Manufacturing Businesses: Answers To End-Of-Chapter Questions

1.1.
1 Manufacturing
businesses
Answers to End-of-chapter questions

2 Direct costs
$
Cost of raw materials 112 600
Manufacturing labour 432 000
544 600
4 Kingsdown Doors Ltd

Manufacturing account for the year ended 30 June 2014
$ $ $
Cost of raw materials consumed
Opening inventory 26 000
Purchases 132 000
add carriage inwards 1 600
133 600
less returns outwards (2 300)
131 300
157 300
Closing inventory (24 500)
132 800
Factory wages 130 500
Prime cost 263 300
Factory overheads
Factory supervisor’s wages 22 500
Factory depreciation 12 000
Factory heating and lighting 14 600
Total factory overheads 49 100
Cost of production 312 400
© Oxford University Press 2015: this may be reproduced for class use solely for the purchaser’s institute 1
6 a Persad plc
Manufacturing account for the year ended 31 May 2014
$ $ $
Purchases 234 090
add carriage inwards 750
234 840
less returns outwards (980)
233 860
255 310
233 140
Direct labour costs (+$6 000 due) 266 000
Prime cost 499 140
Factory overheads
Indirect labour costs (+$2 000 due) 84 800
Other overheads 138 000
Depreciation of factory machinery 25 000
Total factory overheads 247 800
Adjustment for work in progress
1 030
b Work in progress is the term used for the value of products that are in the
process of being manufactured but are in various stages of completion.
c Cost per unit is: Cost of production/35 000, i.e. $747 970/35 000 = $21.37
8 Unrealised profit is based on the realisation and prudence concepts.
10 Inventory at cost Mark-up Inventory at transfer price
($) ($) ($)
12 000 20 14 400
26 000 40 36 400
40 000 25 50 000
30 000 10 33 000
12 a
Marco plc
Manufacturing account for the year ended 31 January 2015
$000 $000
Opening inventory 40
Purchases 568
Carriage inwards 12
620
Closing inventory (42)
578
Factory wages 527
Prime cost 1 105
Factory overheads
Heating and lighting ($70 × 4/5) 56
Power 105
Rent and rates ($80 × 4/5) 64
Depreciation of machinery 88
Total factory overheads 313
Manufacturing profit 284
Production at transfer price 1 704
b Income statement for the year ended 31 January 2015
$000 $000
Revenue 1 920
Less: Opening inventory at transfer price 132
1 836
Closing inventory at transfer price (150)
(1 686)
Gross profit 234
Manufacturing profit 284
Less: increase in provision for unrealised profit (W1) (3)
281
515
Less: carriage outwards 24
Heating and lighting ($70 × 1/5) 14
Office salaries 190
Rent and rates ($80 × 1/5) 16
Depreciation of office equipment 11
(255)
Profit for year 260
$000
W1 Increase in provision for unrealised profit (figures in $000)
Provision on finished goods inventory at 31 January 2015
(1/6 × $150) 25
Provision on finished goods inventory at 1 February 2014
(1/6 × $132) (22)
Increase in provision 3
c
Statement of financial position at 31 January 2015 (Extract)
$000 $000
Current assets
Inventories
raw materials 42
work in progress 18
finished goods at transfer price 150
less provision for unrealised profit (25)
125
185
1.1.2 Not-for-profit
organisations

2 Sports First
Receipts and payments account for the year ended 31 March 2015
$ $
RECEIPTS PAYMENTS
Cash balance, 1 April 2014 450 Refreshments purchases 6 510
Subscriptions 18 620 Administration 735
Refreshments takings 9 460 Additional sports equipment 5 950
Club staff wages 7 050
Ground maintenance 805
Refreshments staff wages 6 460
Secretary’s expenses 450
Cash balance, 31 March 2015 570
28 530 28 530
Balance b/d, 1 April 2015 570
4 Kingsley Theatre Club

Refreshments trading account
for the year ended 30 June 2014
$ $
Refreshment takings 42 500
Less Opening inventory 2 600
Purchases (+$300) 22 300
24 900
Closing inventory (−$50) (3 450)
(21 450)
21 050
Less Refreshments staff wages (13 500)
Profit on refreshments 7 550
Income and expenditure account
$ $
INCOME
Membership subscriptions (+$350) 8 650
Performance ticket sales 12 600
28 800
EXPENDITURE
Production expenses 10 400
Rent 16 500
Theatre costs (heating etc.) 1 700
(28 600)
Surplus of income over expenditure 200
6
Accumulated fund at 1 January 2015
$ $
Assets
Cash in hand 20
Sailing equipment at valuation 12 600
Subscriptions due 250
12 870
Liabilities
Subscriptions received in advance 400
Bank overdraft 650
Amount due for equipment 1 100
(2 150)
10 720
8 a
Hole In One Golf Club
Statement of affairs at 1 January 2014
$ $
Non-current assets
Clubhouse at valuation 120 000
Golf equipment at valuation 42 300
162 300
Current assets
Refreshments inventory 3 270
Subscriptions due and unpaid 400
Cash at bank 1 420
5 090
167 390
Accumulated fund 163 880
Current liabilities
Refreshments suppliers amounts due 1 430
Refreshments staff wages owing 380
Subscriptions received in advance 1 700
3 510
167 390
b Dr Subscriptions account Cr
Opening balance (due) 400 Opening balance
Income and (received in advance) 1 700
expenditure account 52 660 Bank 52 100
Closing balance c/d Closing balance c/d
(received in advance) 1 640 (due) 900
54 700 54 700
Balance b/d 900 Balance b/d 1 640
c
Refreshments trading account
for the year ended 31 December 2014
$ $
Revenue 33 620
Less: Opening inventory 3 270
Purchases (W1) 22 480
25 750
21 458
12 162
Less: refreshments staff wages (W2) (10 260)
W1 Refreshments purchases
$
Payments to suppliers 22 800
Less opening amount due (1 430)
Add closing amount due 1 110
22 480
W2 Refreshments staff wages
$
Wages paid 10 400
Less opening amount due (380)
Add closing amount due 240
10 260
d Income and expenditure account
for the year ended 31 December 2014
$ $
INCOME
Subscriptions 52 660
54 562
EXPENDITURE
Administration 260
Golf course maintenance 8 610
Advertising costs 1 680
Cleaning expenses 2 842
Golf professional’s salary 18 000
Greenkeeper’s wages 5 300
Clubhouse expenses 6 350
Depreciation:
Clubhouse 6 000
Golf equipment (W3) 10 200
(59 242)
Deficit (4 680)
W3 Depreciation of golf equipment

$
Opening valuation 42 300
Add purchases of new equipment 12 500
Less closing valuation (44 600)
10 200
e Statement of financial position at 31 December 2014

$ $
Non-current assets
Clubhouse at valuation 114 000
Golf equipment at valuation 44 600
158 600
Current assets
Refreshments inventory 4 292
Other receivables (subscriptions due) 900
5 192
163 792
Accumulated fund
Balance at 1 January 2014 163 880
Less deficit (4 680)
159 200
Current liabilities
Other payables (wages due and
subscriptions received in advance) 1 880
Refreshment suppliers 1 110
Bank overdraft 1 602
4 592
163 792
10 a Support Our Town (S.O.T.)
Statement of affairs at 1 February 2014
$ $
Non-current assets
Floats at valuation 1 200
Current assets
Refreshments inventory 370
Event insurance prepaid 150
Cash at bank 670
1 190
2 390
Accumulated fund 270
Current liabilities
Trade payables for refreshments 1 920
Town community charges owing 200
2 120
2 390
b Refreshments trading account

for the year ended 31 January 2015
$ $
Revenue 34 910
Less Opening inventory 370
Purchases (W1) 22 350
22 720
(22 228)
W1 Refreshment purchases
$
Payments to suppliers 22 400
Less opening amount due (1 920)
Add closing amount due 1 870
22 350
c Income and expenditure account
for the year ended 31 January 2015
$ $
INCOME
Donations for carnival floats 22 600
35 282
EXPENDITURE
Administration expenses 100
Carnival floats decoration 4 610
Advertising 680
Rubbish removal and clear-up costs 2 100
Charity donations 25 500
Event insurance (W2) 1 000
Town community charges (W3) 1 250
Petrol costs 260
Depreciation of carnival floats 60
(35 560)
Deficit (278)
W2 Event insurance
$
Paid 950
Add opening prepayment 150
Less closing prepayment (100)
1 000
W3 Town community charges

$
Paid 1 200
Add closing amount due 250
1 250
d Statement of financial position at 31 January 2015
$ $
Non-current assets
Carnival floats at valuation 1 140
Current assets
Other receivables (insurance) 100
Cash at bank 380
972
2 112
Accumulated fund
Balance at 1 February 2014 270
Less deficit (278)
(8)
Current liabilities
Trade payables (refreshments) 1 870
Other payables (community charges) 250
2 120
2 112
12 a
Glades Social Club
Accumulated Fund at 1 July 2013
$ $
Assets
Cash at bank 3 840
Club buildings nbv 259 000
Club furniture 17 500
Inventory 870
Subscriptions due 650
281 860
Liabilities
Subscriptions in advance 210
General expenses due 380
Life membership fund 14 500
(15 090)
266 770
b Dr Subscriptions account Cr
Opening balance (due) 650 Opening balance
Income and (received in advance) 210
expenditure account 6 080 Bank 6 750
Closing balance c/d Closing balance c/d
(received in advance) 710 (due) 480
7 440 7 440
Balance b/d 480 Balance b/d 710
c Refreshments trading account

$ $
Revenue 2 470
Less: Opening inventory 870
Purchases (+$310) 2 060
2 930
(2 550)
Loss on refreshments (80)
d Income and expenditure account

$ $
INCOME
Members’ subscriptions 6 080
Donations 320
Life membership fund (W1) 1 675
8 075
EXPENDITURE
General expenses (W2) 4 000
Loss on refreshments 80
Depreciation
club buildings 7 000
furniture and equipment (W3) 3 750
(14 830)
Deficit 6 755
W1 Life membership fund $

Fund at 1 July 2013 14 500
Add new subscriptions 2 250
16 750
Less 10% income for year (1 675)
Fund at 30 June 2014 15 075
W2 General expenses $
Paid 4 440
Less closing amount prepaid (60)
4 000
W3 Depreciation of furniture and equipment

$
Opening valuation 17 500
Add new furniture and equipment 6 750
Less closing valuation (20 500)
3 750
e
Statement of financial position at 30 June 2014
$ $
Non-current assets
Club buildings at cost 280 000
less depreciation (28 000)
252 000
Furniture and equipment
at valuation 20 500
272 500
Current assets
Other receivables (prepaid
general expenses and
subscriptions due) 540
Cash at bank 3 290
4 210
276 710
Accumulated fund
Balance 1 July 2013 266 770
Less deficit (6 755)
260 015
Non-current liability
Life membership fund 15 075
Current liabilities
Loans from members 600
Trade payables (refreshments) 310
Other payables (subscriptions
received in advance) 710
1 620
276 710
1.1.3 Limited liability
companies

2 Window dressing is the process of attempting to improve the appearance of
financial statements so as to give investors a more favourable impression of
a company’s financial health. Examples could include: reducing a provision
for doubtful debts; delaying payments to suppliers; running down inventory
levels to improve cash balances; selling off non-current assets at the year end
to improve cash balances.
4 Reconciliation of operating profit to the net cash from operating activities
for year ended 31 March 2015
$ $
Profit before interest and taxes 95 242
Adjustment for depreciation 13 420
Profit on disposal of non-current assets (915)
Decrease in inventories 1 580
Increase in trade receivables (778)
Decrease in trade payables (2 518)
106 031
Less interest expense (8 640)
tax paid (12 200)
Net cash from operating activities 85 191
6 TFR Ltd
Statement of cash flows for the year ended 31 March 2015
Statement reconciling operating profit to net cash flow from operating activities
$000 $000
Profit before interest and taxes 30
Adjustment for depreciation 12
Profit on disposal of non-current assets (3)
Increase in inventories (26)
Increase in trade receivables (14)
Decrease in trade payables (7)
(8)
Less: interest paid (9)
tax paid (18)
Net cash used in operating activities (35)
Investing activities
Proceeds from disposal of non-current assets 8
Payments to acquire non-current assets (W1) (52)
Net cash from investing activities (44)
Financing activities
Issue of shares 45
Bank loan 22
Dividends paid (25)
Net cash from financing activities 42
(37)
Cash and cash equivalents at 1 April 2014 14
Cash and cash equivalents at 31 March 2015 (23)
W1 Payments to acquire non-current assets
Net book value at beginning of year 224
Less disposal nbv (5)
Less depreciation (12)
207
Add purchase of additional non-current assets 52
Net book value at end of year 259
8 a Journal
$m $m
Revaluation reserve (W1) 21.2
Share premium 21.0
Retained earnings 17.8
Ordinary shares 60.0

W1 Revaluation Reserve $m
Land and buildings at valuation 135.0
Net book value of land and buildings was 113.8
21.2
b Profit before interest and tax
$m
Retained earnings at 31 December 2014 60.4
Add back transfer for bonus issue 17.8
dividends paid 28.0
tax liability for year 103.1
interest 3.9
213.2
Less retained earnings at 1 January 2014 (41.6)
171.6
c VORTEX plc
Statement of cash flows for the year ended 30 December 2014
$m $m
Statement reconciling operating profit to net cash from operating activities
Profit before interest and tax 171.6
Adjustment for depreciation (W2) 18.0
Profit on sale of non-current assets (W3) (0.2)
Decrease in inventories 12.3
Increase in trade and other receivables (7.1)
Increase in trade and other payables 8.8
203.4
Interest paid (3.9)
Tax paid (121.4)
Net cash flow from operating activities 78.1
Cash flow from investing activities
Proceeds from sales of non-current assets 0.9
Payments to acquire non-current assets (20.0)
Net cash flow from investing activities (19.1)
Cash flow from financing activities
Redemption of debentures (13.0)
Dividends paid (28.0)
Cash from financing activities (41.0)
Increase in cash and cash equivalents 18.0
Cash and cash equivalents at 1 January 2014 11.1
Cash and cash equivalents at 31 December 2014 (6.9)
W2 Adjustment for depreciation $m

Land and buildings 0.7
Machinery 11.0
Fixtures and fittings [27 − (26 − 5.3)] 6.3
18.0
W3 Profit on sale of non-current assets $m

Sale proceeds 0.9
Less net book value (6 − 5.3) (0.7)
0.2
International
1.1.4 accounting
standards
2 International accounting standards are important to shareholders for the
following reasons.
uuThey ensure the implementation of the five fundamental accounting
concepts: true and fair view, duality, consistency, business entity, money
measurement. The financial statements required by IAS 1 Presentation of
financial statements will apply these concepts.
uuThe standards are designed to protect the interests of shareholders and
prevent them from being misled. Directors who are responsible for the
preparation of financial statements are required by the standards to
follow very strict rules. IAS 1 Presentation of financial statements requires
directors to produce particular financial statements (income statement,
statement of changes in equity, statement of cash flows, statement
of financial position, explanatory notes including information about
accounting policies).
Standards ensure the following.
uuComparability: so that shareholders can be confident of basing any
assessment of a company’s financial position on information that is
comparable from one year to the next. (IAS 1 Presentation of financial
statements requires the inclusion of figures from the previous year in
each of the financial statements.)
uuRelevance: so that shareholders can feel confident that the information
is designed to meet their needs. (IAS 1 Presentation of financial
statements requires the comprehensive list of financial statements
listed above which provide shareholders with all of the information they
require.)
uuReliability: so that shareholders can be confident that the information
would be the same irrespective of who produced the financial
statements. (IAS 1 Presentation of financial statements is specific
about the financial statements required and their content.)
uuUnderstandability: so that shareholders will find financial statements
accessible and comprehensible. (IAS 1 Presentation of financial
statements sets out formats to be followed which are designed to be as
straightforward for shareholders and other users as possible.)
4 a IAS 2 Inventories should be applied. The standard requires inventories
to be valued at the lower of cost and net realisable value. The inventories
should be valued as follows:
374 undamaged items can be valued at cost ($12) = $4 488
14 damaged items can be valued at cost ($12) = $ 168
32 damaged items should be valued at
net realisable value ($14 – $4, i.e. $10 each) = $ 320
Total = $4 976
b IAS 10 Events after the reporting period should be applied. The standard
sets out how to deal with events that have occurred after the reporting
period which provide further evidence of conditions that existed at the
end of the reporting period. These are referred to as adjusting events. In
the case of this trade receivable, the directors must adjust the total of trade
receivables shown in the statement of financial position and write off the
irrecoverable debt in the income statement prior to the publication of the
company’s accounts on 31 March.
c IAS 37 Provisions, contingent liabilities and contingent assets should be
applied. This standard requires that a liability should be disclosed in the
financial statements where the obligation arises from past events, payment
is probable (there is more than a 50 per cent chance) and where the
amount of the obligation can be reliably estimated. Where the obligation
is possible (there is less than a 50 per cent chance) and cannot be reliably
estimated then a note must be provided to the accounts setting out
details of what is called a contingent liability. In the case of the situation
described, the directors must show a liability of $14 800 in the financial
statements.
Auditing and
1.1.5 stewardship of
limited companies
2 It is a legal requirement that shareholders appoint auditors to ensure that they
(the shareholders) can have confidence that the directors of the company have
given a true and fair view of the company’s affairs in the published financial
statements. As a result, shareholders will be in a position to make valid decisions
about their investment in the company.
4 Stewardship is the term used to describe a company’s directors’ responsibility
to manage the resources of the company in the best interests of the
shareholders.
6 Auditors may express reservations in their report because: there are
significant inconsistencies or errors in the financial statements; the financial
statements are misleading in some way; the directors’ report contains
statements with which the auditors disagree.
8 a and b A qualified report is produced where auditors have reservations about
the financial statements prepared by the directors. An unqualified report is
produced where the auditors are of the opinion that the financial statements:
give a true and fair view of the company’s affairs; have been prepared in
accordance with international accounting standards; comply with the
requirements of the Companies Acts.
Business
1.2.1 purchase
and merger
2 Dr Net assets Cr
Balance 280 000 Realisation 280 000
Dr Realisation Cr
Net assets 280 000 Young Ltd 400 000
Capital: Xavier 90 000
Capital: Zeb 30 000
400 000 400 000
Dr Young Ltd Cr
Realisation 400 000 Cash 40 000
8% Debentures 120 000
Shares 240 000
400 000 400 000
Dr Cash Cr
Young Ltd 40 000 Capital: Xavier 50 000
Capital: Zeb 10 000
50 000 50 000
Dr 8% Debentures Cr
Capital: Zeb 60 000
120 000 120 000
Dr Shares Cr
Capital: Zeb 60 000
240 000 240 000
Dr Capital accounts Cr
Xavier Zeb Xavier Zeb
8% Debentures 60 000 60 000 Opening balances 200 000 80 000
Shares 180 000 60 000 Realisation profit 90 000 30 000
Cash 50 000 Cash 10 000
290 000 120 000 290 000 120 000
4 a Books of Ali, Broc and Cheema

Ali Broc Cheema Ali Broc Cheema
Vehicles taken over 10 000 7 500 7 800 Opening balances 100 000 70 000 50 000
Investments 13 400 Loan 30 000
Preference shares 28 500 19 000 9 500 Realisation profit 18 300 12 200 6 100
Ordinary shares (W5) 65 000 45 500 32 500 Bank 3 200 3 700
Debentures (W4) 40 000
Bank 14 800
118 300 85 400 89 800 118 300 85 400 89 800
Workings
W1 Profit on realisation
Dr Realisation Cr
Sundry assets 249 000 Capital accounts
Costs 6 400 vehicles 25 300
Profit Bank, trade
Capital: Ali 18 300 receivables 12 900
Capital: Broc 12 200 Discounts received 400
Capital: Cheema 6 100 Purchase
consideration 240 000
Capital Broc,
investments 13 400
292 000 292 000
W2 Bank account

Dr Bank Cr
Opening balance 8 500 Trade payables 7 100
Realisation, trade Dissolution costs 6 400
receivables 12 900 Capital: Ali 14 800
Capital: Broc 3 200
Capital: Cheema 3 700
28 300 28 300
W3 Purchase consideration

$
Agreed amount 240 000
Made up of:
Preference shares 57 000
Debentures 6% (W4) 40 000
Ordinary shares (W5) 143 000
240 000
W4 Debenture stock 6%
Cheema used to received a return of 8% × $30 000 on loan, i.e. 2 400 p.a.
So Cheema will need to be given debenture stock (6%) value $40 000 in order to achieve the same return.
W5 Share distribution
Shares are each valued at $1.30, so there are 110 000 $1 shares issued to the partners:
Capital account ratio is, 100 : 70 : 50, i.e. 10 : 7 : 5
So distribution is Ali 50 000 shares at $1.30 each, i.e. $65 000
Broc 35 000 shares at $1.30 each, i.e. $45 500
Cheema 25 000 shares at $1.30 each, i.e. $32 500
$143 000
Books of Gavin and Hanuko
Gavin Hanuko Gavin Hanuko
Preference shares 21 500 21 500 Opening balances 50 000 45 000
Ordinary shares 45 500 45 500 Realisation profit 20 450 20 450
Bank 3 450 Bank 1 550
70 450 67 000 70 450 67 000
Workings
W1 Profit on realisation
Dr Realisation Cr
Sundry assets 97 000 Bank, trade
Dissolution costs 3 100 receivables 7 000
Capitals Purchase
Gavin, profit 20 450 consideration 134 000
Hanuko, profit 20 450
141 000 141 000
W2 Bank account
Dr Bank Cr
Opening balance 4 000 Dissolution costs 3 100
Realisation, trade Trade payables 6 000
receivables 7 000 Capital, Gavin 3 450
Capital, Hanuko 1 550
12 550 12 550
W3 Purchase consideration
$
Agreed amount Made up of: 134 000
Preference shares 43 000
Ordinary shares (W4) 91 000
134 000
W4 Share distribution
Shares are valued at $1.30 each, so 91 000/1.30 shares are issued, i.e. 70 000 shares. Distribution is:
Gavin 35 000 $1 shares at $1.30 each 45 500
Hanuko 35 000 $1 shares at $1.30 each 45 500
b,c
Shareholding
Holding at Required Change Amount Payable/
dissolution holding Receivable (× 1.30)
$1 shares $1 shares
Abi 50 000 54 000 +4 000 Pay $5 200
Broc 35 000 18 000 −17 000 Receive $22 100
Cheema 25 000 36 000 +11 000 Pay $14 300
Gavin 35 000 36 000 +1 000 Pay $1 300
Hanuko 35 000 36 000 +1 000 Pay $1 300
180 000 180 000
ABCOGH Ltd
Statement of financial position at 31 March 2015
$ $
Non-current assets
Goodwill (W1) 10 000
Premises 270 000
Machinery 40 000
Vehicles 40 000
360 000
Current assets
Inventory 14 000
Total assets 374 000
Equity
180 000 ordinary shares of $1 each 180 000
100 000 preference shares of $1 each 100 000
Share premium (180 000 × 30¢) 54 000
334 000
Non-current liabilities
6% Debentures 40 000
Total equity and liabilities 374 000
W1 Goodwill $
Abche Purchase consideration 240 000
less sundry assets taken over 249 000
Negative goodwill 9 000
$
Gavu Purchase consideration 134 000
Sundry assets taken over 115 000
Goodwill 19 000
Consignment
1.3.1 and joint venture
accounts
2
BOOKS OF CARLOS RODRIQUEZ, VENEZUELA
Dr Consignment to BQT Inc, New York Cr
Sept 23 Consignment outwards 15 400 Dec 19 BQT Inc
23 Bank: Sale proceeds 29 700
Air freight charges 3 400
Customs duties 750
Dec 19 BQT Inc
Storage costs 820
Commission (5%) 1 485
Del credere commission (3%) 891
Income statement (profit) 6 954
29 700 29 700
BOOKS OF BQT Inc, NEW YORK

Dr Carlos Rodriquez, Venezuela Cr
Dec 19 Storage costs 820 Dec 19 Sale proceeds 29 700
Commission 1 485
Del credere commission 891
24 Bank, net proceeds 26 504
29 700 29 700
Dr Total trade receivables Cr
Dec Sales 29 700 Dec Bank 29 300
Irrecoverable debts 400
29 700 29 700
Consignee’s net income: commission $1 485 + del credere commission $891

less irrecoverable debt $400 = $1 976
4
BOOKS OF JULIA HARPER

Dr Consignment to Xera Retail, Quebec Cr
May 4 Consignment outwards 23 400 June 7 Insurance compensation 390
4 Bank: 11 Xera Retail
Transport costs 4 350 Sale proceeds 28 300
Insurance 720 Aug 31 Balance c/d 10 220
July 11 Xera Retail (unsold goods) (W1)
Storage costs 2 190
Commission (5%) 1 415
Aug 31 Income statement (profit) 6 835
38 910 38 910
Sept 1 Balance b/d (unsold goods) 10 220 Oct 11 Xera Retail
Oct 11 Income statement (profit) 4 680 Sale proceeds 14 900
14 900 14 900
W1 Value of unsold goods at 31 August:

$ $
Unsold goods ($23 400 – $15 600) 7 800
Proportion of costs on whole consignment (proportion is 1/3)
Transport costs 4 350
Insurance 720
Storage costs 2 190
Total 7 260
One-third of total costs 2 420
Balance: unsold goods to carry down 10 220
BOOKS OF XERA RETAIL, QUEBEC

Dr Julia Harper Cr
July 11 Storage expenses 2 190 July 11 Sale proceeds 28 300
11 Commission (5%) 1 415 Oct 11 Sale proceeds 14 900
Oct 11 Commission (5%) 745
24 Bank, net proceeds 38 850
43 200 43 200
6
BOOKS OF HELEN
Dr Joint venture with IAN and JANE Cr
Feb 1 Rent 500 June 30 Bank, receipt from Jane 800
3 Bank, seeds and plants 150 Aug 31 Bank, receipt from Ian 1 840
May 31 Wages 400
Aug 31 Profit share 1 590
2 640 2 640
BOOKS OF IAN
Dr Joint venture with HELEN and JANE Cr
May 31 Wages 900 June 30 Bank, receipt from Jane 800
Aug 31 Profit share 1 590 Aug 3 Vegetables for personal use 200
31 Bank, payment to Helen 1 840 28 Bank, sale of van 4 500
31 Bank, payment to Jane 1 170
5 500 5 500
BOOKS OF JANE
Dr Joint venture with HELEN and IAN Cr
June 15 Bank, van 5 200 June 30 Bank, sale proceeds 2 400
30 Bank, payment to Helen 800 July 31 Bank, sale proceeds 5 200
30 Bank, payment to Ian 800 Aug 31 Bank, receipt from Ian 1 170
14 Commission 380
Aug 31 Profit share 1 590
8 770 8 770
MEMORANDUM RECORDS
Dr Helen, Ian and Jane Cr
Memorandum joint venture
Rent 500 Sale proceeds 7 600
Seeds and plants 150 Vegetables taken over 200
Wages 1 300 Sale of van 4 500
Van 5 200
Commission 380
Profit on joint venture 4 770
12 300 12 300
Computerised
1.4.1 accounting
systems
2
Advantage Disadvantage
Cost Possible reduction in staffing costs High initial capital expenditure; regular upgrades required
Capital expenditure costs on equipment have reduced Additional training costs
considerably in recent years Cost of maintenance and technical support
Possible efficiency gains for the business as a result Cost of running two systems during period of transition
(e.g. of improved credit control)
Staffing Possible reduction in staffing Cost of training staff
Higher job skills of staff may lead to increased rate of staff
turnover
Information More accurate information Risk of data loss
Information available more quickly
Easier to access information
More information available
4 Answers could include:

Inventory control: computer software can keep up-to-date record of
movements in inventory. This is useful to managers because potential
shortages in particular products can be identified in sufficient time to reorder.
Computerised records can be compared with physical check on inventory to
identify if inventories are missing.
Credit control: it is possible for management to have access to detailed records
about trade receivables including amounts due and to what extent any debt is
overdue. As a result, managers can take more effective action to encourage late
payers to settle the amounts owed.
Payroll: software packages can produce all of the information required for wages
and salary payments to employees. As a result, managers will benefit because errors
are less likely and information can be produced more quickly.
Preparation of budgets: software programs and spreadsheets can be used to
help in the preparation of budgets. Budgets prepared in this way can easily be
updated (flexed) to reflect different scenarios. Managers will benefit from having the
opportunity to plan in more detail and with greater accuracy, and investigate more
options than would normally be possible.
Detailed reports: can be produced from information recorded within particular
programs (e.g. databases) to help improve managers’ awareness of key factors
affecting business performance (e.g. sales patterns).
6 Answers could include:
Ensuring that the system is secure through automatic backing-up of data to
avoid serious data loss should there be faults with software, a virus attack,
hacking, power failure, accidental deletion of files.
Restricted access to computer rooms and to particular computers.
Restricted access to data within the computerised systems through the use of
passwords, encryption and the development of an extranet.
Further
1.5.1 interpretation and
analysis ratios
2 a Notes and workings
Bailey Ltd Malib Ltd
$ $
Operating profit 260 000 330 000
Less preference dividends paid (16 000) (32 000)
Less debenture interest 0 (63 000)
Profit before tax 244 000 235 000
Less taxation (57 000) (71 000)
Profit after tax 187 000 164 000
Profit after tax 187 000 164 000

Less ordinary share dividends (38 000) (42 000)
Retained profit for year 149 000 122 000
Equity
Ordinary shares of $1 each 195 000
Ordinary shares of 25¢ each 200 000
8% preference shares 200 000 400 000
Share premium 50 000 130 000
Revaluation reserve 100 000 60 000
Retained earnings 425 000 550 000
Shares and reserves 970 000 1 340 000
7% debentures 0 900 000
Total long-term finance 970 000 2 240 000
Formula Bailey Ltd Malib Ltd
Fixed cost finance × 100 200 000 × 100 1 300 × 100

i Gearing
Total long-term finance 970 000 2 240
i.e. 20.62% i.e. 58.04%
Dividend Profit available for ordinary dividends 187 000 164 000
ii
cover Ordinary dividend paid 38 000 42 000
i.e. 4.92 times i.e. 3.90 times
Earnings per Profit after tax in cents 187 000 × 100 164 000 × 100
iii
share Number of ordinary shares 195 000 800 000
i.e. 95.90 cents 20.50 cents
Dividend paid Ordinary share dividends paid 38 000 42 000

iv
per share Number of ordinary shares 195 000 800 000
19.49¢ per share 5.3¢ per share
Total ordinary share dividend paid 38 000 × 100 42 000 × 100

v Dividend yield
Market price of equity shares $4.20 × 195 000 $1.40 × 800 000
i.e. 38 000/819 000% 42 000/1 120 000%
i.e. 4.64% 3.75%
Price Market price in cents 420 140

vi
earnings ratio Earnings per share in cents 19.49 5.3
21.55 26.42
b Gearing: Bailey Ltd is low-geared, while Malib Ltd is high-geared. For

equity shareholders, Bailey Ltd is a low-risk company since it is less likely
to be threatened with liquidation should profits fall as it has no debenture
interest to cover. The reverse is true of Malib Ltd where a fall in profits
could have serious consequences as it has to find $63 000 in debenture
interest irrespective of profit levels. However, if profits increase, equity
shareholders in Malib Ltd are likely to have the chance of benefiting
to a greater extent as the amount to be paid in debenture interest and
preference share dividends remains fixed. The directors of Bailey Ltd are
likely to find it easier to raise loans than Malib Ltd as the latter already
has a higher proportion of long-term liabilities.
ividend cover: Bailey Ltd has a higher figure for dividend cover than
D
Malib Ltd. This means that should profits fall, Bailey Ltd is more likely
than Malib Ltd to be able to sustain dividend payments. It may also
indicate that the directors of Malib Ltd are more restrained when making
dividend payments than the directors of Malib Ltd, and tend to retain a
greater proportion of profits.
arnings per share: this key ratio for investors reveals that the performance
E
of Bailey Ltd is far superior to that of Malib Ltd, providing shareholders
with greater profits.
ividend paid per share: this also shows that shareholders in Bailey Ltd are
D
actually receiving a greater return than the shareholders in Malib Ltd.
ividend yield: a potential investor would receive a greater return on an
D
investment made at the current market prices in Bailey Ltd than in Malib Ltd.
rice earnings ratio: there is greater confidence in the future of Malib Ltd
P
than in Bailey Ltd. Potential investors would be prepared to wait 26 years
to recover their investment in Malib Ltd, but 22 years in the case the of
Bailey Ltd. However, both ratios are high so the expectation is that both
companies will experience future growth.
4 a Notes and workings
Gilchrist Ltd Burrell Ltd
$ $
Operating profit 2 458 000 1 276 000
Less preference dividends paid (240 000) (60 000)
Less debenture interest 0 (300 000)
Profit before tax 2 218 000 916 000
Less taxation (983 000) (382 000)
Profit after tax 1 235 000 534 000
Profit after tax 1 235 000 534 000

Less ordinary share dividends (393 000) (320 000)
Retained profit for year 842 000 214 000
Equity
Ordinary shares of 50¢ each 3 960 000
Ordinary shares of $1 each 3 500 000
6% preference shares 4 000 000 1 000 000
Share premium 1 320 000 1 980 000
Revaluation reserve 500 000 0
Retained earnings 1 840 000 638 000
Shares and reserves 11 620 000 7 118 000
10% debentures 0 3 000 000
Total long-term finance 11 620 000 10 118 000

Formula Gilchrist Ltd Burrell Ltd
Fixed cost finance × 100 4 000 000 × 100 4 000 000 × 100
i Gearing
Total long-term finance 11 620 000 10 118 000
i.e. 34.42% i.e. 39.53%
Dividend Profit available for ordinary dividends 1 235 000 534 000
ii
cover Ordinary dividend paid 393 000 320 000
i.e. 3.14 times i.e. 1.67 times
Earnings per Profit after tax in cents 1 235 000 × 100 534 000 × 100
iii
share Number of ordinary shares 7 920 000 3 500 000
i.e. 15.59 cents i.e. 15.25 cents
Dividend paid Ordinary share dividends paid 393 000 320 000
iv
per share Number of ordinary shares 7 920 000 3 500 000
i.e. 4.96 cents i.e. 9.14 cents
Total ordinary share dividend paid 393 000 × 100 320 000 × 100
v Dividend yield
Market price of equity shares $1.10 × 7 920 000 $2.10 × 3 500 000
i.e. 393 000%/8 712 000 i.e. 320 000%/7 350 000
4.51% 4.35%
Price Market price in cents 110 210

vi
earnings ratio Earnings per share in cents 15.59 15.25
7.06 13.77
b Gearing: both companies have similar gearing ratios which are low; Burrell
Ltd’s ratio is slightly higher than that of Gilchrist Ltd. This means that both
companies have relatively low amounts of borrowing and are, therefore,
more likely to be able to borrow more than high-geared companies. Both
companies are relatively low risk, meaning that a change in profit levels is
not likely to have much impact on the return to shareholders.
ividend cover: dividend cover is higher in the case of Gilchrist Ltd, meaning
D
that a decrease in profits is less likely to have an impact on the dividends
payments to ordinary shareholders than is the case for shareholders in
Burrell Ltd. It could also mean that the directors of Gilchrist Ltd operate a
more cautious dividend policy, tending to retain more profits.
arnings per share: both companies have very similar ratios and that
E
indicates that the profit performance of each company is about the same.
ividend paid per share: shareholders in Burrell Ltd receive almost twice
D
as much dividend per share than the shareholders in Gilchrist Ltd. This
confirms that the directors of Burrell Ltd have a more generous, but
possibly less prudent, dividend policy than the directors of Gilchrist Ltd.
ividend yield: this indicates that an investor purchasing shares at the
D
current market price would receive almost the same return on their
investment in both of the companies, with a very slightly higher return for
a shareholder in Gilchrist Ltd.
rice earnings ratio: it would take about seven years to recover any
P
investment in the shares of Gilchrist Ltd, but almost twice that in the
case of Burrell Ltd. The ratios indicate that there is more confidence that
Burrell Ltd will enjoy more growth in the future than Gilchrist Ltd.
6 a Statement to show retained profit for the year ended 31 December 2014
$
Profit from operations (W1) 192 000
Less debenture interest
$200 000 × 6% (12 000)
Profit before tax 180 000
taxation (20% × profit
before tax (36 000)
Profit for year after tax 144 000
Less dividends paid (54 000)
Less transfer to general reserve (30 000)
60 000
Add retained earnings at 1 January 2014 62 000
Retained earnings at 31 December 2014 122 000
Workings
W1 Profit from operations
Interest gearing is 6.25%, so operating profit is
100/6.25 × $12 000 = $192 000
b Workings
W1 Number of issued ordinary shares: dividend paid/dividend per share

i.e. $54 000/0.09
i.e. 600 000 ordinary shares
W2 Long-term finance at 31 December 2014

$
Issued shares (W1) (600 000 shares × 50¢) 300 000
Share premium (600 000 × 25¢) 150 000
General reserve 30 000
Retained earnings 122 000
602 000
6% debentures 200 000
802 000
c
Profit available for ordinary share dividends $144 000
i Dividend cover i.e. i.e. 2.67 times
Dividends paid $54 000
Price earnings Market price in cents 250

ii i.e. i.e. 11.36
ratio Earnings per share in cents 22
Ordinary share dividends paid × 100 $54 000 × 100

iii Dividend yield i.e. i.e. 3.6%
Market price of ordinary shares 600 000 × 2.50
Fixed return capital × 100 $200 000 × 100

iv Gearing ratio i.e. i.e. 24.94%
Total capital 802 000
Return on capital Profit before interest × 100 $192 000 × 100

v i.e. i.e. 23.94%
employed Shares + Reserves + Long-term liabilities $802 000
d Gearing: Vox plc is highly-geared, whereas Gamble plc is low-geared. Vox

plc is a more high-risk company than Gamble plc as any decrease in its
profits could have a significant impact on dividends, whereas any decrease
in the profits of Gamble plc is less likely to have any impact on dividends.
The directors of Gamble plc are more likely to be able to raise additional
long-term finance than the directors of Vox plc.
Return on capital employed: both companies have similar returns on capital
employed; Gamble plc’s ratio is just 1.84 per cent higher than that of Vox
plc. Both companies are achieving the same in terms of the effectiveness of
the use of resources.
Dividend cover: Gamble plc has a slightly higher dividend cover than
Vox plc (2.67 times and 1.8 times, respectively). This means that the
shareholders in Gamble plc are less likely to see a change in dividend
payments than the shareholders in Vox plc should profits fall. It may also
mean that the directors of Gamble plc have a slightly more conservative
policy in regard to dividend payments, preferring to retain a higher
amount of profits.
Topic 1: Financial accounting
Answers to exam-style questions
2 a A transfer price may be used to ensure that the manufacturing section
of the company’s operations is allocated a share of the profit made by the
company as a whole.
Transfer price can be used to show how profits would have arisen had
the goods been bought in from a competitor rather than made by the
company.
[1 mark]
b Osomo Ltd
Manufacturing account for the year ended 31 December 2014
$000 $000
Raw materials consumed
Purchases (less returns outwards) 478
Carriage inwards 6
522
473
Direct wages ($474 + $11) 485
Prime cost 958
Factory overheads
Factory utility charges 43
Indirect factory wages and salaries 47
Insurance (75% × $32) 24
Maintenance of factory plant and machinery 27
Depreciation of plant and machinery 63
(30% × ($280 − $70))
Rent (75% × ($139 − 3)) 102
306
1 264
Add opening inventory 29
Less closing inventory (33)
(4)
Add profit on manufacture 189
[10 marks]
c Income statement for the year ended 31 December 2014
$000 $000
Revenue 1 471
Less opening inventory at transfer price 92
1 541
Closing inventory at transfer price (138)
1 403
Gross profit 68
Add manufacturing profit 189
Less increase in provision for unrealised profit (W1) (6)
183
251
Less administration expenses 36
insurance 8
rent 34
selling and distribution expenses 72
(150)
Operating profit 101
Less financial charges (12)
Profit before tax 89
Tax provision (32)
Profit after tax 57
[7 marks]

Workings
W1 Increase in provision for unrealised profit
New provision 15/115 × 132 18
Less opening provision (12)
6
d Dr Provision for unrealised profit Cr

Closing balance c/d 18 Opening balance 12
Income statement 6
18 18
Balance b/d 18
[3 marks]
e The provision for unrealised profit ensure that inventories of finished
goods are shown in the accounts at cost in accordance with the prudence
concept and realisation concept. The provision ensures that profit which
has yet to be realised is not included in the valuation of finished goods
inventories.
The provision ensures that inventories of finished goods are valued in
accordance with IAS 2, i.e. at the cost of production.
[4 marks]
[Total: 25 marks]
4 a Companies Act 2006 requires the publication of a statement of cash flows.
IAS 7 requires the publication of a statement of cash flows.
[1 mark]
b Kranak plc
Statement reconciling operating profit to net cash flow from operating
activities
$000 $000
Profit before interest and taxes (W1) 633
Adjustment for depreciation (W2) 134
Loss on disposal of non-current assets (W3) 5
Decrease in inventories 71
Increase in trade and other receivables (16)
Increase in trade and other payables 8
835
Less interest expense (30)
tax paid (129)
Net cash from operating activities 676
Workings
W1 Profit before interest and taxes
$000
Increase in retained earnings 177
Add back dividends paid 315
Profit for year 492
Add back debenture interest 30
Add back tax provision 111
Operating profit 633
W2 Depreciation charges for year

Depreciation of plant, machinery and 214
equipment
Cancellation of depreciation on property (80)
134
W3 Loss on disposal of non-current assets

$000
Net book value (30 − 19) 11
Proceeds from sale of equipment 6
5
[14 marks]
c
Cash flows from investing activities
Purchases of non-current assets (347)
Proceeds from sale of non-current assets 6
Net cash flow from investing activities (341)
[3 marks]
d
Benefits:
uuProvides a focus on liquidity of a company which is critical for the
survival of the company.
uuFailure to manage a company’s liquid resources is a major cause of
company liquidation; a more common reason than poor profitability.
uuIt helps to explain why the change in the company’s liquidity (here just
$20 000) is different to the company’s profit for the year ($492 000).
uuIt helps the shareholders to understand key decisions made by the
directors in maintaining and expanding the company’s resources
(investing activities).
uuIt helps the shareholders to understand key decisions regarding the
servicing of finance (interest and dividend payments).
uuPoor management of liquid resources could have an impact on the
company’s ability to pay dividends to shareholders, which would have
an adverse effect on the value of the shareholders’ investment.
uuThe content of a cash flow statement may be considered more
objective than the information shown in other financials statements as
some information, such as depreciation charges, are not shown.
However:
uuThe statement is only a link between the income statement and the
statement of financial position; it covers only one aspect of a business’s
performance.
uuThe shareholders must also consider the profitability of the business.
If the company is not profitable in the long term then liquid resources
are bound to dwindle.
[7 marks]
[Total: 25 marks]

Manufacturing Businesses: Answers To End-Of-Chapter Questions

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1.1.

Answers to End-of-chapter questions

4 Kingsdown Doors Ltd

Cost of raw materials consumed

Closing inventory (42)

Factory wages 527

Prime cost 1 105

Heating and lighting ($70 × 4/5) 56

Rent and rates ($80 × 4/5) 64

Total factory overheads 313

Adjustment for work in progress

Closing inventory (18)

Cost of production 1 420

Manufacturing profit 284

Production at transfer price 1 704

Answers to End-of-chapter questions

4 Kingsley Theatre Club

W3 Depreciation of golf equipment

e Statement of financial position at 31 December 2014

b Refreshments trading account

W3 Town community charges

c Refreshments trading account

d Income and expenditure account

W1 Life membership fund $

W3 Depreciation of furniture and equipment

Answers to End-of-chapter questions

W2 Adjustment for depreciation $m

W3 Profit on sale of non-current assets $m

Books of Gavin and Hanuko

BOOKS OF BQT Inc, NEW YORK

Consignee’s net income: commission $1 485 + del credere commission $891

BOOKS OF JULIA HARPER

W1 Value of unsold goods at 31 August:

BOOKS OF XERA RETAIL, QUEBEC

4 Answers could include:

Profit after tax 187 000 164 000

Formula Bailey Ltd Malib Ltd

Fixed cost finance × 100 200 000 × 100 1 300 × 100

i.e. 20.62% i.e. 58.04%

i.e. 95.90 cents 20.50 cents

Dividend paid Ordinary share dividends paid 38 000 42 000

19.49¢ per share 5.3¢ per share

Total ordinary share dividend paid 38 000 × 100 42 000 × 100

i.e. 38 000/819 000% 42 000/1 120 000%

i.e. 4.64% 3.75%

Price Market price in cents 420 140

b Gearing: Bailey Ltd is low-geared, while Malib Ltd is high-geared. For

Profit after tax 1 235 000 534 000

i.e. 34.42% i.e. 39.53%

i.e. 3.14 times i.e. 1.67 times

i.e. 15.59 cents i.e. 15.25 cents

i.e. 4.96 cents i.e. 9.14 cents

Price Market price in cents 110 210

W1 Number of issued ordinary shares: dividend paid/dividend per share

W2 Long-term finance at 31 December 2014

Price earnings Market price in cents 250

Ordinary share dividends paid × 100 $54 000 × 100

Fixed return capital × 100 $200 000 × 100

Return on capital Profit before interest × 100 $192 000 × 100

d Gearing: Vox plc is highly-geared, whereas Gamble plc is low-geared. Vox

d Dr Provision for unrealised profit Cr

W2 Depreciation charges for year

W3 Loss on disposal of non-current assets