ACCOUNTING – JUNE 2015

Section II

Case Studies

Case Study 1

You are the financial controller of Zurich Watches GmbH, which has a financial year
ending on 31 May 2015.

The company has been having a strong financial year, generating significant profits for
the nine months to 28 February 2015 – as shown in the actual Profit & Loss Account for
that period, as compared to the budgeted Profit & Loss Account (for the twelve months
to 31 May 2015):

Profit & Loss Account Profit & Loss Account

Actual – Nine Months to Budget – Twelve Months
28 February 2015 to 31 May 2015
SF SF
Sales 1,315,020 1,300,000

Cost of Sales 815,164 850,000

Depreciation – Plant 12,456 14,000
827,620 864,000

Gross Profit 487,400 436,000

Less: Overheads
Administration Salaries 145,200 175,000
Insurance 10,000 8,000
Rent 36,000 48,000
Advertising 60,000 75,000
Motor Vehicle Costs 10,400 5,000
Depreciation – Motor Vehicle 5,200 8,000
Other Expenses 17,250 16,000
284,050 335,000

Net Profit 203,350 101,000

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The company’s Balance Sheet as at 28 February 2015 comprised the following items:

SF SF
Plant & Machinery 87,000 Ordinary Shares 135,000
Motor Vehicles 27,625 Share Premium 20,500
Raw Materials 24,333 Retained Profits 232,882
Finished Goods 99,215 Long-term Loan 74,250
Debtors 452,000 Trade Creditors 237,591
Cash at Bank 10,050 700,223
700,223

During the three months to 31 May 2015, the company’s accounting transactions can be
summarised as follows:

1. Cash of SF 183,470 is received from debtors.

2. Raw materials of SF 37,525 are purchased from suppliers on credit.
3. Loan repayment of SF 7,500 is made.
4. Rent of SF 16,000 is paid, in cash.
5. A new motor vehicle, costing SF 13,500, is purchased on credit on 1 May.
6. Raw materials of SF 42,000 are converted into finished goods, incurring SF 13,500
in direct labour costs.
7. Finished goods, costing SF 56,200, are sold for SF 79,275 on credit.
8. Finished goods, costing SF 45,250, are sold for SF 70,785 in cash.
9. Monthly administration salaries of SF 36,000 are paid in cash.
10. Payments of SF 196,250 are made to trade creditors.

Further information is also relevant:

1. Depreciation charge has been provided in the accounts for the nine months to 28
February 2015. The company’s depreciation policy is as follows:

Plant & Machinery - 20% per annum on the reducing balance basis
Motor Vehicles - 25% per annum on the reducing balance basis

Fixed assets purchased in a financial year are to be charged with a proportionate

depreciation charge in their year of purchase.

2. The rent paid covers the period between 1 March 2015 and 30 June 2015.

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Required:

1. Prepare the Accounting Equation as at 31 May 2015, incorporating all of the relevant year-end adjustments in a tabular
format.
(17 marks)
Inventory Inventory Trade Long Ordinary Share Retained
Plant Motor Raw Finished Cash at Creditors term Share Premium Profits
Vehicles Materials Goods Debtors Prepayment Bank Loan Capital

At 1.3.15 87000 27625 24333 99215 452000 10050 700223 237591 74250 135000 20500 232882 700223

1 -183470 183470
2 37525 37525
3 -7500 -7500
4 -16000 -16000 Rent
5 13500 13500
6 -42000 42000
6 13500 -13500
7 -56200 -56200 COS
7 79275 79275 Sales
8 -45250 -45250 COS
8 70785 70785 Sales
9 -36000 -36000 Admin Sales
10 -196250 -196250
(i)-Depn-Plant -4350 -4350 Depreciation-Plant
(ii)-Depn Vehicles -2008 -2008 Depreciation-MV
(iii)-Prepayment-Rent 4000 4000 Prepaid Rent

At 31.5.15 82650 39117 19858 53265 347805 4000 -4945 541750 92366 66750 135000 20500 227134 541750

Depreciation - Plant - SF87000 x 20% 4350(Three months) Prepayment - Rent SF16,000- four months to 30 June
Depreciation - Motor Vehicles - SF 27625 x 25% 1727(Three months) SF16000/4 SF 4000
Addition 13500 281 (One month)
2008

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2. Prepare the Profit and Loss Account for the year to 31 May 2015, including relevant comparisons and variances with the
budget for the year.
(14 marks)
Profit and Loss Account
Year to 31 May 2015 Actual Actual Actual Budget Variances
Nine Months Three Months Year Year Year
to 28.2.15 to 31.5.15 to 31.5.15 to 31.5.15 to 31.5.15
SF SF SF SF SF

Sales 1,315,020 150,060 1,465,080 1,300,000 165,080

Cost of Sales 815,164 101,450 916,614 850,000 66,614

Depreciation – Plant & Machinery 12,456 4,350 16,806 14,000 2,806
827,620 105,800 933,420 864,000 69,420

Gross Profit 487,400 44,260 531,660 36% 436,000 34% 95,660

Less: Expenses

Administration Salaries 145,200 36,000 181,200 175,000 6,200

Insurance 10,000 0 10,000 8,000 2,000
Rent 36,000 12,000 48,000 48,000 0
Advertising 60,000 0 60,000 75,000 -15,000
Motor Vehicle Costs 10,400 0 10,400 5,000 5,400
Depreciation – Motor Vehicles 5,200 2,008 7,208 8,000 -792
Other Expenses 17,250 0 17,250 16,000 1,250
284,050 50,008 334,058 335,000 -942

Net Profit 203,350 -5,748 197,602 101,000 96,602

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3. Comment on any significant differences between actual and budgeted
performance.
(4 marks)

Comments:

Loss-making in the three months to 31 May.

Sales achieved were 12.6% above budget for the year.
Gross profit margins were 36% – higher than budget’s 34%.
Overall overheads just under budget with savings in advertising and depreciation
on vehicles.
Overspends on insurance, motor vehicle costs and other expenses.

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Case Study 2

The board of directors of Basel Chocolatiers AG is meeting to review the financial

statements for the year ended 30 April 2015 (See Appendix 1).

‘It’s an unusual report,’ opined Georg Weisinger, the unusually upbeat Chairman of the
company. ‘I thought that, with all that investment in new sales outlets and inventory, our
cash position would have got worse. Yet, it appears that the complete opposite has
occurred. Well done, Franck.’

Franck was Franck Lefevre, the long-serving Group Finance Director. Normally, he and
Georg had disagreements at Board meetings, so he was relieved that this was not one of
those occasions.

‘Hold on, it’s not all Franck’s work,’ interrupted Petulia de Klerk, the Operations
Director. ‘We have installed a new purchasing system that is streamlining our
relationships with our suppliers.’

‘Yes, you’re right, Petulia. Also, there’s also the new agreements with our distributors in
Australia and USA that I set up,’ added Annette Leporc, the Marketing Director. ‘They
have really boosted our sales volumes.’

‘You’re quite correct, ladies,’ agreed Franck, somewhat reluctantly. ‘Without your
contributions, our cash flow position would have been considerably different. However,
there are a couple of other factors that also contributed. I will prepare a full Cash Flow
Statement so that you can measure your relative contributions.’

‘Yes, go ahead and do that. Circulate it before close of business today,’ instructed Georg.

‘No problem,’ sighed Franck. ‘It won’t take long to prepare.’

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Appendix 1

The following information has been extracted from the draft audited accounts of Basel
Chocolatiers AG:

2015 2014

Profit and Loss Accounts SF’000 SF’000

Sales 5,560 3,940
Cost of Sales (1,985) (1,205)
Gross Profit 3,575 2,735
Other Expenses (2,212) (1,845)
Operating Profit 1,363 890
Interest (104) (24)
Profit before Taxation 1,259 866
Taxation (301) (247)
Profit after Taxation 958 649
Dividends Payable (150) (50)
Retained profit for the year 808 599

Balance Sheets SF’000 SF’000

Fixed Assets
Property 575 250
Plant & Equipment 1,550 785
Motor Vehicles 445 185
2,570 1,220
Current Assets
Inventory 1,195 447
Debtors 600 986
Cash at Bank 1,702 987
3,497 2,420
Current Liabilities
Creditors 803 350

Net Current Assets 2,694 2,070

Total Assets less Current Liabilities 5,264 3,290

Creditors > One Year

Long-term Loan 916 150

Net Assets 4,348 3,140

Capital and Reserves

Ordinary Share Capital 400 100
Share Premium 150 50
Retained Profits 3,798 2,990
4,348 3,140

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The following additional information is available:

1. The annual depreciation charges for the year were:

Plant & Equipment SF 105,000

Motor Vehicles SF 49,000

There was no depreciation charge on Property during 2015.

2. There were no disposals of motor vehicles during the year.

3. Some items of plant & machinery were sold during the year for SF 39,000, giving
rise to zero profit or loss on disposal.

4. Creditors comprise:
2015 2014
SF’000 SF’000

Trade creditors 502 53

Dividends payable – 50
Taxation payable 301 247
803 350

5. Ordinary share capital comprises only ordinary shares with a nominal value of SF1
per share.

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Required:

1. Prepare a Cash Flow Statement for the year to 30 April 2015, based on the
financial statements in Appendix 1.
(16 marks)
CASH FLOW STATEMENT SF'000
Year to 30 April 2015

Net cash flow from operating activities (see note 1) 1,604

Returns on investment and servicing of finance -104

Taxation (Liability at 30.4.14) -247

Capital expenditure
Payments for fixed assets (see note 2) -1,543
Sales of fixed assets 39
-1,504

Equity Dividends paid to shareholders (both 2014 and 2015) -200

Financing
Receipt of long-term loans (see note 3) 766
Issue of share capital (see note 4) 400 1,166

Increase in Cash (see note 5) 715

Note 1: SF'000

Operating profit 1,363

Add back: Depreciation 154

1517
Adjustments to working capital
2015 2014
SF'000 SF'000
Increase in Inventories 1,195 447 -748
Decrease in Debtors 600 986 386
Increase in Creditors (Trade only) 502 53 449
87
Net cash flow from operating activities 1,604

Note 2: Property Plant Motor Vehicles

SF'000 SF'000 SF'000 Total
Net Book value at 30.4.15 575 1,550 445
Net Book value at 30.4.14 250 785 185
Increase in NBV 325 765 260
Sales of Assets 0 39 0
Depreciation 0 105 49
Therefore, Purchases of Assets = 325 909 309 1,543

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Note 3:
SF'000
Long-term Creditors at 30.4.15 916
Long-term Creditors at 30.4.14 150
Receipt of Loans 766

Note 4:
SF'000
Share Capital at 30.4.15 400
Share Premium at 30.4.15 150
Share Capital at 30.4.14 -100
Share Premium at 30.4.14 -50
New Shares Subscribed 400

New shares have been subscribed for an amount of SF 400,000 (300,000 at SF1.33/share)

Note 5:
SF'000
Cash at Bank at 30.4.15 1,702
Cash at Bank at 30.4.14 987
Increase in Cash at Bank 715

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ALTERNATIVE SOLUTION (in line with June 2014 text revision)

CASH FLOW STATEMENT SF'000

Year to 30 April 2015

Cash from operations

Profit after tax 958
Add back:
Depreciation 154
Taxation (current year) 301
1,413

Adjustments to working capital

2014 2015
SF'000 SF'000 SF'000
Increase in Inventories 1,195 447 -748
Decrease in Debtors 600 986 386
Increase in Creditors (Trade only) 502 53 449
87
Less: Taxation paid (2014) -247
1,253
Cash from investments
Payments for non-current assets (Note 2) -1,543
Sales of non-current assets 39 -1,504

Cash from financing

Receipt of long-term loans (see note 3) 766
Issue of share capital (see note 4) 400
Dividends to shareholders (both years) -200 966

Increase in Cash (see note 5) 715

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2. Prepare a brief report for circulation to the board, identifying:

(a) the principal reasons for the company’s ability to increase its cash
reserves during the year.
(b) any relevant comments on the other significant cash movements
during the year.
(9 marks)

Principal reasons for the increase in the cash reserves during 2015

Issue of 300,000 new shares for SF 400,000

Receipt of additional SF 766,000 in long-term loans
Decrease of SF 386,000 in debtors
Operating profit of SF 1,363,000 for the year
Increase of SF 449,000 in trade creditors

Other relevant comments

Capex of SF 1,543,000 during the year on all fixed assets

Increase of SF 748,000 in inventories
Payment of SF 200,000 dividends during the year (prior year and current year)
Payment of SF 247,000 of tax in the year
Payment of SF 104,000 of loan interest – major increase due to additional long-
term loans

NOTE:
This solution has been prepared under previous Accounting Standards on Cash
Flow Statements. Therefore, the format/content is different to that included
within Module 4 of the text (current version).

© Heriot-Watt University, June 2015

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