Contents

Task 1 ................................................................................................................................ 2

Task 2 ................................................................................................................................ 6

Task 3 .............................................................................................................................. 10

Task 4 .............................................................................................................................. 13

Task 5 .............................................................................................................................. 15

Task 6 .............................................................................................................................. 18

COURSEWORK ............................................................................................................ 21
Task 1

Extract a profit and loss account for the year ended 30 June 2017 and drawing up a

balance sheet as at 30 June 2017 for G Graham. The trial balance as at 30 June 2017

after his first year of trading was as follows:

G Graham

Income Statement for the year ending 30 June 2017

Sales 382,420

Less Cost of goods sold: 245,950

Purchase 29,304 216,646

Less Closing

inventory 165,774

Gross profit

Less Expenses:

Salaries and wages 48,580

Equipment rental 940

Insurance 1,804

Lighting and heating 1,990

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 Motor expenses 2,350

Sundry expenses 624 56,288

Net profit 109,486

Page 3 of 26
 G Graham

Balance Sheet as at 30 June 2017

Non-current assets

Shop 174,000

Fixtures 4,600

Lorry 19,400 198,000

Current assets

Inventory 29,304

Accounts receivable 44,516

Bank 11,346

85,166

283,166

Current liabilities

Accounts payable 23,408

259,758

Capital

Balance at 1.7.2007 194,272

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Add Net profit 109,486

303,758

Less Drawings 44,000 259,758

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Task 2

F Brown drew up the following trial balance as at 30 September 2017. You are to draft

the trading and profit and loss account for the year ended 30 September 2017 and a

balance sheet as at that date.

F Brown

Income Statement for the year ending 30 September 2017

Sales 391,400

Less Returned in 2,110 389,290

Less Cost of goods sold:

Opening

inventory 72,410

Add Purchases 254,810

Less Returns out 1,240 253,570

Carriage

inwards 760

326,740

Less Closing 89,404

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 inventory 237,336

Gross profit 151,954

Less Expenses:

Wages and

salaries 39,600

Carriage out 2,850

Motor expenses 1,490

Rent and rates 8,200

Telephone

charges 680

Insurance 754

Office expenses 392

Sundry expenses 216 54,173

97,781

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 Balance Sheet as at 30 September 2017

Non-current assets

Van 5,650

Office equipment 7,470 13,120

Current assets 89,404

Inventory 38,100

Account receivable 4,420

Bank 112 132,036

Cash 145,156

Current liabilities 26,300

Account payable 118,856

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Capital

Balance as at

1.10.2007 49,675

Add Net Profit 97,781

147,456

Less Drawings 28,600 118,856

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Task 3

Study the following financial statements of two companies and then answer the

questions which follow. Both companies are stores selling carpets and other floor

coverings. The values shown are in £000s.

a) Calculate the following ratios for both Spreadlight Ltd and Easylawn Ltd:
Spendlight Ltd Easylawn Ltd

i. Gross profit as % of

sales 430 100 430 100

× = 17.2% × = 26.9%
2500 1 1600 1

ii. Net profit as % of

sales 166 100 170 100

× = 6.6% × = 10.6%
2500 1 1600 1

iii. Expenses as % of

sales 264 100 260 100

× = 10.6% × = 16.25%
2500 1 1600 1

iv. Inventory turnover

2070 1170
= 10.1 times = 8.7 times
(190+220)÷2 (110+60)÷2

v. ROCE

166 100 170 100

× = 45.1% × = 76.2%
368 1 223 1

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vi. Current ratio

399 199
= 2.1 = 5.2
189 38

vii. Acid test ratio

179 39
= 0.95 = 1.03
189 38

viii. Accounts

receivable/sales ratio 104 29

× 12 = 0.5 months × 12 = 0.2 months
250 1600

ix. Accounts

payable/purchases 189 38
× 12 × 12
2100 1220
ratio
= 1.08 months = 0.37 months

b) Comment briefly on the comparison of each ratio as between the two companies.

Easylawn is a more organized company than Spendlight. Compared with the profits of

the two companies, Easylawn has gained 76.2% of the profits, so Easylawn 70% is

more superior to Spendlight with 45.1%.

These are conjecture you need to know more about the industry before you make a

decision.

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 i. Easylawn has achieved even greater gross profit while maintaining reasonable

sales levels.

ii. Because of the low cost, Easylawn is the same as the gross profit of Spendlight,

but the higher number of net profit is realized by Easylawn.

iii. Spendlight has managed to increase inventory turnover, but Easylawn still keeps

the number of accounts relatively low.

iv. Easylawn's return on capital was 69% because it was helped by low inventories,

better debt or sales ratios and relatively low accounts payable.

v. Compared with Spendlight, Easylawn seems to have a healthier ratio of acid

tests.

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Task 4

The balance sheets of F Black, a sole trader, for two successive years are shown below.

You are required to draw up a cash flow statement for the year ended 31 December

20X4.
Deconciliation of net profit to net cash

Net profit 22 000

Depreciation 4 650

Decrease in stock 300

Decrease in creditors (10 400)

Decrease in debitor 5 200

Net cash inflow 21 750

Analysis of changes in cash during the year:

Balance at 1 January 20X6 (13 650)

Net cash inflow 20 750

Balance at 31 December 20X6 7 100

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Cash flow statement for the year ended 31 December 20X6

Net cash flow from operating activities 21 750

Returns on investment and servings of finance:

Payment to acquire tangible fixed assets (6 000)

Financing:

Loan received 20 000

Drawing (15 000) 5 000

Increase in cash 20 750

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Task 5

Categorize each of the following costs into one of these six categories:

(i) Direct materials

 (f) Cost of raw materials

 (h) Carriage inwards on raw material

(ii) Direct labour

 (m) Wages of lathe operators in factory

(iii) Indirect manufacturing costs

 (a) Wages for staff maintaining machines in factory

 (c) Expenses of canteen run exclusively for factory workers

 (e) Grease used for factory machinery

 (g) Carriage inwards on fuel used in factory boiler-house

 (j) Wages of cleaners in factory

 (t) Repairs to factory buildings

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(iv) Administration expenses

 (b) Wages for staff maintaining accounting machinery

 (d) Expenses of canteen run exclusively for administrative workers

 (i) Wages of managing director’s chauffeur

 (n) Wages of security guards; the area of the factory buildings is four times as great

as the other buildings

 (q) Managing director’s remuneration

(v) Selling and distribution expenses

 (l) Rent of salesrooms

 (r) Sales staff salaries

 (p) Rent of annexe used by accounting staff

 (x) Rent of internal telephone system in factory

 (w)Business rates: 3/4 for factory buildings and 1/4 for other buildings

 (z) Costs of advertising products on television.

 (s) Running costs of sales staff cars

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(vi) Finance expenses

 (k) Discounts allowed

 (o) Debenture interest

 (u) Audit fees

 (v) Power for machines in factory

 (y) Bank charges

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Task 6

From the following information, calculate:

(a) Prime cost

(b) Production cost

(c) Total cost

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 £ £ £

Production Cost

Stock of start of period 120,000

Bought in the period 400,000

(+) Haulage cost on raw material bought 4,000

404,000

524,000

(-) Stock at close of period 160,000

Production cost used 364,000

(+) Wages and salaries of employees 154,000

Royalties payable per unit 1,600

Prime cost 519,600

Overhead Cost

Wage and salaries of employees 66,000

Salary of administrative staff 72,000

Travelling expenses: Factory worker not directly 100

concerned with production

Administrative staff 200

Canteen cost used by all workers, 2/3 work in the 4,000

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factory

Interest on loan and overdraft 3,800

Other indirect manufacturing costs 58,000

Other administrative expenses 42,000

Other selling expenses 65,000

830,700

i) Prime cost: 519,600

ii) Production cost: 364,000

iii) Total cost: 830,700

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COURSEWORK

1. List and briefly explain the stakeholders mentioned by the Corporate Report.

The stakeholders mentioned by the Corporate Report are:

 Shareholders – existing and potential investors need information to help them to

decide whether to hold, buy or sell shares in a company.

 Lenders – both existing and potential lenders need to assess the risks involved –

the possibility of default. They will be concerned to judge the ability of the borrower to

service interest charges and to repay current and future amounts outstanding.

 Employees – individuals and their representatives need financial information to

assess job security and job prospects and to support collective bargaining negotiations.

 Investment analysts and professional advisers – the financial press, ‘the City’

and financial advisers need access to and need to be able to understand financial

information to advise their readers and clients.

 Business partners – suppliers, customers and competitors are all interested in an

organization’s financial performance, its reputation and its future prospects.

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 Government – in addition to the possibility of the government being a customer

or a creditor (a person or an organization to whom a business has a commitment), the

taxation of profits requires the disclosure of certain financial information.

 The general public – information supplied, for example, to shareholders and

business partners helps to inform employment and wealth creation issues.

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2. The preparation of the sales budget is the starting point for the preparation of the

overall or master budget. Explain carefully.

The preparation of the sales budget is the starting point for the preparation of the overall

or master budget. The marketing and sales team will need to consider the present level

of trading, anticipate future conditions, and use feedback from the sales force and

market research to prepare a sales budget. The sales budget, of course, is not a single

figure for the financial year but a detailed analysis of sales based on selling prices and

sales volumes as follows:

 by product and service offering;

 by customer;

 by region;

 by month.

Once the first draft of the sales budget has been completed, the production or operations

budget can be put together. In the case of a manufacturing company, the sales budget

willneed to be considered and allowances will need to be made for changes in stock

levels, the use of sub-contractors and lead times so that the full operational implications

of the sales budget can be highlighted. These will focus on:

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  the level of output by product and service line;

 when it is needed;

 which activities or departments will produce it; and

 the associated costs of the labour, materials and facilities.

The sales and operations budgets determine the level of activity for the whole of the

organization. This affects the resources required for marketing, the sales force,

distribution, and administrative activities such as finance and human resources which

will need to prepare their own cost budgets. The budget-setting process is illustrated in

Figure 11.2. In the case of a non-manufacturing or service business such as an

advertising agency or a management consultancy, there will be no ‘cost of goods sold’

or ‘production’ budget. Instead, the focus of attention will be the ‘operating cost’ budget

which will be particularly concerned with (a) personnel costs, and (b) the cost of

facilities such as office accommodation and information technology.

There are additional important points to bear in mind when a budget is being prepared.

First, do make sure that you understand the actual results for the current period – the

period before the start of the budget period – so that the impact of the different factors

affecting overall performance, such as the product mix and the breakdown of operating

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costs, is fully appreciated. This will help to ensure that next year’s budget fully reflects

these inter-relationships.

Second, be clear about what is going to be different in the next budget period. For

example, the introduction of a new product range and the expansion of facilities will

affect the overall revenue and cost structure. These differences need to be reflected in

the budget.

Third, take care to specify all the assumptions you have used in preparing the various

drafts of the budget. Sales volumes, selling prices, head count, and percentage salary

increases are all examples. Your budget submissions will almost certainly be challenged

and if you are not clear about the assumptions on which they were based, it will be very

difficult to defend them since there will be no benchmarks against which they can be

justified.

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