June 2008 paper 3 1 C Operating profit 70 600 add depreciation 20 100 loss on sale 1900 less increase in working

capital (14 300) Operating cash flow 78 300 Operating profit before depreciation 1 220 increase in stock (13) decrease in debtors 8 decrease in creditors (12) Operating cash flow 1 203 The retained earnings must be debited for the entire premium as the shares were originally issued at par. A capital redemption reserve must be created to replace the redeemed capital by debiting the retained earnings. 1 share for $4 of loan equates to 5000 shares so a premium of $3 per share. Ordinary shares increase by (5 x $1) $5000. Share premium increases by (5 x $3) $15000 Preference shares will be reduced by 60% - $40 000. Ordinary shares will be reduced to 5% of existing total - $20 000 Total = $60 000 The Capital redemption reserve is required to replace the capital redeemed only. General Journal Assets 200 Goodwill 70 Ordinary share capital 200 Share premium 50 Bank 20 Premium = $137 50 60 = $27 000 per share = $27 / 60 = 0.45c General Journal Assets 150 Goodwill 30 Liabilities 40 Ordinary shares 32 Share premium 48 On 31/12/08 half of the debentures ($35000) and all of the loan will be current liabilities as they are due for repayment in the next period. The other half will still be non-current. On 31/12/07 the loan stock is still a non-current liability incurring 8% ($80 000) interest per year, Earnings = profit after interest (and tax) = $30m - $6m = $24m EPS = $24m / 20m shares = $1.20 per share Price : earnings = $15 : 1.20 = 12.5 Debtors turnover = debtors / credit sales x 365 so debtors = 40 / 365 x $146000 = $16000 If assets were $100, liabilities $20 and profit $50 then asset use is 50% and gearing 20%. By taking a loan of $20 to increase assets. Asset use is now 50/120 = 41.47%. Gearing = 40/120 = 33.33% A no change to liabilities or net assets B and C increases liabilities so increases gearing D rights issue increases cash, no increased liabilities so improves gearing Earnings per share is a measure of the profit earned for each ordinary share therefore the preference dividend ($15) is deducted from the NPAT ($215). Window dressing is the term that describes the directors attempts to make the final accounts look better than they are. A, B and C may be done to dress up the final accounts.

4 5

B B

6 7

C C

8 9

A A

10

11 12

B C

13 14

C B

15

16 17

C D

18 19 20

A D A

21

22

23

24 25 26

D D A

27 28 29

B B B

30

An overdraft is a short-term source of finance Sensitivity analysis determines the impact of price/cost changes will have on future profitability. Breakeven = Fixed cost / contribution Budgeted Breakeven = $30 / $3 = 10 000 units. Actual breakeven = $30 / 4 = 7500 units 25% lower (better) breakeven Overhead absorption rate = budgeted overheads / budgeted hours = $104 / 8 = $13 per dlh. If 7500 hours worked then (7500 x $13) = $97 500 has been absorbed. Under recovered (absorbed) overheads = Actual overheads absorbed overheads So actual overheads = $97500 (absorbed) + $15000 (under-absorbed) = $112 500 Only the variable component of the costs will change. 4000 2000 units = 2000 extra units cost extra ($248 - $154) = $94 000. Per unit this is $94 / 2 = $47 Total cost (2000 units) = Variable costs + Fixed costs so fixed costs = $154 (2000 x 47) = $60 000 Total cost (3000 units) = (3000 x $47) + $60 000 = $201 000 20 000 units 16 000 units $ $ Direct material 80 000 16/20 x 80 000 64 000 Direct labour 120 000 16/20 x 120 000 96 000 Variable overheads (100% prime cost 200 000 64 + 96 or 16/20 x 200 160 000 Fixed costs 280 000 unchanged 280 000 680 000 $600 000 40 000 extra units (120 80) cost an extra $160 000 ($660 - $500). This is the variable cost. Per unit this is $160 / 40 = $4 per unit. Budgeted production = 240 000 hours / 3 hrs per unit = 80 000 units Budgeted costs $720 000 / 80 000 units = $9 per unit. Standard cost Actual cost Materials (24 x $12) $288 Materials (26 x $16) $416 Labour (8 x $25) $200 Labour (6 x $22) $132 $488 / unit $548 / unit Variance = standard actual = $488 - $548 = ($60). Negative so adverse AQ x SP 4350 x $9 $39 150 AQ x AP ($39150 435) = $38 715 $435 F Net present value is based on cash flow only depreciation is a non-cash item. ARR = average profit / average investment Net profit (5 years) = $100 - $20 (depreciation) + $10 (reduced costs) = $90 000 Average profit = $90/5 = $18 000. Average investment = $200 / 2 = $100 000 ARR = $18 / $100 = 18% $40000 x (.909 + .826 + .751) = $99 440 - $80 000 (initial investment) = $19 440