learning outcome. A trial
balance with several adjusting items has been the format for the compulsory question over recent
years. In answering this type of question a methodical and organised approach is needed. It is
very important that detailed, legible workings are given in order that marks are awarded for all
work which is correct. If figures in the final accounts comprise a number of items, marks will be
awarded accordingly. Without workings one error may result in several marks being lost. The
candidates should allow examiners to award all appropriate marks. The 8-column accounting
paper provided is particularly useful for presenting the financial statements. You should pay
attention to the presentation of your answer, taking care to use the appropriate descriptions of
line items in the income statement and statement of financial position
(a) Income Statement for the year ended 31 January 2015

Sales 2,479,405
Less: Cost of sales (W1) (1,393,840)

Gross profit 1,085,565
Less: Wages and salaries (415,906)

Rent (112, 855 6, 250) (106,605)
Electricity (49,587)
Telephone (8,133)
Admin Expenses (198,638)
Salesmans commission (5,580)
Directors Remuneration (172,074)
Bad Debt Expense (6, 637 + 2, 267) (8,904)
Increase in provision (W2) (4,759)
Depreciation Plant (98,227)
M.V. (92,602) 1,161,015
Loss before Interest and Tax (74,450)
Less: Finance Costs (5% 125,000) (6,250)

Loss before Tax (81,700)
Add: Corporation Tax 15,000
Loss for the year (66,700)
34
(b) Dorper plc

Statement of financial position at 31 January 2015

Assets
Non-current assets [W3] 314,936
Current assets
Inventories 94,133
Trade and other receivables [W4] 283,656
Tax receivable 15,000
Cash and cash equivalents 800
393,589
Total assets 708,525

Current liabilities
Bank overdraft 8,082
Trade and other payables [W5] 298,450
306,532
Long-term borrowings 125,000
Equity and liabilities

Equity
Equity share capital 200,000
Share premium 40,340
Retained earnings 36,653
276,993
Total equity and liabilities 708,525
Workings
Statement of changes in equity for the year ended 31 January 2015
Equity share capital Share premium Retained earnings Total

At 1 February 2014 200,000 40,340 128,553 368,893
Loss for the year (66,700) (66,700)
Dividend paid (25,200) (25,200)
At 31 January 2015 200,000 40,340 36,653 276,993
W1 Cost of sales

Opening inventories 88,805
Purchases 1,399,168
1,487,973
Closing inventories (94,133)
1,393,840
W2 Provision for doubtful debts

Specific provision 3,406
General provision 2% (288,740 2,267 3,406) 5,661
Closing provision 9,067
Opening provision (4,308)
Increase 4,759
35
W3 Non-current assets
Cost Accumulated Net book value

depreciation

216,875 +
98,227
Plant and equipment 491,135 = 315,102 176,033
92,365 +
92,602
Motor vehicles 323,87 = 184,967 138,903
815,005 500,069 314,936
Plant = 491,135 20% = 98,227
MV = (323, 870 92, 365) 40% = 92,602
W4 Trade and other receivables

Trade receivables per trial balance 288,740
Less: Additional irrecoverable debts (2,267)
Less: Provision for doubtful debts (9,067)
Prepayments 6,250
283,650
W5 Trade and other payables

Trade payables per trial balance 286,620
Salesmens commission 5,580
Preference dividend 6,250
298,450
36
Question 3
Extracts from the statements of financial position of Merino plc at 31 March 2015
and 31 March 2014 are as follows:
2015 2014
000 000
Non-current assets
Land and buildings: cost 5,800 4,500
accumulated depreciation (1,345) (1,250)
Fixtures and fittings: cost 2,840 2,670
accumulated depreciation (1,920) (1,430)
5,375 4,490
Current assets
Inventories 1,110 1,480
Prepayments 245 230
Bank 740
Cash 60 50
4,005 3,430
Total Assets 9,380 7,920
Current liabilities
Bank overdraft 890
Accruals 390 465
Interest payable 30 25
Taxation 60 75
2,020 2,745
8% debentures 4,500 3,750
Equity 2,860 1,425
(1) During the year ended 31 March 2015 fixtures and fittings which had cost
350,000 and which had a net book value of 65,000 at the date of disposal
were sold for 80,000. There were no disposals of land and buildings.
(2) The company issued further 8% debentures on 1 September 2014 and a cash
share issue of 1 million Ordinary 1 shares at a total issue price of 1,305,000.
(3) The income tax expense in the companys income statement for the year ended
31 March 2015 was 125,000.
(4) Profit after interest before tax for the year ended 31 March 2015 was 555,000.
A dividend of 300,000 was paid on 14 January 2015.
Required:
(a) Explain why a statement of cash flows is useful to users in addition to the other
principal financial statements. (5 marks)
(b) Prepare the Statement of cash flows for Merino plc for the year ended 31 March
2015 using only the data shown above. (20 marks)
37
This question requires preparation of a cash flow statement (CFS). You should adopt a
systematic approach which will enable you to extract the cash flows from the accruals based
income statement and statement of financial position. The resulting increase or decrease in cash
balances should be reconciled to the relevant figures in the statement of financial position. Good
answers will be well presented, correctly describing the component cash flows with well laid out
workings. Part (a) of the question required explanation of the usefulness of a CFS .
(a) Business cannot survive without cash.

Cash cannot lie.
Statement provides details of all cash inflows and outflows from all sources.
Statement shows why cash and cash equivalent balances at the financial year-end
have changed.
Statement of cash flows directly linked to liquidity.
Objective of financial reporting is to enable users to assess cash flows which an entity
generates.
Income statement prepared on the basis of accruals.
Accounting policies (e.g. depreciation) affect this.
Use of estimates and judgement in profit.
Enables users to understand the liquidity of an equity.
Why current/liquid ratios have varied.
Reconciliation of PBT to operating cash flows particularly useful, as shows how
management of working capital affects liquidity.
(b) Cash Flow Statement for the year ended 31 March 2015
000
Cash flows from operating activities
Add back : Interest expense [W1] 335
Add back : depreciation [W2] 870
Less: Profit on disposal of F+F [W3] (15)
Decrease in inventories 1, 110 1, 480 370
Increase in receivables 1, 850 1, 670 (180)
Increased in prepayments 245 230 (15)
Increase in payables 1, 540 1, 290 250
Decreased in accruals 390 465 (75)
2,095
Interest paid [W1] (330)

Tax paid [W4] (140)
Cash flows from operating activities 1,625
Cash flow from investing activities
Purchase of land and buildings (1,300)
Purchase of F&F
(2, 480 (2, 670 350) (520)
Proceeds of sale of F&F 80 (1,740)
Cash flow from financing activities
Issue of debentures (750)
Dividend paid (300)
Issue of shares 1,305 1,755
Net cash inflow 1,640
Cash and cash equivalents at 1/4/14 (840)
Cash and cash equivalents at 31/3/15 800
38
Workings
W1 Interest payable/paid
Per income statement

5/12 8% 3,750 + 7/12 8% 4,500 335
Add: Opening accrual 25
Less: Closing accrual (30)
Interest paid 330
W2 Depreciation
Land and buildings 1, 345 1, 250 95

Fixtures and fittings
Opening accumulated depreciation 1,430
Less: Accumulated depreciation on assets sold
350 65 (285)
1,145
Closing accumulated depreciation 1,920
Depreciation expense for year 775
870
W3 Non-current asset disposal
Profit = 80 65 = 15
W4 Tax paid
2014 current liability 75

2015 payment on account 125 60 65
140
Question 4
The following are extracts from the financial statements of Cheviot plc:
Extracts from the income statements to 30 April 2015 2014

000 000
Sales 11,200 9,750
Cost of sales 8,460 6,825
Net profit before tax 465 320
This is after charging:
Depreciation 360 280
Debenture interest 80 60
Interest on bank overdraft 15 9
39
Statements of Financial Position at 30 April 2015 2014

000 000 000 000
Assets
Non-current assets 1,850 1,430
Current assets
Inventory 640 490
Receivables 1,230 1,080
Cash 80 120
1,950 1,690
Total assets 3,800 3,120
Equity and liabilities

Equity
Ordinary share capital (Nominal value 50p per 800 800
share) 1,245 875
Reserves
2,045 1,675
10% debentures 800 600
Current liabilities
Bank overdraft 110 80
Payables 750 690
Taxation 95 75
955 845
The following ratios are those calculated for Cheviot plc, based on its published
accounts for the previous year, and also the latest industry average ratios:
Cheviot Industry
30 April 2014 average
ROCE 16.70% 18.50%
Net profit margin (before tax) 3.90% 4.73%
Asset turnover 4.29 3.91
Current ratio 2.00 1.90
Quick assets ratio 1.42 1.27
Gross profit margin 30.00% 35.23%
Accounts receivable collection period 40 days 52 days
Accounts payable payment period 37 days 49 days
Inventory turnover (times) 13.90 18.30
Gearing 26.37% 32.71%
Required:
(a) Calculate comparable ratios (to two decimal places where appropriate) for
Cheviot for the year ended 30 April 2015. Ratios should be computed using
closing balances. All calculations must be clearly shown.
(10 marks)
(b) Write a report to your board of directors analysing the performance of Cheviot
plc, comparing the results against the previous year and against the industry
average.
(11 marks)
(c) If the profit after tax of Cheviot plc for the year ended 30 April 2015 was
370,000 and the share price was 2.80, compute the Price Earnings number
(PE) and evaluate this against the industry average PE of 9.
(4 marks)
40
The learning outcomes of this module include the ability to analyse, interpret and communicate
the information contained in financial statements. The most common analytical method is the
use of accounting ratios. This technique is often tested by a mini case study of the type used in
this question. It is important that answers go beyond simply stating that a particular ratio has
gone up or down, the interpretation should use the contextual information given in the question
and make links between different ratios. Good answers will draw conclusions from the ratios and
the background information, which provide insight into the financial position and performance of
the companies. This question in particular provided relevant industry average figures which
should feature in your analysis.
Excellent answers will use the analysis to draw appropriate conclusions which will be discussed
from the perspective of potential users.
You should carefully read the requirements of the questions which in this case specify the number
and nature of the ratios to be calculated. If you do not follow these instructions your work may
not be marked.
There are no absolute answers to this type of question and you will be rewarded for a logical and
informed analytical approach to the case described in the question.
Part c was a test of your understanding of the calculation and interpretation of the Price
Earnings number.
(a) Cheviot
Industry
2014 2015 average
465+80
ROCE 16.70% 2,845 = 19.16% 18.50%
465+80
Net margin 3.90% 11,200 = 4.87% 4.73
11,200
Asset turnover 4.29x 2,845 = 3.94x 3.91x
1,950
Current ratio 2.00 955 = 2.04 1.90
1,230+80
Quick ratio 1.42 955 = 1.37 1.27
11,200+8,460
Gross profit margin 30.00% 11,200 = 24.46% 35.23%
1.2030
Accounts receivable 40 days 11,200 365 = 40 days 52 days
collection period
750
Accounts payable 37 days 8,460 365 = 32 days 49 days
payment period
8,460
Inventory Turnover 640 =13.2x 18.30x
(times)
800
Gearing 26.37% 2,845 = 28.12% 32.71%
(b) REPORT
To: Board of Directors Date: xx/xx/xxxx
From: Accountant
Subject: Analysis of performance of Cheviot
This report should be read in conjunction with the appendix attached which shows the
relevant ratios (from part (a)).
Trading and profitability
Return on capital employed has improved considerable between 2014 and 2015 and is now
higher than the industry average.
41
Net income as proportion of sales has also improved noticeably between the years and is also
now marginally ahead of the industry average. Gross margin, however, is considerable lower
than in the previous year and is only some 70% of the industry average. This suggests either
that there has been as change in the cost structure of Cheviot or that there has been a
change in the method of cost allocation between the periods. Either way this is a marked
change that requires investigation. The company may be in a period of transition as sales
have increased by nearly 15% over the year and it would appear that new non-current assets
have been purchased.
Asset turnover has declined between the periods although the 2015 figure is in line with the
industry average. This reduction might indicate that the efficiency with which assets are
used has deteriorated or it might indicate that the assets acquired in 2015 have not yet fully
contributed to the business. A longer term trend would clarify the picture.
Liquidity and working capital management
The current ratio has improved slightly over the year and is marginally higher than the
industry average. It is also in line with what is generally regarded as satisfactory (2:1).
The quick ratio has declined marginally but is still better than the industry average. This
suggests that Cheviot has no short term liquidity problems and should have no difficulty in
paving its debts as they become due.
Receivables as a proportion of sales is unchanged from 2014 and are considerable lower than
the industry average. Consequently, there is probably little opportunity to reduce this
further and there may be pressure in the future from customers to increase the period of
credit given. The period of credit taken from suppliers has fallen from 37 days purchases to
32 days and is much lower that the industry average; thus, it may be possible to finance any
additional receivables by negotiating better credit terms from suppliers.
Inventory turnover has fallen slightly and is much slower than the industry average and this
may partly reflect stocking up ahead of a significant increase in sales. Alternatively, there is
some danger that the inventory could contain certain obsolete items that may require
writing off. The relative increase in the level of inventory has been financed by an increased
overdraft which may reduce if the inventory levels can be brought down.
The high levels of inventory, overdraft and receivables compared to that of payables suggests
a labour intensive company or one where considerable value is added to bought-in products.
Gearing
The level of gearing has increased only slightly over the year and is below the industry
average. Since the return on capital employed is nearly twice the rate of interest on the
debentures, profitability is likely to be increased by a modest increase in the level of gearing.
Signed: Accountant
(c) Price Earnings Number
EPS = 370,000 1,600,000 = 0.23125.
Price = 2.80.
280
PE = 23.125 = 12.1.
Industry average = 9.
Markets have confidence in future of the company and are willing to pay a price higher than
industry average PE suggests.
42
Section C
Answer one question and no more than one further question from this section.
Question 5
Ronaldsay Ltd is involved in the supply and maintenance of farming equipment.

One of its activities is the sale of output monitors. It offers a follow-up service to
companies that wish to upgrade their monitors to give a wider range and speed of
data output. The work needed to upgrade monitors is carried out at customers
premises. The upgrade involves the same work for most monitors and therefore a
standard price is used, as follows.
Monitor upgrade standard price

Components 150
Labour involved in travel to customers:
1/2 hr at 48 per hour 24
Labour: 2 hours at 48 per hour 96

Overhead: 200% of labour cost 240
Total cost 510
Profit mark-up at 20% on cost 102
Standard price 612
A customer has asked Ronaldsay to quote for a special upgrading for 100 monitors
at its farms. Using the standard price gave a total quote of 61,200 which was
rejected by the customer. The customers response was that a price of 30,000 was
what it had in mind. Ronaldsay is in the process of changing to a different monitor
manufacturer. As this is probably the last major upgrade of the old manufacturers
monitors the sales director of Ronaldsay is keen to accept the order and
recommends that a break-even price be calculated in order to provide information
for further negotiation.
The following information has been obtained:
(1) The standard upgrade requires three components (P, Q and R) with a total cost
of 150. Component P has a standard cost of 44 and will not be used when
the change of manufacturer occurs. There is no alternative use for this
component and it has no realisable value. Ronaldsay has 200 of these in stock.
Components Q and R will be compatible with the new manufacturers monitor.
The special nature of the upgrade required by the customer requires a further
component, W, which will have to be ordered from the current manufacturer at
68 per upgrade.
(2) The estimated total labour time travelling to the customer for the upgrade of
all of the monitors is 10 hours.
(3) The repetitive nature of the work means that the labour time for upgrading
each monitor would be only 1 1/2 hours. The operations manager has suggested
that 25% of the work could be carried out by trainees who are charged at half
the hourly rate of qualified engineers.
(4) The type of monitor in question requires use of a special machine during
upgrade. This will not be needed for the monitors from the new manufacturer.
An offer to buy the machine for 1,600 has been received from another
company; however requires immediate delivery or it will not buy the machine.
(5) Overheads are all fixed.
43
Required:
Prepare a brief report for the sales director of Ronaldsay Ltd which includes:
(a) A calculation of the break-even price for these special job and an explanation of
the figures used.
(19 marks)
(b) Comment on the factors which the sales director should consider when deciding
on the price to quote for the special job.
(6 marks)
Relevant and opportunity cost recognition are key techniques in short-term decision-making.
This question tests a candidates ability to apply these techniques. It is important in answering
such questions that you keep in mind the basic contribution approach to the analysis and clearly
distinguish between those costs and revenues that are relevant to the decision and those that are
no. Good answers will set out the computations in a clear, logical and coherent manner.
Candidates should note that the question required a full explanation of the figures used in the
analysis and marks were awarded as appropriate.
Part (b) required candidates to place the calculations in the context of the wider business
considerations by identifying appropriate factors for the sales director to consider.
Brief report for sales director of Ronaldsay Ltd
Re: Pricing for special customer quotation
(a)

Calculation of break-even price
Components 150
Less: Components P (44)
Component W 68
174 100 = 17,400
Travel time 10 hours at 48 480

Labour
1 1/2 hours 75% 48 54
1 1/2 hours 25% 24 9
63 100 = 6,300
Overheads
Opportunity cost of special machine 1,600

Break-even price 25,780
Explanation of the figures used:
Component P is a sunk cost 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.
44
The standard cost would have charged for 50 hours but only 10 will be actually 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 for the purposes of this decision.
The opportunity cost of using the special machine is the loss of the resale value.
(b) Factors to be considered in setting a price:
The break-even price (minimum price) is below that suggested by the customer. This
price gives a contribution of 4,220 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 upgrades of old
copiers?
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?
N.B. Other sensible factors may be acceptable.
Question 6
Suffolk plc specialises in the manufacture of radios and has just bought the rights to
make and sell a solar powered radio, the SPR. A firm of management consultants
has carried a feasibility study for the company at a cost of 100,000. The
consultants have concluded that the company will have a market for the SPR for 5
years before it becomes technically obsolete.
The management consultants have forecast the sales will be:
Year 1 2 3 4 5
Sales (units) 8,000 12,000 10,000 6,000 5,000
The SPRs are expected to sell for 70 per unit and the variable cost per unit is
expected to be 40. Relevant fixed costs per year (excluding depreciation, machine
maintenance and marketing) are expected to be 20,000.
If the project goes ahead, maintenance costs would be 32,000 per annum.
Additional working capitals of 150,000 would be required at the beginning of the
project; this is expected to be recovered at the end of the period.
Annual marketing costs would be 60,000 per annum for each of the 5 years. All
annual marketing occurs at the beginning of each year.
To make the SPR, there will be two requirements for assembly machinery:
i. Machinery for stage 1 of the production will be imported at a cost of 160,000.

It is expected that at the end of 5 years, it will be sold for 40,000.
ii. The company already has suitable machinery for the second stage of the
production process. This machinery has a book value of 120,000 while its
original cost was 380,000.
If not used on this project, this machinery would be sold now for 100,000. If it is
used on this project, this machinery will have to be adapted at a cost of 66,000.
This adapted machinery would be sold at the end of the project for 70,000.
The companys cost of capital is assumed to be 12% per annum.
45
Required:
(a) Determine the Net Present Value and Payback Period for the decision to go
ahead with the SPR project.
(20 marks)
(b) Advise the management of Suffolk plc whether, on a purely financial basis, the
company should make the SPR. You should explain your reasoning and state
any assumptions that you make.
(5 marks)
The application of capital investment techniques is an important element of the syllabus and
learning outcomes for Chapter 12 of the subject guide. The most effective approach to Part (a) is
to construct a columnar table in which relevant cash flows can be inserted. It is important to
give workings of all figures and to clearly explain treatment of all amounts, for example if a cost
is to be treated as sunk and therefore not included as a relevant cost this should be stated.
Having determined the net cash flow for each year these are discounted using the discount factors
taken from the tables provided. Thus a net present value can be arrived at and a decision
recommended and justified. This type of question requires use of a significant amount of data
and it is very important that your work is clearly presented and that al workings are legible and
understandable. The 8-column accounting paper can help in the respect. A suggested
presentation of the answer is given below. The calculation of the payback period shroud be
clearly shown and answers using either discounted or nominal cash flows were accepted.
Part (b) required an evaluation of the financial outcomes revealed in a; this required a
well-argued and explained analysis of the figures and a clear recommendation. The assumptions
you state should not simply state that you assume the information given in the question is correct
(a) Calculation of NPV
Years
0 1 2 3 4 5
000 000 000 000 000 000
Sales (units) 8000 12000 10000 6000 5000
Contribution (7040) 240 360 300 180 150
Working capital (150) 150

Stage 1 machinery (160) 40
Foregone sale of
second stage machinery (100)
Adaption cost (66)
Resale value of adapted
machinery maintenance (32) (32) (32) (32) (32)
Marketing (60) (60) (60) (60) (60)
Fixed costs (20) (20) (20) (20) (20)
Net Cash Flow (536) 128 248 188 68 358
Discount factor 1 0.893 0.797 0.712 0.636 0.567
Discounted cash flow (536,000) (114,304) 197,656 133,856 43,248 202,986
46
NPV = 156,050.
Ignore feasibility study.
Payback period based on cash flows = 2 years and 160,000/188,000 i.e. 2 years 10 months.
PP could be on discounted figures = 4 years and 3 months (ignoring specific timings),
(b) Since the NPV is positive then the project seems worthwhile as it will increase the economic
value of the firm. Payback is within three years which is reasonable.
Ignores uncertainty of cash flow estimates, inflation, taxation and risk. We assume there is
no alternative to selling the stage 1 machinery if the project is not undertaken.
We also assume the cash cost for marketing are at the beginning of the year whilst all other
cash outlays are spread throughout the year and subtracted from the contribution.
Any other sensible comments should be given credit.
Question 7
Dorset plc is considering undertaking a new project. The project manager has
produced a budgeted operating statement which shows that the project will be
profitable but acknowledges that there will be significant up-front investment. The
Chief Financial Officer is concerned about the level of funding needed for the project
and considers that it is essential that a cash budget is prepared. Initial consideration
is to be given to the first four months of the project from 1 January 2016.
Budgeted Operating Statement to 30th April 2016
Jan Feb March April

000 000 000 000
Sales, all on credit 120 130 84 132
Materials 40 42 28 46
Labour 34 34 26 36
Production costs 7 8 7 8
Administrative costs 8 8 8 8
Selling and distribution costs 8 9 6 10
97 101 75 108
Net profit 23 29 9 24
The following additional information is available:
(1) There are no inventories of finished goods.

(2) Cost of materials has been arrived at as follows:
Jan Feb March April
000 000 000 000
Opening inventory 0 22 30 42
Purchases 62 50 40 50
Less closing inventory 22 30 42 46
Cost of raw materials 40 42 28 46
(3) The period of credit allowed by suppliers of materials is one month.
(4) To encourage early payment of invoices, Dorset plc allows a cash discount of
10% if payment is made within the month of sale. It is estimated that 10% of
the debtors of each month will pay in the month of sale and a further 50% of
the debtors will pay in the following month. The remaining 40% are expected to
pay their invoices in full, two months after the month of sale.
(5) The overhead costs include the following items which have been allocated over
the year to give an equal monthly charge but which are payable as follows:
47
Costs Monthly charge Amount and date of payment

Production 1,000 4,000 in January
Administration 800 2,000 in January
Selling and distribution 500 1,500 in March
(6) Depreciation has been charged and included in production overhead at 1,500
per month.
(7) The capital budget indicates that capital payments will be made as follows:
January 180,000 March 20,000.
(8) Unless stated otherwise all items can be treated on a cash basis.
Required:
(a) Prepare a monthly cash budget for the four months to 30 April 2016 showing
the accumulated cash surplus or deficit from the project at the end of each
month to determine the finance required.
(19 marks)
(b) Explain why the CFOs insistence on a cash budget is justified and explain why
the information provided is important to management.
(6 marks)
The preparation of budgets is a key learning outcome of the course. This question provided a
relatively complex scenario which reuired a logical and well structured approach to extracting the
figures and preparing the budgets. A columnar answer was the most effective approach to
presenting this cash budget. Part (b) required you to identify the key management issues which
are evident in this budget and to use these to justify the preparation of such a budget.
(a) Cash Budget for the four months ended 30th April 2016
Jan Feb Mar Apr

Receipts:
Sales 10,800 71,700 120,560 105,880
Payments:
Purchases 62,000 50,000 40,000
Labour 34,000 34,000 26,000 36,000
Capital Expenditure 180,000 20,000
Production Expenses 8,500 5,500 4,500 5,500
Administration Expenses 9,200 7,200 7,200 7,200
Selling and Distribution 7,500 8,500 7,000 9,500
239,200 117,200 114,700 98,200
Net cash flow (228,400) (45,500) 5,860 7,680
Balance b/f 0 (228,400) (273,900) (268,040)
Balance c/f (228,400) (273,900) (268,040) (260,360)

Presentation
48
Workings
1. Calculation of receipts
Jan Feb Mar Apr

Sales 120,000 130,000 84,000 132,000
Current 12,000 13,000 8,400 13,200
1 month 50% 60,000 65,000 42,000
2 months 40% 48,000 52,000
12,000 73,000 121,400 107,200
Less Cash discount 10% (1,200) (1,300) (840) (1,320)
10,800 71,700 120,560 105,880
2. Calculation of production cost payments
Jan Feb Mar Apr

Production Costs 7,000 8,000 7,000 8,000
Depreciation (1,500) (1,500) (1,500) (1,500)
Monthly Charge (1,000) (1,000) (1,000) (1,000)
Cash Payment 4,000
8,500 5,500 4,500 5,500
3. Administrative costs
Jan Feb Mar Apr

Total costs 8,000 8,000 8,000 8,000
Monthly charge (800) (800) (800) (800)
Cash payment 2,000
9,200 7,200 7,200 7,200
4. Selling and distribution costs
Jan Feb Mar Apr

Total costs 8,000 9,000 6,000 10,000
Monthly charge (500) (500) (500) (500)
Cash payment 1,500
7,500 8,500 7,000 9,500
(b) The cash budget identifies shortfalls of cash in the early months which enables the
company appropriate financing of the project.
The cash flows in the early months could be made less negative by changing some of the
timings e.g. delay payments, give less credit, pay capital expenditure over a longer period.
Cash budget provides a link with other budgets
Cash budget provides a monitoring mechanism for project management
The cash budget enables the company to determine the ongoing working capital
implications of the project.
The cash budget can be used in avoiding over-trading and liquidity crises.
49

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Examiners commentaries 2015

Examiners commentaries 2015

Information about the subject guide and the Essential reading

What the examiners are looking for

Examination revision strategy

Examiners commentaries 2015

Information about the subject guide and the Essential reading

Comments on specific questions Zone A

Answer question 1 from this section.

(4) The business operates at a consistent gross profit percentage of 25%.

Reading for this question

Insurance claim = 30,490

(b) Distinction is often made between financial and management accounting.

Reading for this question

Approaching the question

Price/cost data per unit

Selling price 60 108 58 50

Reading for this question

Contribution per unit 16 20 36 10

Contribution per kg of Direct material 6.4 4 24 5

C 2,500 3,750 3,750 90,000 90,000

A 2,000 5,000 8,750 32,000 122,000

D 2,750 5,500 14,250 27,500 149,500

B 1,150 5,750 20,000 23,000 172,500

Total 20,000 172,500

Variable overhead per hour 3.00 2.50

Direct labour hours per unit of X 5 hours 3 hours

Direct labour hours per unit of Y 6 hours 4 hours

The actual production for April 2015 was:

Reading for this question

Subject guide, Chapter 9 (pp.15560).

Perks R, and Leiwy D. (2013) Chapter 14.

Approaching the question

i. Department 2 budgeted variable overheads

ii. Department 1 budgeted fixed overhead absorption rate

440, 000/(50, 000 5 50, 000 6) = 0.80

iii. Department 1 fixed overhead over recovery

Over recovery 11,200

The following is the trial balance of Pickwick plc at 31 January 2015:

(1) Inventories at 31 January 2015 are valued at 188,266.

(4) The companys depreciation policies are as follows:

Fixtures and Fittings Straight line over 5 years

Motor vehicles Reducing balance method at 40% per annum

All non-current asset residual values are estimated at zero.

Irrecoverable receivables of 4,534 in addition to those already written off.

Specific provision for doubtful receivables of 6,812.

General provision of 2% against the remaining receivables.

Prepare the following financial statements for Pickwick plc:

(a) Income statement for the year ended 31 January 2015.

(b) Statement of financial position at 31 January 2015.

Reading for this question

Subject guide, Chapters 4, 5 and 6.

Perks R, and Leiwy D. (2013) Chapter 18.

Approaching the question

(a) Pickwick plc

Income Statement for the year ended 31 January 2015

(b) Pickwick plc

Statement of financial position at 31 January 2015

Non-current assets [W3] 629,872

Total equity and Liabilities 1,429,550

W2 Provision for doubtful debts

Barnaby Ltd is a UK family business which trades as a wholesaler, importing silk

Statements of financial position at 31 December