2017 Za + ZB (Ec) Ac1025

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Exam 11 May 2017, questions and answers
Principles of accounting (University of London)
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Examiners’ commentaries 2017

AC1025 Principles of accounting
Important note
This commentary reflects the examination and assessment arrangements for this course in the
academic year 2016–17. 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 subdivided 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
follow these instructions precisely. 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 examination has three sections. Section A consists of 20 multiple-choice questions covering the
entire syllabus in financial and management accounting. In Section A you will need to answer all the
questions for which the maximum mark will be 30.
Section B consists of questions on financial accounting. Question 1 is compulsory and is worth 30

marks requiring preparation of financial statements from a trial balance with adjustments, the
question includes an additional section which asks for a short essay explaining financial accounting
principles or concepts. In Section B there are two further financial accounting questions worth 20
marks.
Section C consists of the longer questions in management accounting worth 20 marks each. There
will be three questions, you will be asked to answer one question in this section. You will then need
to answer one further question from either Section B or Section C.
The rubric of the examination states that workings must be submitted for all questions in Sections B
and C 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.
Note: Workings will not be marked for MCQs – the answers will be entered on a
pre-printed sheet supplied in the examination. There will not be negative marking –
you will get marks for all correct answers without deduction for wrong answers.
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 of the VLE and you can print off as many sheets of the paper as
you need.

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This subject does not require a lot of reading beyond the core text of Leiwy D. and R.E. Perks
Accounting: understanding and practice (Maidenhead: McGraw–Hill, 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’ 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.
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, but 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 might 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 available on the VLE. 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
Section A of this examination consists of 20 Multiple Choice Questions. You should attempt to
answer ALL the questions. Each question has four possible answers (a–d). There is only one correct
answer to each of the questions. Please mark the correct answer on the special sheet provided. The
maximum mark for this part is 30.
Sections B and C: Please answer QUESTION 1 (30 marks) of Section B; ONE question from
Section C and ONE further question from either section B or C (except for Question 1 all questions
are worth 20 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 all questions from this section.
Please mark the correct answer in the special multiple choice answer sheet provided using an
HB pencil only.
Candidates should write their candidate number in the boxes and then mark up their appropriate
letter and numbers in the grid.
The date, candidate first name(s) and surnames should be written in the appropriate space.
Candidates should use an eraser to remove any unwanted marks as fully as possible. If an eraser is
unavailable, please put a cross (X) through the incorrect mark.
The sheets should not be folded or creased in any way as this will make them unreadable.

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Candidates should not write anywhere else on the sheet other than to mark their answers as shown
on the sheet; any writing or marks in an inappropriate place could make the sheet unreadable.
Candidates should NOT attach the multiple choice answer sheet to their answer
booklet.
Correct answers are shown in bold.
Question 1
Which of the following represents the statement of financial position equation?
A assets = liabilities + equity

B assets + liabilities = equity
C assets = liabilities − equity
D assets + equity = liabilities.
Question 2
Which of the following are differences between sole traders and limited liability
companies?
i. A sole trader’s financial statements are private; a company’s financial

statements are sent to shareholders and may be publicly filed.
ii. Only companies have capital invested into the business.
iii. A sole trader is fully and personally liable for any losses that the business might
make; a company’s shareholders are not personally liable for any losses that the
company might make.
A (i) and (ii) only

B (ii) and (iii) only
C (i) and (iii) only
D (i), (ii) and (iii).
Question 3
Mary owns and runs a restaurant. The following describes some of the items on her
statement of financial position. Which ones are liabilities?
i. Restaurant tables and chairs at cost

ii. Wages owed to waiters
iii. Bank account containing £3000
iv. Tax bill due to Tax authorities
v. Restaurant premises at cost
vi. Loan from the bank to buy restaurant premises
vii. Food supplies in the refrigerator
viii. Amount due to the baker for bread supplied last month
A All except (i),(iii) and (v)

B All except (iv) and (viii)
C All of them
D All the even numbered items (ii), (iv), (vi), (viii).

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Question 4
A business acquires a machine costing £30,000. The machine is expected to last for
5 years and have a residual value of £2,000. The business uses the straight line
depreciation method. The machine was sold for £8,000 at the start of year 4.
The loss on sale would be:
A £5,200
B £10,800
C £10,000
D £12,000.
Working: (30,000 − 2,000)/5 = 28,000/5 = 5,600. 30,000 − (5,600 × 3) = 13,200 − 8,000 = 5,200.
Question 5
The following is an extract of balances for a company for the year:

£
Heat and light paid 22,000
Rent paid 27,000
Non-current assets (at cost) 80,000
Gross profit has already been calculated as being £85,000.
Accumulated depreciation on the non-current assets at the start of the year was
£20,000. Depreciation is to be calculated at 25% on the reducing balance method.
At the end of the year, heat and light accrued is £4,000, and rent prepaid is £2,500.
The correct net profit for the year is:
A £85,000
B £19,500
C £65,500
D £26,000.
Working: 85,000 − 22,000 − 27,000 − 4,000 + 2,500 − (25% × (80,000 − 20,000)) = 19,500.
Question 6
On 1 March the opening inventory of a company was 12 units costing £8 each.

Purchases on 2 March were 60 units at £9 each. On 8 March sales of 18 units were
made, followed by sales on 15 March of 23 units. Inventory is valued using First in
First out (FIFO).
Cost of sales for March were:
A £636
B £540
C £369
D £357.
Working: 636 − (31 × 9) = 357.

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Question 7
Extracts from the financial statements of Barbara Ltd are set out below:
Income statement for the year ended 31 December 2016
£’000
Turnover 400
Cost of sales (175)
Gross profit 225
Profit on sale of non-current 80
asset
Expenses (35)
Depreciation (40)
Net profit 230
Statement of financial position as at 31 December

2015 2016
£’000 £’000
Inventories + receivables − current liabilities 50 65
What figure would appear in the cash flow statement of Barbara Ltd for the year
ended 31 December 2016 in respect of cash generated from operations?
A £230,000
B £270,000
C £175,000
D £190,000.
Working: 230 + 40 − 80 − 15 = 175.
Question 8
If a company purchases plant and equipment for cash, which of the following would
occur?
i. Decrease in working capital.

ii. Increase in total assets.
iii. Increase in non-current assets.
iv. Increase in equity.
A (iii) only
B (i) and (iii)
C all of the above
D (iii) and (iv).
Question 9
A company had net assets as at 1 January 2016 of £123m. The net profit for the
year ended 31 December 2016 was £25m. The Company had paid an equity
dividend of £5m during 2016. During 2016 the Company had issued 20 million £1
equity shares at a premium of 50p each and had borrowed £18m from its bank.

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The amount to be shown as Equity in the Statement of Financial Position as at 31

December 2016 is:
A £173m
B £191m
C £155m
D £163m.
Working: 123 + 25 − 5 + 30 = 173.
Question 10
For the year ended 31 December 2016 a company earned a profit after interest and
tax of £480,000. The company’s share price is £12 per share. The following are
extracts from the company’s Statement of financial position at 31 December 2016:
Ordinary share capital (50p shares) £200,000

Retained earnings £380,000
Revaluation reserve £80,000
Long-term 10% Bank loan £48,000
The company’s price earnings (PE) number and return on equity for the period
were:
PE Number Return on Equity
A 2.50 100%
B 5.00 68%
C 7.00 83%
D 10.00 73%
Working: PE = £12/(£480/200) × 2. RoE = 480/(200 + 380 + 80).
Question 11
A company has sales of £900,000 for the year. The asset (capital) turnover for the
year was 3 times and the return on capital employed was 6%. What was the net
profit before interest and tax for the year?
A £12,000
B £16,200
C £18,000
D £54,500.
Working: 900/3 = 300 × 6% = 18.
Question 12
Bill has a small company which makes luxury dog kennels. The kennels are sold
online for a selling price of £350 each. The fixed costs are the same each month. In
November, the company makes and sells 290 kennels at a total cost of £40,610; in
December the company makes and sells 440 kennels at a total cost of £59,960.

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What are the annual fixed costs of Bill’s company?
A £32,000
B £38,400
C £39,960
D £56,760.
Working: (59,960 − 40610)/(440 − 290) = 129. 40,610 − (290 × 129) = 3,200 × 12 = 38,400.
Question 13
Marco sells pizzas for £12 each with a variable cost per pizza of £4 each. His
predicted fixed costs for the year are £180,000. He wishes to make a return on
capital employed of 25%. Marco has business assets with a book value of £300,000
and liabilities of £60,000.
How many pizzas will he need to sell to achieve his desired return on capital
employed?
A 7,500
B 23,333
C 30,000
D 70,000.
Working: (240,000 × 25%) + 180,000/(12 − 4).
Question 14
A company manufactures one product the Z4. The budgeted output of Z4 for the
year was 60,000 units. Each unit of Z4 takes 2 hours of labour at a cost per labour
hour of £8.
The actual output of Z4 for the year was 66,000 units with a total labour cost of
£1,000,000.
What is the total labour cost variance for the year?
A £40,000 adverse
B £40,000 favourable
C £56,000 adverse
D £56,000 favourable.
Working: 66,000 × (2 × 8) − 1,000,000.
Question 15
WM plc makes two products L and S. One L sells for £50 per unit, and one S for
£70 per unit. The variable cost per unit of one L is £35, that of one S £40. Each
unit of L uses 2kgs of raw material. Each unit of S uses 3kgs of raw material.
In May the availability of raw material is limited to 2,000kgs. Maximum demand for
the S in May is predicted at 250 units, demand for L is very high.

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What is the profit-maximising product mix for May?
L units S units
A 625 250
B 1,250 250
C 250 625
D 250 1,250
Working: Contribution per unit of L = 15, S = 30. 250 units of S = 750 kgs.
2000 − 750 = 1250/2 = 625 units of L.
Question 16
The following information relates to the month of April for a company.
Budgeted labour hours 12,000

Budgeted overheads £158,400
Actual labour hours 12,050
Actual overheads £162,700
Overheads are absorbed on the basis of labour hours.
What amount of overhead is over/under absorbed?
A £3,640 under-absorbed
B £3,640 over-absorbed
C £4,300 over-absorbed
D £4,300 under-absorbed.
Working: ((158,400/12,000) × 12,050) − 162,700.
Question 17
A company rents a factory space which has the capacity to produce 5000 units per
month. If output is to be higher than this the company can rent a further space
with a capacity of 2000 units per month.
In this case rent is an example of which of the following?
A Variable cost
B Semi-variable cost
C Fixed cost
D Stepped fixed cost.
Question 18
Marcus is considering an investment project which will last for 3 years. The
expected profits are expected to be: £38,000 in year 1; £41,000 in year 2; and
£44,000 in year 3. The project will require the purchase of a machine, which will
cost £140,000 but which can be sold for £50,000 at the end of year 3.
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What is the average accounting rate of return on the project?
A 36.7%
B 43.2%
C 64.7%
D 136.7%.
Working: (123,000/3) × 100/(190,000/2).
Question 19
A company manufactures two products Pins and Needles in two production cost
centres, Moulding and Sharpening. In order to determine a budgeted production
overhead cost per unit of product the following budgeted data are available:
Moulding Sharpening
Allocated production overhead cost £96,000 £82,000
Direct labour minutes per unit:
Pins 36 25
Needles 48 30
Budgeted production is 6,000 units of Pins and 7,500 units of Needles. Production
overheads are to be absorbed on a direct labour hour basis.
The budgeted production overhead cost per unit of product Needles is:
A £10.00
B £12.12
C £14.00
D £14,56.
Working: Moulding = 96,000/(6,000 × 36/60) + (7,500 × 48/60) = £10ph.
Sharpening = 82,000/(6,000 × 25/60) + (7,500 × 30/60) = £13.12ph.
Needle = (10 × 48/60) + (13.12 × 30/60) = £14.56.
Question 20
Which ONE of the following best describes a cost centre?
A Units of a product or service for which costs are ascertained

B Function or location for which costs are ascertained and related to cost units
C Amounts of expenditure attributed to various activities or products
D A section of an organisation for which budgets are prepared and costs controlled.
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Section B
Answer question 1 and not more than one further question from this section.
Question 1
Jagger plc prepares its financial statements for the year ended 31 March. The
company has extracted the following trial balance at 31 March 2017:
£000 £000
6% Preference Shares (redeemable 2020) 10,250
Trade payables 8,120
Trade receivables 9,930
Accumulated depreciation at 1 April 2016:
Plant & Equipment 6,460
Vehicles 1,670
Administrative expenses 16,141
Bank 456
Purchases returns 106
Distribution costs 9,060
Dividends paid 5,800
Dividends received 850
Equity shares, 20p each, fully paid 19,000
Dividend paid on Preference Shares 615
Inventories at 1 April 2016 4,852
Investments non-current 15,000
Plant & equipment, at cost 27,315
Proceeds from issue of share capital 1,500
Provision for doubtful debts at 1 April 2016 600
Purchases 94,160
Retained earnings at 1 April 2016 13,677
Sales 125,900
Taxation 4
Vehicles, at cost 5,720
£188,593 £188,593
The following further information is available.
1. Non-current assets are to be depreciated as follows:

Plant & equipment 20% per annum straight-line
Vehicles 25% per annum reducing balance
2. An invoice for telephone charges for the quarter ended 1 May 2017 for £15,000
was received by the company after the above trial balance was extracted.
Telephone expenses are included in administrative expenses.
3. The company paid £156,000 insurance premiums for the year 1 November 2016
to 30 October 2017. This amount is included in administrative expenses.
4. The closing inventory at 31 March 2017 was £5,180,000.
5. Subsequent to drawing up the trial balance, the company has been informed
that a major customer owing £348,000 has gone into administration, and Jagger
plc will receive only 25% of the amount owing. Jagger plc has also decided to
change its provision for doubtful debts to 5% of the remainder of receivables
balances.
6. Tax due for the year to 31 March 2017 is estimated at £30,000. The taxation
balance in the trial balance relates to an overestimate of the tax charge in the
year ended 31 March 2016.
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7. On 1 October 2016, Jagger plc issued 5,000,000 20p equity shares at a premium.
The proceeds were credited to the ‘Proceeds from the issue of share capital
account’.
8. The Directors have proposed a final equity dividend for the year ended 31
March 2017 div of 5p per share payable in May 2017.
Required:
(a) Prepare Jagger plc’s (£000s to one place of decimals):

i. Income Statement for the year ended 31 March 2017.
(10 marks)
ii. Statement of Changes in Equity for the year ended 31 March 2017.
(4 marks)
iii. Statement of Financial Position at 31 March 2017.
(10 marks)
(b) Explain, and justify, the different treatments of preference shares and equity
and the related dividends in the financial statements.
(6 marks)
Total 30 marks
Reading for this question
Subject guide, Chapters 4, 5 and 6.
L&P (2013), Chapter 10.
Approaching the question
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. The format of the
statement of changes in equity should follow best practice. Part (b) required explanation of the
treatments of equity and preference shares. Answers which simply described the differences
between the two types of share without explaining the accounting implications were not awarded
marks.
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(a) i. Jagger plc’s Income Statement for the year ended 31 March 2017
£000 £000
Sales 125,900
Cost of sales
Opening inventory (4,852)
Purchases (94,160 − 106) (94,054)
(98,906)
Closing inventory 5,180
(93,726)
Gross profit 32,174
Dividends received 850
33,024
Expenses
Administrative expenses 16, 141 + (2/3 × 15) − (7/12 × 156) (16,060)
Distribution costs (9,060)
Bad debts 75% × 348 (261)
Decrease in provision for doubtful debts
[5% × (9,930 − 348)] − 600 120.9
Depreciation: Plant and equipment 20% × 27,315 (5,463)
Motor vehicles 25% × (5,720 − 1,670) (1,012.5)
(31,735.6)
Profit before interest and tax 1,288.4
Preference dividend (615)
Profit for the year before tax (673.4)
Taxation (30 − 4) (26.0)
647.4
ii. Jagger plc’s Statement of changes in equity for the year ended 31 March 2017
Equity Share Retained Total
share premium earnings
capital
£000 £000 £000 £000
Balance at 1 April 2016 19,000 13,677 32,677
Issue of shares 1,000 500 1,500
Profit for the year 647.4 647.4
Dividends paid (5,800) (5,800)
Balance at 31 March 2017 20,000 500 8,524.4 29,024.4
iii. Jagger plc’s Statement of financial position at 31 March 2017

ASSETS £000 £000 £000
Non-current assets Cost Accum Deprn NBV
Plant and equipment 27,315 11,923 15,392
Motor vehicles 5,720 2,682.5 3,037.5
33,035 14,605.5 18,429.5
Investments 15,000
33,429.5
Current assets
Inventory 5,180
Trade receivable (9,930 − 261) 9,669
Less: provision for doubtful debts (479.1) 9,189.9
Prepayments 91
14,460.9
Total assets 47,890.4
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EQUITY & LIABILITIES

Equity
Equity share capital 20,000
Share premium 500
Retained earnings 8,524.4
29,024.4
Non-current liabilities
Preference shares 10,250
Current liabilities
Bank overdraft 456
Accruals 10
Corporation tax 30
8,616
Total equity and liabilities 47,890.4
(b) Answers should explain that:
• Preferences have the characteristics of a liability and are payable later than 12 months
from the accounting date. They are a non-current liability.
• Equity shares represent the owners’ interest in the entity and not a liability.
• Good answers would show the equation A = L + E.
• Thus preference dividends are an expense shown as finance costs.
• Equity dividends are a distribution of profits to the owners and thus are not an expense.
Question 2
McCartney Ltd is a company which manufactures and sells acoustic and electronic
guitars. In 2017 the company recorded a record level of sales and is predicting a
further increase in 2018. A private equity inventor is considering the purchase of a
20% holding in McCartney. The investor already holds a controlling interest in
Harrison Ltd ,a company which manufactrures and sells a range of brass
instruments.The following are the financial statements of McCartney Ltd.
Income Statements for the years ended 30 April
2017 2016
£’000 £’000
Sales 11,200 9,750
Cost of Sales 8,460 6,825
Gross Profit 2,740 2,925
Expenses 2,275 2,605
Net Profit before tax 465 320
Tax 95 75
Profit for the year 370 245
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Statements of Financial Position as at 30 April
2017 2016
£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
share) 800 800
Reserves 1,245 875
2,045 1,675
10% debentures 800 600
Current liabilities
Bank overdraft 110 80
Payables 750 690
Taxation 95 75
955 845
Total equity and liabilities 3,800 3,120
A set of accounting ratios has been prepared for Harrison Ltd for the year ended 30
April 2017 as follows:
ROCE 18.50%
Net profit margin (before tax) 4.73%
Asset turnover 3.91
Current ratio 1.90
Quick assets ratio 1.27
Gross profit margin 35.23%
Accounts receivable collection period 52 days
Accounts payable payment period 49 days
Inventory turnover (times) 18.30
Gearing 32.71%
Required
(a) Calculate comparable ratios (to two decimal places where appropriate) for
McCartney for the years ended 30 April 2016 and 2017. Ratios should be
computed using closing balances. All calculations must be clearly shown.
(10 marks)
(b) Prepare a set of notes for the private equity investor evaluating McCartney in
respect of
• Trading and profitability
• Liquidity and working capital management
• Gearing
• Investment potential.
(10 marks)
Total 20 marks
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Subject guide, Chapter 7.
L&P (2013), Chapters 4 and 5.
The learning outcomes of Chapter 7 of the subject guide 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 a potential equity investor.
(a) McCartney Ltd:

2016 2017 Harrison Ltd
465 + 80
ROCE 16.70% = 19.16% 18.50%
2,845
465 + 80
Net margin 3.90% = 4.87% 4.73
11,200
11,200
Asset turnover 4.29× = 3.94× 3.91×
2,845
1,950
Current ratio 2.00 = 2.04 1.90
955
1,230 + 80
Quick ratio 1.42 = 1.37 1.27
955
11,200 − 8,460
Gross profit margin 30.00% = 24.46% 35.23%
11,200
1,230 × 365
Accounts receivable 40 days = 40 days 52 days
11,200
collection period
750 × 365
Accounts payable 37 days = 32 days 49 days
8,460
payment period
8,460
Inventory Turnover 13.93× = 13.2× 18.30×
640
(times)
800
Gearing 26.37% = 28.12% 32.71%
2,845
(b) Trading and profitability
Return on capital employed has improved considerably between 2016 and 2017 and is now
higher than Harrison.
Net income as a proportion of sales has also improved noticeably between the years and is
also now marginally ahead of Harrison. Gross margin, however, is considerably lower than in
the previous year and is only some 70% of Harrison. This suggests either that there has
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been a change in the cost structure of McCarthy 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 2017 figure is in line with
Harrison. This reduction might indicate that the efficiency with which assets are used has
deteriorated or it might indicate that the assets acquired in 2017 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 Harrison. This suggests that
McCarthy has no short-term liquidity problems and should have no difficulty in paying its
debts as they become due.
Receivables as a proportion of sales are unchanged from 2016 and are considerably lower
than Harrison. 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 than Harrison; thus, it may be possible to finance any additional receivables
by negotiating better credit terms from suppliers.
Inventory turnover has fallen slightly and is lower than Harrison 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 Harrison. 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.
Investment potential
Overall McCarthy is more profitable than Harrison probably because of a more specific and
popular product line demonstrated by its recent and predicted sales growth. McCarthy’s
financial management compares very well with Harrison. An investment in McCarthy, at the
right price would appear to be justified on financial and operating results. There may well be
significant synergies of investing in two companies in the same sector but distinct markets.
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Question 3
Ringo plc manufactures and distributes jewellery. The following are extracts from
the financial statements of Ringo plc for the years ended 31 March 2017 and 2016.
Income Statement for the year ended 31 March 2017

£m
Turnover 2470
Cost of sales (1804)
Gross profit 666
Administrative expenses (196)
Selling and distribution costs (137)
Operating profit 333
Investment income 15
Finance cost (18)
Profit before tax 330
Taxation (160)
Profit for the year 170
Statement of changes in equity for the years ended 31 March 2017

Ordinary Share Retained
shares Premium Earnings Total
£m £m £m £m
As at 1 April 2016 200 49 277 526
Bonus issue 100 (49) (51) —
Issue of shares 23 15 38
Profit for the year 170 170
Dividend paid (80) (80)
323 15 316 654
Statements of Financial Position as at 31 March

2017 2016
£m £m
Non-current assets
Tangible 600 583
Investments 77 59
677 642
Current assets
Inventories 435 314
Receivables 285 246
Bank balances 9 53
729 613
Total assets 1406 1255
Current liabilities
Trade payables 62 72
Taxation 160 140
Accrued interest 6 4
422 367
Loans 330 362
Total liabilities 752 729
Equity 654 526
Total liabilities and Equity 1406 1255
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The following information is available:
(1) Non-current assets – Tangible
Accumulated
Cost Depreciation Net
£m £m £m
As at 1 April 2016 771 188 583
Disposal (110) (40) (70)
Additions at cost 162 162
Depreciation for the year 75 (75)
823 223 600
The assets were disposed of for cash proceeds of £80m and any profit or loss on
the sale was included in operating costs.
(2) Non-current assets – Investments
These are shares held in another company; additional shares were purchased for
cash during 2017.
(3) Loans were repaid at a premium during the year ended 31 March 2017. The
premium of £4m was included in interest paid.
(4) Equity
The 1 for 2 bonus issue took place on 1 April 2016 utilising all of the share
premium account and the balance by capitalising retained earnings. A further
issue of shares for cash took place on 1 January 2017.
Required
Prepare a cash flow statement for Ringo plc for the year ended 31 March 2017.
(20 marks)
L&P (2013), Chapter 6.
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 should be well presented, correctly describing the component cash flows with well
laid-out workings. It is important to show clear workings so that we can award any partially
correct answers with appropriate marks.
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Ringo plc:
Cash Flows from Operating Activities

Profit before Tax 330
Adjustments for: Depreciation 75
Profit on disposal (10)
Finance costs 18
Interest received (15)
Operating Profit before Working Capital Changes

Increase in inventory (121)
Increase in payables (39)
Decrease in payables (10) (170)
Cash generated from Operations 228

Finance Costs (18 + 4 − 6 − 4) (12)
Taxation paid (140) (152)
Net Cash from Operating Activities 76
Cash Flows from Investing Activities
Purchase of tangible non-current assets (162)
Purchase of investments (18)
Disposal of tangible non-current assets 80
Investment Income 15 (85)
Cash Flows from Financing Activities

Issue of Shares 38
Repayment of loans (32 + 4) (36)
Net decrease in cash and cash equivalents (87)
Cash and Cash Equivalents bought forward (53 − 151) 98
Cash and Cash Equivalents carried forward (9 − 194) (185)
Section C
Answer one question and not more than one further question from this section.
Question 4
Richards plc manufactures and sells specialist equipment to the catering trade. The
company has developed a new oven and the directors are considering whether to
proceed with production. The development costs incurred were £220,000.
A market research report costing £30,000 was received and paid for in April 2017.
The report suggested that the oven had an expected four year market life and
provided forecasts of demand. On the basis of these the following forecast profit and
loss accounts have been prepared:
Forecast profit and loss accounts for the year ended 30 June
2018 2019 2020 2021

£000 £000 £000 £000
Sales 500 640 480 320
Cost of goods sold (200) (256) (192) (128)
Gross profit 300 384 288 192
Variable overheads (100) (128) (96) (64)
Fixed overheads (50) (50) (50) (50)
Depreciation (130) (130) (130) (130)
Net profit (loss) 20 76 12 (52)
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In order to commence production on the new oven a machine costing £550,000 will
have to be purchased at the end of June 2017. The salvage value of this machine at
the end of four years is estimated to be £30,000. Additional working capital of
£40,000 will also be required at the start of July 2017, this will be recovered at the
end of four years
Fixed overheads of £40,000 per annum have been charged as a result of a

reallocation of existing overheads. The remaining £10,000 p.a. represents additional
fixed overheads resulting from the decision to undertake production of the new oven.
Keith the CEO of Richards plc, called a meeting of the product development team
soon after receiving the forecast profit figures. At this meeting he said:
“I am sorry to say that the forecast profit figures for the new product are very
disappointing. In three out of the four years of the product’s life the net profit margin
is less than 5 per cent. However, the cost of capital to finance the new product is 10
per cent. The projected profit margins are particularly disappointing given that the
development costs, market research costs and new equipment costs total £800,000. It
does not seem, therefore, that the product is financially viable.”
Required
(a) Set out in tabular format a calculation of the net present value of
manufacturing and selling the new oven using the information provided above.
Identify and explain any costs not included in your analysis.
(14 marks)
(b) Advise the Company including an evaluation of the comments made by the
CEO and the conclusion he reached.
(6 marks)
Total 20 marks
Subject guide, Chapters 11 and 12.
L&P (2013), Chapter 14.
The application of capital investment techniques is an important element of the syllabus and
learning outcomes for this course. The most effective approach to part (a) is to construct a
column table in which relevant cash flows can be inserted. It is important to give workings of all
figures and to clearly explain the 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. Therefore, 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 all workings are legible and
understandable. The 8-column accounting paper can help in this respect. A suggested
presentation of the answer is given below.
Part (b) required evaluation of the CEO’s comments and answers should concentrate on the
errors of principle made by the CEO, explain how the calculations in (a) overcome these and
discuss the final recommendation.
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(a) Richards plc:

2010 2011 2012 2013 2014
£000 £000 £000 £000 £000
Machinery (550) 30
Working capital (40) 40
Sales 500 640 480 320
Cost of sales (200) (256) (192) (128)
Variable costs (100) (128) (96) (64)
Fixed costs (10) (10) (10) (10)
Net Cash flows (590) 190 246 182 188
Discount factor 1.0 0.909 0.826 0.751 0.683
Present value (590) 172.7 203.2 136.7 128.4
The NPV is 51.0, hence the project is worthwhile.

Excluded :
• development costs – sunk cost.
• market research – sunk cost.
• depreciation – not a cash flow.
• £40,000 fixed overhead – allocations.
(b) Evaluation:
• Concentrates on profits not cash flows.
• Treats sunk costs as relevant.
• Assumes that profit margin lower than 5% equates to lack of financial viability.
• Reaches an incorrect conclusion/explain why positive NPV gives correct view, project
worthwhile subject to risk analysis.
Question 5
The Cotwold Hotel is run by Richard and Caroline. Richard is a trained landscape
gardener who could earn £25,000 per annum if he worked part time but he prefers
to help Caroline run the hotel. The profits from the hotel are shared equally
between them.
The hotel has 40 rooms which are currently let at a daily rate of £60. The hotel is
open for 7 days a week for 52 weeks a year. The business is very seasonal; the
forecasts for the year ended 31 March 2018 are as follows:
Rooms occupied at full daily rate

April – September (26 weeks) 6500 rooms
October – March (26 weeks) 4500 rooms
The forecast costs for the year are:
• Variable costs at £16 per room per day throughout the year
• Fixed costs
April–September October–March
£ £
Reception and office staff 65,000 50,000
Maintenance 39,000 30,000
Depreciation 75,000 75,000
General running costs 23,600 18,600
Richard and Caroline are concerned about what they think will be a weak economic
climate and are considering a number of mutually exclusive options.
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Option 1 – To reduce the room rate for the October–March period to £55 per
day. This is expected to increase room occupancy by 10%.
Option 2 – To close the hotel in November and February. In these months no
reception or office staff would be needed, maintenance and general running
costs would be reduced by 50% but depreciation would remain unchanged.
Assume occupancy is the same for each month in the six month period.
Option 3 – Richard to work part time as a landscape gardener and in the hotel
only at weekends. A full time hotel manager to be employed for £40,000 per
annum. It is estimated that this manager would introduce efficiencies which
would reduce variable costs by 10% and reception and office costs by 20%. The
share of profits would be changed to Richard 30% and Caroline 70%.
Required
(a) Calculate the room occupancy in days required to break even in each of the six
month periods based on original forecasts.
(3 marks)
(b) Calculate and briefly comment on, the profit for the year based on:
i. Original forecasts
ii. Option 1
iii. Option 2
(11 marks)
(c) Calculate and briefly comment on the income of Richard and Caroline if Option
3 is implemented.
(6 marks)
Total 20 marks
L&P (2013), Chapter 17.
A key learning outcome of this course is to apply decision-making techniques using a given set of
information. This question required calculation of contribution, net profit, break-even for a small
hotel. The question required calculations and analysis of a range of options.
The information needed an organised and systematic approach; a well-prepared candidate should
have found little difficulty if the data were used carefully. Part (c) required consideration from
the perspective of each of the owners and should include all relevant information.
(a) We have:
Fixed costs £202,600 £173,600
Contribution per room per day (60 − 16) £44 £44
Break-even point 4,605 3,945 (or 3,946)

(room occupancy in days)
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(b) i. Original forecasts:

£ £
Contribution (44 × 6,500) 286,600 (44 × 4,500) 198,000

Fixed costs 202,600 173,000
Profit 83,400 24,400
Total profits = £107,800.
ii. Option 1:
£
Contribution (55 − 16) × (4,500 × 1.1) 193,050
Fixed costs 173,600
Profit October–March 19,450
Profit April–September 83,400
102,850
iii. Option 2:
£
Contribution (see working) 132,000
Fixed costs (see working) 148,333
Profit October–March (16,833)
Profit April–September 83,400
66,567
Option 1 gives lower profit than Original. Option 2 gives lower profit than Original and
Option 1.
Working:
Number of rooms 4,500 × 4 − 6 = 3,000.
Contribution per room = £44.
Total contribution = £132,000.
Fixed costs:
Reception and office staff 33,333
Maintenance 25,000
Depreciation 75,000
General running costs 15,500
148,833
(c) We have:
£ £
Option 3
Contribution (45.6 × 6,500) 296,400 (45.6 × 4,500) 205,200
Fixed costs 189,600 163,600
Profit 106,800 41,600
Total 148,400
Manager’s salary 40,000
108,400
Income
Richard: 108,400 × 30% = 32,520
Gardening income 25,000
57,520
Caroline 108,400 × 70% = 75,880
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Comment: Richard would be marginally better off (original income £53,900) but Caroline
benefits significantly.
Question 6
Dinghy Products Ltd is a company which manufactures a range of products for the
leisure boating and sailing market in the UK. The Company is structured into
divisions which operate from a number of specialist manufacturing sites. The
divisions prepare product costings as independent operational sites. The following
information relates to two of the manufacturing divisions.
Division A
Division A is based in Southampton and makes two products, masts and booms.
There are two production departments. Turning and Finishing. There is also a sales
administration office and a storeroom for parts and materials. The following
information is available.
Turning Finishing Office Storeroom

Floor space (m2 ) 300 150 10 40
Issues of parts and materials per 200 50
month
Direct labour hours per mast 3 4
Direct labour hours per boom 4 3
The following are the budgeted output and costs for a month:
Output of masts 200

Output of booms 800
Factory power cost per month £30,000
Factory rent £1,000
Salary of storeman (all storeroom costs) £1,300
Salary of sales office clerk (all selling costs) £1,500
Factory rent and power costs are apportioned on the basis of floor space of all
departments.These are the only indirect costs of production and a direct labour
hour basis of absorption should be used for the two production departments.
Division B
Division B is based in Dartmouth and makes sails for small sailing boats on a
made-to-measure basis. The following costs are expected to be incurred by the
business during a month:
Direct materials cost £3,000

Direct labour costs £30,000
Depreciation of machinery £3,000
Heating, lighting and power £2,000
Indirect labour cost £9,000
Indirect expenses £400
Direct labour time (assume a single hourly 6,000 hours
rate)
Machine time 2,000 hours
The business has received an enquiry about a sail and it is estimated that the sail
will take 12 direct labour hours to make and will require 20 sqare metres of
sail-cloth (which costs £2 per square metre). The business normally uses a
direct-labour-hour basis of charging overheads to individual jobs.
The production manager has suggested that for this job a machine hour basis of
overhead recovery might be more appropriate. The sail will take 5 machine hours.
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Required
(a) Calculate the indirect manufacturing cost of a mast and boom in Division A.
(10 marks)
(b) Calculate the full cost of making the sail in Division B on the normal overhead
recovery basis.
(6 marks)
(c) Calculate and briefly comment on the effect of the Division B’s production
manager’s suggestions.
(4 marks)
Total 20 marks
Subject guide, Chapter 9 pp. 152–162.
L&P (2013), Chapter 16 pp. 64–65.
The learning outcomes of this course refer to the ability to apply costing methods including
absorption costing. This question requires the allocation of overheads and their application to
cost units. The question required application of all of the stages of full cost calculation and part
(c) tested the understanding of the impact of choosing different allocation and absorption bases.
(a) Division A:
Turning Finishing Sales Office Storeroom Total
Indirect costs £ £ £ £ £
Storeroom’s salary 1,300 1,300
Office clerk’s salary 1,500 1,500
Power (basis : floorspace) 18,000 9,000 600 2,400 30,000
Rent ( basis : floorspace) 600 300 20 80 1,000
Sub total 18,600 9,300 2,120 3,780 33,800
Reapportion (basis: issues) 3,024 756 (3,780)

Total departmental cost 21,624 10,056 2,120 — 33,800
Total direct labour hours (W) 3,800 3,200
Indirect cost per labour hour 5.6905 3.1425
Indirect cost per mast 17.07 12.57 29.64
Indirect cost per boom 22.76 9.43 32.19

Working:
• Rent:
Total factory floorspace = 300m2 + 150m2 + 10m2 + 40m2 = 5002
so rent is apportioned on the basis of £1,000/500m2 = £2 per m2 .
• Power costs : 30,000/500m2 = £60 per m2 .
• Storeroom : Total monthly issues = 250 reapportion storeroom costs on the basis of
3780/250 = £15.12.
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• Direct labour hours:

∗ Total direct labour hours in Turning = 200 masts × 3 hrs per mast + 800 booms × 4
hrs per boom = 3,800 hrs.
∗ Total direct labour hours in Finishing = 200 masts × 4 hrs per mast + 800 booms ×
3 hrs per boom = 3,200 hrs.
(b) Overhead recovery rate:
9,000 + 3,000 + 2,000 + 400
= £2.40 per labour hour.
6,000
Full cost Direct material (20 × 2) 40.00

Direct labour (12 × 30,000/60,000) 60.00
Overhead (12 × 2.40) 28.80
128.80
(c) We have:
Direct cost 100.00
Overhead 14,400 × 5/2,000 36.00
136.00
The choice of overhead recovery rate should be based on the principal resource usage of the
factory. With more labour hours (a) could be preferred.
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Important note

references
section.
Comments on specific questions – Zone B
Section A of this examination consists of 20 Multiple Choice Questions. You should attempt to
answer ALL the questions. Each question has four possible answers (a–d). There is only one correct
answer to each of the questions. Please mark the correct answer on the special sheet provided. The
maximum mark for this part is 30.
Sections B and C: Please answer QUESTION 1 (30 marks) of Section B; ONE question from
Section C and ONE further question from either section B or C (except for Question 1 all questions
are worth 20 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 all questions from this section.
Please mark the correct answer in the special multiple choice answer sheet provided using an
HB pencil only.
Candidates should write their candidate number in the boxes and then mark up their appropriate
letter and numbers in the grid.
The date, candidate first name(s) and surnames should be written in the appropriate space.
Candidates should use an eraser to remove any unwanted marks as fully as possible. If an eraser is
unavailable, please put a cross (X) through the incorrect mark.
The sheets should not be folded or creased in any way as this will make them unreadable.
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Candidates should not write anywhere else on the sheet other than to mark their answers as shown
on the sheet; any writing or marks in an inappropriate place could make the sheet unreadable.
Candidates should NOT attach the multiple choice answer sheet to their answer
booklet.
Correct answers are shown in bold.
Question 1
What are the correct Statement of Financial Position (Balance Sheet) categories for
the following:-
Amounts owed to suppliers, goodwill, reserves
A Non-current liability, current asset, equity

B Current liability, current asset, non-current asset
C Non-current asset, equity, current asset
D Current liability, non-current asset, equity.
Question 2
The follow information is taken from a set of accounts:-

Non-current assets £100
Current assets £60
Net current assets (working capital) £10
Long term loans £40
What are the correct figures for the two missing numbers; current liabilities and
equity (shareholders’ funds)?
A Current liabilities: £70; equity £110

B Current liabilities: £50; equity £70
C Current liabilities: £50; equity £140
D Current liabilities: £70; equity £70.
Working: CL = 10 − 60. E = 100 + 10 − 40.
Question 3
The equity of a company at the start of a period was £600,000.
During the period the follow transactions occur:
• Cash received from accounts receivable (debtors) of £55,000.

• Sale of inventory (stock) for £90,000 on credit, the inventory had cost £75,000.
• A 5 year bank loan of £50,000 is arranged and the cash received.
• An unexpected bad debt of £5,000 is written off.
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The figure for equity at the end of the period is:
A £735,000
B £660,000
C £610,000
D £600,000.
Working: 600 + (90 − 75) − 5.
Question 4
A company uses the FIFO (First In, First Out) method for inventory valuation.
During the month of December 2016, the company had the following inventory
movements:
Date Detail Units Unit (Selling or
Purchasing)
price
1 December Opening inventory 300 £8.00
10 December Purchases 400 £8.50
12 December Sales 350 £8.80
20 December Sales 250 £9.20
29 December Purchases 200 £9.00
At 31 December 2016, the expected selling price of the remaining products was
£9.50 per unit.
What is the gross profit of the company for December 2016?
A £320
B £460
C £210
D £430.
Working: (350 × 8.8) + (250 × 9.2) − (300 × 8) − (300 × 8.5).
Question 5
XD plc prepares its financial statements for the year ended 31 December. XD
charges depreciation straight line basis. XD acquired a machine on 1 January, 2014
for £70,000 , it is expected that the machine will last until 31 December 2020 when
it will be sold for £14,000.
What will be the net book value (cost less accumulated depreciation) of the machine
on 31 December, 2018?
A £10,000
B £20,000
C £30,000
D £32,000.
Working: (70,000 − 14,000)/7 = 8,000 × 5 = 40,000. 70,000 − 40,000 = 30,000.
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Question 6
The following information for 2016 has been extracted from the accounts of a
company:
Total Assets at 1 January 2016 £300,000

Total Liabilities (including Debt) at 1 January 2016 £150,000
Total Equity Capital at 31 December 2016 £210,000
Dividends paid in 2016 £25,000
New Equity Capital paid in during 2016 £50,000
Repayment of Debt during 2016 £30,000
Which of the following was the net profit for 2016?
A £65,000
B £35,000
C £25,000
D £10,000.
Working: (300 − 150) − 25 − 50 = 175. 175 − 210 = 35.

Information for questions 7 and 8
The following are extracts from the financial statements of a company for the two years
ended 31 December 2015 and 2016.
Statement of financial position as at 31 December
2015 2016
£000 £000
Inventory 490 365
Trade receivables 375 525
Current asset investments 300 340
Cash and bank balances 25 76
Trade payables 1.418 910
Non-Current assets 1,536 2,728
Non-Current liabilities 0 300
Issued £1 Ordinary Shares 5,000 5,500
The current asset investments are highly liquid and are payable on demand.
The ordinary shares were issued at nominal value.
The income statement for the year ended 31 December 2016 shows an operating profit
of £2,500,000 after charging depreciation of £750,000 and a profit on disposal of a
non-current asset of £32,000.
Question 7
The change in the company’s cash and cash equivalents for the year ended 31
December 2016 was:
A Outflow £159,000
B Inflow £116,000
C Outflow £89,000
D Inflow £51,000.
Working: (300 + 25 − 200) − (340 + 76 − 450).
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Question 8
The cash flow from operations of the company for the year ended 31 December 2016
was:
A £3,218,000
B £2,749,000
C £2,685,000
D £2,185,000.
Working: 2500 + 750 − 32 + 125 − 150 − 508.
Question 9
During the year ended 31 December 2016, a company paid a total of £60,000 for
rent, covering the 18 month period from 1 October 2015 to 31 March 2017.
What figures should appear in the financial statements of the company for the year
ended 31 December 2016?
Income Statement Statement of Financial Position
A £40,000 expense £10,000 prepayment
B £40,000 expense £15,000 prepayment
C £50,000 expense £10,000 accrual
D £50,000 expense £15,000 accrual
Working: IS = 60,000 × 12/18. SFP = 60,000 × 3/18.
Question 10
The financial statements of a company for the year ended 31 December 2016
revealed a profit before interest and tax of £300,000 and the following accounting
ratios:
Asset (Capital) Turnover – 2.5 times
Return on Capital Employed – 15%
What were the sales for the year ended 31 December 2016?
A £750,000
B £1,800,000
C £5,000,000
D £11,250,000.
Working: CE = 30,000/0.15 = 200,000. S = 200,000 × 2.5.
Question 11
A company sells a product at £80 per unit and the variable cost per unit sold is
£30. It currently sells 2,000 units per month and obtains a net profit per month of
£20,000.
What profit will the company achieve next month if it decides to reduce its fixed
costs by £4,000 per month, increase its selling price to £85 per unit and
consequently only sell 1,800 units per month?
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A £27,500
B £23,000
C £19,000
D £15,000.
Working: FC = (2,000 × 50) − 20,000 = 80,000. NP = ((85 − 30) × 1,800) − 76,000.
Question 12
A company produces 12,000 units per year, with a total production cost of £93,000.
If it produces 20,000 units per year, its total production cost is £125,000.
What would the companys margin of safety (expressed as a percentage) be if it

produced 18,000 units and sold them at £7 each?
A 20%
B 33.3%
C 15%
D 16.7%.
Working: VC = (125,000 − 93,000)/8,000 = 4. FC = 93,000 − (12,000 × 4) = 45,000.

BEP = 45,000/3 = 15,000. MoS = −(18,000 − 15,000) × 100/18,000.
Question 13
A company makes two products K and L. K sells for £50 per unit.; L for £70 per
unit. The variable cost per unit of K is £35, that of L £40. Each unit of K uses 2kgs
of raw material. Each unit of L uses 3kgs of raw material.
In April the availability of raw material is limited to 2,000kgs. Maximum demand in

April for the L is 250 units. Demand for the K in April is unlimited. What is the
profit-maximising product mix for April?
K units L units
A 625 250
B 1,250 250
C 250 625
D 250 1,250
Working: Contribution per unit of K = 15, L = 30. 250 units of L = 750 kgs.
2,000 − 750 = 1,250/2 = 625 units of K.
Question 14
An investment project requires an initial cash investment of £600,000. The expected

cash inflows are as follows:
Year 1 £300,000; Year 2 £200,000; Year 3 £200,000; Year 4 £100,000. If cash flows
are expected to occur evenly throughout the project, what is the payback period?
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A 2 years 3 months
B 3 years
C 2 years 6 months
D 2 years 4 months.
Working: 600,000 = 200,000 + 200,000 + 6/12 × 200,000.
Question 15
A project requires purchase of plant for £450,000 at the start of year 1, the project
will last 3 years after which the plant will be sold for £150,000. The plant is
assumed to be consumed evenly over the period. The expected profits before tax
from the project are as follows:
Year 1 £100,000; Year 2 £150,000; Year 3 £150,000
What is the average Accounting Rate of Return (ARR) for the project?
A 44.44%
B 66.67%
C 100%
D 88.89%.
Working: (400,000/3) × 100/(450,000 + 150,000)/2.
Question 16
Which ONE of the following best describes a cost centre?
A Units of a product or service for which costs are ascertained

B Amounts of expenditure attributed to various activities or products
C Function or location for which costs are ascertained and related to cost units
D A section of an organisation for which budgets are prepared and costs controlled.
Question 17
A company manufactures two products J and K, in a factory divided into two

production cost centres, Primary and Finishing. In order to determine a budgeted
production overhead cost per unit of product the following budgeted data are
available:
Primary Finishing
Allocated production overhead cost £96,000 £82,000
Direct labour minutes per unit:
J 36 25
K 48 30
Budgeted production is 6,000 units of J and 7,500 units of K. Production overheads

are to be absorbed on a direct labour hour basis.
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The budgeted production overhead cost per unit of product K is:
A £10.00
B £13.12
C £14.00
D £14.56.
Working: P = 96,000/(6,000 × 36/60) + (7,500 × 48/60) =£10 ph.

F = 82,000/(6,000 × 25/60) + (7,500 × 30/60) =£13.12 ph.
K = (10 × 48/60) + (13.12 × 30/60) =£14.56.
Question 18
A production department has 3,250 budgeted machine hours and budgeted overhead
costs of £14,950 for June 2016.
The actual machine hours for the department in June 2016 were 3,175 and the
actual overheads were £14,810.
The overheads for the June 2016 were:
A Under-absorbed by £140
B Over-absorbed by £140
C Under-absorbed by £205
D Over-absorbed by £205.
Working: ((14,950/3,250) × 3,175) − 14,810.
Question 19
Extracts from a company’s records for March are as follows:
Budget Actual
Production 520 units 560 units
Variable production overhead cost £3,120 £4,032
Labour hours worked 1,560 2,240
The variable production overhead variance for March is:
A £240 adverse
B £672 adverse
C £672 favourable
D £912 favourable.
Working: (23,120 × 560/520) − 4,032.
Question 20
The labour total variance for the latest period was favourable.
Which ONE of the following is certain to have caused this variance?
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A Lower hourly rates than standard and higher than budgets labour hours
B Lower hourly rates than standard and lower than standard hours for the actual
production
C Lower hourly rates than standard and higher than standard labour hours for the actual
production
D Lower hourly rates than standard and lower than budgeted labour hours.
Section B
Answer question 1 and not more than one further question from this section.
Question 1
The following is the trial balance of Lennon plc as at 30 April 2017
£ £
100,000 equity shares of £1 each 100,000
50,000 7% preference shares of 50p each 25,000
Freehold Land at 30 April 2016 valuation 160,000
Accumulated depreciation: Buildings at 1 May 2016 13,100
Buidings, at cost 80,000
Plant & Equipment, at cost 13,000
Accumulated depreciation of Plant & Equipment at 1
May 2016 3,900
Inventory at 1 May 2016 9,400
Trade receivables 11,200
Bank overdraft 7,800
Purchases 49,700
Sales 135,900
Administrative expenses 28,400
Distribution costs 11,700
Interest on Loan Stock 1,200
10% Loan Stock 24,000
Investments (current assets) 8,000
Provision for doubtful debts at 1 May 2016 910
Share premium 35,000
Interim dividend paid on equity shares 3,250
Bad debts written off 700
Revaluation reserve 9,860
Retained earnings 12,780
376,550 376,550
The following additonal information is available:
1. Inventory at 30 April 2017 is valued at £15,000. This valuation includes an item

of stock at a cost of £2,000 which has been damaged and has an estimated
resale value of £480.
2. Included in administrative expenses is a payment for rent of £1,800 for the six
months ended 30 September 2017. Also included in administrative expenses
were marketing costs, however an unpaid invoice for on-line advertising for
April 2017 of £350 has not been included.
3. Depreciation on buildings is to be provided at a rate of 15% per annum on the
cost of £80,000 and the plant and equipment should be depreciated to result in
a net book value of £7,800 on 30 April 2017.
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4. The freehold land should be revalued at 30 April 2017 to £180,000.
5. The provision for doubtful debts is to be adjusted to 10% of the trade

receivables at 30 April 2017.
6. Provide for corporation tax on the profit for the year ended 30 April 2017 of
£6,370.
7. The preference share dividends are outstanding at 30 April 2017 and the last
half year’s interest on the loan stock has not been paid.
8. The directors propose to declare a final dividend on the equity shares of 13

pence per share.
Required:
(a) Prepare the following for Lennon Ltd:
i. An Income Statement for the year ended 30 April 2017.

(10 marks)
ii. A Statement of Changes in Equity for the year ended 30 April 2017.
(4 marks)
iii. A Statement of Financial Position as at 30 April 2017.

(10 marks)
(b) Explain and justify the different treatments of preference shares and equity
shares and the related dividends in the financial statements.
(6 marks)
Total 30 marks
Subject guide, Chapters 4, 5 and 6.
L&P (2013), Chapter 10.
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.
Candidates should allow the 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. The format of the
statement of changes in equity should follow best practice. Part (b) required explanation of the
treatments of equity and preference shares. Answers which simply described the differences
between the two types of share without explaining the accounting implications were not awarded
marks.
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(a) i. Lennon Ltd’s Income Statement for the year ended 30th April 2017
£
Sales revenue 135,900
Cost of sales [W1] (45,620)
Gross profit 90,280
Distribution costs (11,700)
Administrative expenses [W2] (27,250)
Bad Debts (700)
Increase in provision (210)
Depreciation (12,000 + 1,300) (13,300)
Profit before Interest and Tax 37,120
Finance costs [W6] (4,150)
Profit before tax 32,970
Taxation (6,370)
Profit for the year 26,600
ii. Statement of changes in equity for the year ended 30 April 2017
Share Share Revaluation Retained Total
Capital Premium Reserve Earnings
£ £ £ £ £
Balance at 1/5/16 100,000 35,000 9,860 12,780 157,640
Revaluation 20,000 20,000
Equity dividends paid (3,250) (3,250)
Profit for year 26,600 26,600
Balance at 30/4/17 100,000 35,000 29,860 36,130 200,990
iii. Statement of Financial Position as at 30 April 2017

£ £ £
ASSETS
Non-current assets:
Land & Buildings 260,000 25,100 234,900
Plant and equipment 13,000 5,200 7,800
273,000 30,300 242,700
Current assets:
Inventory 13,480
Trade debtors 11,200
Less: provision (1,120) 10,080
Prepayments 1,500
Investments 8,000
33,060
Total assets 275,760
Non-current liabilities:
10% debentures 24,000
50,000 7% preference shares 25,000
49,000
Current liabilities:
Bank overdraft 7,800
Trade creditors 8,300
Taxation 6,370
Accruals (1,200 + 1,750 + 350) 3,300
25,770
Equity
Share Capital 100,000
Reserves 100,990
200,990
Total equity and liabilities 275,760
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Working:
[W1] Cost of sales:
£
Opening inventory 9,400
Add: Purchases 49,700
Less: Closing inventory (15,000 − (2,000 − 480) (13,480)
45,620
[W2] Administrative expenses:

TB 28,400
Prepayment (5/6 × 1,800) (1,500)
Accrual 350
27,250
[W3] Land & buildings:

Depn 15% × £80,000 = £12,000
Revaluation 180,000 − (240,000 − 80,000) = 20,000
[W4] Depreciation of P & E

Opening NBV is £(13,000 − 3,900) = £9,100
Closing valuation is £7,800
Depreciation for year: £(9,100 − 7,800) = £1,300
[W5] Provision for doubtful debts:

Opening debtors 11,200
Provision @ 10% 1,120
Existing provision (910)
Increase in provision 210
Bad debt of £700 already accounting for since in TB.
[W6] Finance costs:

Loan interest : £24,000 × 10% or 1200 +1200 2,400
Preference dividend: £25,000 × 7% = 1,750
4,150
(b) The points candidates raise need to be consistent with their answer in part (a).
• Preferences have the characteristics of a liability and are payable later than 12 months
from the accounting date. They are a non-current liability.
• Equity shares represent the owners’ interest in the entity and not a liability.
• Good answers would show the equation A = L + E.
• Thus preference dividends are an expense shown as finance costs.
• Equity dividends are a distribution of profits to the owners and thus are not an expense.
• If preference shares are redeemable then they should be treated as equity.
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Question 2
You are advising the board of Parsley plc a company producing and wholesaling
organic cosmetics and health products. They are considering expansion into the
market for organic products for the catering industry and have identified two
companies for potential acquisition, Sage Ltd and Thyme Ltd. Having obtained the
most recent financial statements of the target companies the next stage is a
comparison of their financial position and performance as revealed by these financial
statements. The expectation is that any acquisition will be of 100% of the shares
and will be financed principally by an issue of loan stock.
The summarised financial statements of the companies are as follows:
Statements of Financial Position as at 30 September 2016.
Sage Ltd Thyme Ltd

£m £m
Non-Current assets
Freehold land and buildings 183 365
Plant, machinery and equipment 100 45
283 410
Current assets
Inventories 140 100
Trade Receivables 90 143
230 243
Current Liabilities
Trade Payables 82 150
Bank Overdraft 19 117
Corporation tax 20 17
121 284
Non-Current Liabilities
8% Loan Stock (payable 2017) 100 —
Equity
Ordinary share capital 165 255
Retained earnings 127 114
Total equity and liabilities 513 653
Income Statement for the year ended 30 September 2016
Sage Ltd Thyme Ltd

£m £m
Sales 800 640
Cost of goods sold (650) (478)
Gross profit 150 162
Expenses (78) (99)
Profit before tax and 72 63
interest
Finance Costs (9) (6)
Profit before tax 63 57
Corporation tax (20) (17)
Profit after tax 43 40
The Chief Financial Officer (CFO) of Parsley plc has asked you to help produce a
report for the board which compares the financial performance and financial
position of the two companies. She has specified the following content of the report:
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Accounting Ratio Analysis for the year to 30 September 2016
1. Profitability
i. Return on capital employed
ii. Gross profit percentage
iii. Net profit margin
iv. Asset (capital) turnover.
2. Efficiency
i. Quick assets (acid-test) ratio
ii. Inventory turnover (in days)
iii. Receivables recovery period (in days)
iv. Payables payment period (in days).
3. Financial risk
i. Interest cover
ii. Gearing ratio.
4. Brief analysis on the comparative profitability, efficiency and financial risk of

the two companies as shown by the ratios calculated in 1, 2 and 3 above.
Required
You are required to prepare a draft of the contents for the report to the board of
Parsley plc as specified by the CFO. Ratios should be shown to two decimal places
except for those expressed to the nearest day. Marks are allocated as follows:
(a) Computation of the ratios set out in 1, 2 and 3 above.

(10 marks)
(b) Brief analysis as required in 4 above.
(10 marks)
Total 20 marks
L&P (2013), Chapters 4 and 5.
The learning outcomes of Chapter 7 of the subject guide 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 a potential equity investor.
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(a) Parsley plc:

Sage Ltd Thyme Ltd
1. Profitability
72 63
ROCE = 18.37% = 17.07%
392 369
150 162
GP% = 18.75% = 25.31%
800 640
72 63
NPM% = 9.00% = 9.84%
800 640
800 640
AT = 2.04 × = 1.73 ×
392 369
2. Efficiency
QA 90 : 121 = 0.74 : 1 143 : 284 = 0.50 : 1
140 100
Inventory × 365 = 79 days × 365 = 76 days
650 478
90 143
Receivables × 365 = 41 days × 365 = 82 days
800 640
82 150
Payables × 365 = 46 days × 365 = 114 days
650 478
3. Financial Risk
72 63
Interest cover = 8× = 10.5 ×
9 6
100
Gearing (i) Or = 25.51% 0
392
100 + 19 117
Gearing (D/D+E)) (ii) = 28.95% = 24.07%
392 + 19 369 + 117
119 117
Gearing (iii) D/E = 30.3% = 31.7%
392 369
(b) Analysis:
Profitability:
• Thyme has a lower ROCE with a higher GP and NPM.
• Sage has higher AT showing either more effective use of assets or that Thyme has either
lower prices and similar volumes or has higher prices and lower volumes.
• Probable that Sage and Thyme are operating in slightly different markets with Thyme in
a higher-price lower-volume market.
• On balance Thyme seems to have better marketing and product strategies.
• Sage appears to be potentially more profitable.
• Thyme could improve its expenses policy.
Efficiency:
• Both have low QA and this is a problem where neither have any bank/cash and have
overdrafts. Both have liquidity/solvency problems.
• Inventory turnover is consistent for both.
• Sage has a good balance of TR and TP periods. Thyme is more of a problem as the TR
is significantly higher and TP is unacceptably high compounding the liquidity problem.
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• On balance Thyme seems to have its working capital under control but has significant
problems.
Financial risk:
• Interest cover is reasonable for both. Sage is lower due to the high interest rate in the
loans. These are also payable in the near future.
• Gearing is relatively low overall but both have issues. Sage has to pay the loan in 2017
and has no liquid revenues. Thyme has a very high bank overdraft.
• On balance, both companies have short-term financial risk issues and need a refinancing
package.
Question 3
The following are the summarized financial statements of Watts plc for the years
ended 31 December 2015 and 2016.
Statements of Financial Position as at 31st December
2015 2016
£m £m
Non-current assets
Tangible 1000 1200
Intangible 40 140
1040 1340
Current assets
Inventories 430 480
Receivables 712 680
Prepayments 100 180
Cash at bank 48 160
1290 1500
Current liabilities
Trade payables 270 500
Taxation 200 240
470 740
Loans 200 160
Total liabilities 670 900
Equity 1660 1940
Total Equity and liabilities 2330 2840
Income Statement for the year ended 31 December 2016

£m
Turnover 2400
Cost of sales (1620)
Gross profit 780
Administrative expenses (240)
Selling and distribution costs (16)
Operating profit 524
Finance costs(net) (44)
Profit before tax 480
Taxation (240)
Profit for the year 240
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Statement of changes in equity for the year ended 31 December 2016
Ordinary Share Revaluation Retained

shares Premium Reserve Earnings Total
£m £m £m £m £m
As at 1 January 2016 1300 100 — 260 1660
Issue of shares 100 40 — — 140
Revaluation — — 60 — 60
Profit for the year — — — 240 240
Dividend paid — — — (160) (160)
1400 140 60 340 1940
The following information is available:
(1) The movement in non-current tangible assets is summarised as follows:

£m
Net book value at 1 January 2015 1000
Additions at cost 400
Revaluation 60
Disposals at book value (140)
Depreciation for the year (120)
1200
The asset disposal was sold for cash proceeds of £160m and the profit on
disposal is included in operating profit.
(2) The non-current intangible assets are patent rights. New rights were purchased
for £110m cash in the year. Amortisation of £10m has been charged to cost of
sales during 2016.
(3) Loans were repaid at a premium during the year for £46m cash. The premium
has been charged to net finance costs. Net finance costs of £44m for 2016 are
stated after deducting £16m of interest received.
(4) The issue of shares at a premium was made for cash on 1 July 2016.
Required
Prepare a Cash Flow Statement for Watts plc for the year ended 31st December
2016.
(20 marks)
L&P (2013), Chapter 6.
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 should be well presented, correctly describing the component cash flows with well
laid-out workings. It is important to show clear workings so that we can award any partially
correct answers with appropriate marks.
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Watts plc:
Cash Flows from Operating Activities

Profit before Tax 480
Adjustments for: Depreciation (120 + 10) 130
Profit on disposal (20)
Finance costs 60
Interest received (16)
634
Operating Profit before Working Capital Changes
Increase in inventory (50)
Decrease in receivables 32
Increase in payables 230
Increase in prepayments (80) 132
Cash generated from Operations

Interest paid (60 − 6) (54)
Taxation paid (200) (254)
Net Cash from Operating Activities 512
Cash Flows from Investing Activities

Purchase of tangible non-current assets (400)
Purchase of intangible non-current assets (110)
Disposal of tangible non-current assets 160
Interest received 16 (334)
Cash Flows from Financing Activities

Issue of Shares 140
Repayment of loans (46)
Net increase in cash and cash equivalents 112
Cash and Cash Equivalents brought forward 48
Cash and Cash Equivalents carried forward 160
Section C
Answer one question and no more than one further question from this section.
Question 4
Over the last year Wyman plc has spent £100,000 developing a new product, the
“MC5” which if launched is expected to have a life of 6 years. The development
work is now complete and the company is considering whether to start production
and, if so, what production method would be best. The alternative production
methods have been narrowed down to two options.
Option A involves the purchase of a special machine to manufacture MC5. This

machine has a capacity of 18,000 units of MC5 per annum and an estimated life of 6
years. It would cost £78,000 to purchase and a further £15,000 per annum in
maintenance and power costs. At the end of six years its residual value would be nil.
Option B would involve using a readily available smaller machine with a capacity of
10,000 units pa and a life of three years. At the end of the first three years the
smaller machine would be replaced by 2 similar machines to cope with the extra
demand. The current cost of the machine is £30,000 but by the time it is replaced
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at the end of the third year the two new machines would cost £78,000 in total. All
machines have a zero scrap value at the end of their three year life. Running costs
of the smaller machines would be £10,000 per annum for each machine.
1. Variable costs of material and direct labour are expected to be £6 per unit of
MC5. Wyman has corporate fixed overheads of £120,000 per annum, there will
be increase in corporate fixed overheads if the MC5 is introduced.
The machine will be depreciated using the straight line basis.
The company would also need to invest £10,000 in working capital at the start
of production. This would be recouped at the end of the project.
2. Each MC5 is expected to sell for £10 per unit. The expected demands for sales
of MC5 over the product life are estimated as follows:
Expected demand
Year 1 4,000 units
Year 2 6,000 units
Year 3 10,000 units
Year 4 16,000 units
Year 5 16,000 units
Year 6 16,000 units
3. The company has a cost of capital of 12% (the present value of £1 discounted at
12% for 6 years is 0.507).
Required
(a) Calculate of the Net Present Value of each option and indicate which you would
recommend.
(15 marks)
(b) Identify and explain the relative merits and disadvantages of internal rate of
return and net present value as decision models for project appraisal.
(5 marks)
(Total 20 marks)
Subject guide, Chapters 11 and 12.
L&P (2013), Chapter 14.
The application of capital investment techniques is an important element of the syllabus and
learning outcomes for this course. The most effective approach to part (a) is to construct a
column 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. Therefore, 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 all workings are legible and
understandable. The 8-column accounting paper can help in the respect. A suggested
presentation of the answer is given below.
Part (b) required comparison and evaluation of IRR and NPV, answers which simply described
the two methods with no comparative analysis received few marks.
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(a) Wyman plc:

OPTION A:
0 1 2 3 4 5 6
£000 £000 £000 £000 £000 £000 £000
Sales 40 60 100 160 160 160
Cost (78)
Working Capital (10) 10
Running cost (15) (15) (15) (15) (15) (15)
V. Cost – Labour (24) (36) (60) (96) (96) (96)
Net Cash Flow (88) 1 9 25 49 49 59
Discount factor 1 0.893 0.797 0.712 0.636 0.567 0.507
PV (88) 0.893 7.173 17.800 31.164 27.783 29.913

NPV + £26,726.
OPTION B:
0 1 2 3 4 5 6
£000 £000 £000 £000 £000 £000 £000
Sales 40 60 100 160 160 160
Cost (78)
Working Capital (10) 10
Running cost (15) (15) (15) (15) (15) (15)
V. Cost – Labour (24) (36) (60) (96) (96) (96)
Net Cash Flow (40) 6 14 (48) 44 44 54
Discount factor 1 0.893 0.797 0.712 0.636 0.567 0.507
PV (40) 5.358 11.158 (34.176) 27.984 24.948 27.378

NPV + £22,650.
Ignore development cost and fixed overheads.
Hence A is the preferred option.
(b) Advantages and disadvantages of NPV and IRR
Both NPV and IRR:
• recognise the time value of money
• use relevant costs and revenues.
As such, both DCF methods are superior to payback period and ARR.
However, NPV is the better DCF method to use for investment appraisal because it
considers the magnitude of a project (projects with positive NPVs increase wealth, and
projects with greater positive NPVs increase wealth more than those with smaller positive
NPVs).
The NPV is additive and allows managers to determine the total sum of NPVs of a group of
investments. The IRR of a group of investments does not equal the sum of IRRs of each
individual investment.
In contrast:
• IRR cannot distinguish between projects involving investment (initial cash outflows) and
projects involving borrowing (initial cash inflows).
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• IRR does not provide an absolute measure. It is necessary to compare the IRR with a
discount rate, in order to make a decision (it is impossible to know whether an IRR of,
say 12%, makes a project worthwhile or not, without also at least knowing the
appropriate discount rate to apply).
IRR cannot distinguish between mutually exclusive projects. If two projects have IRRs of,
say 15% and 20%, we cannot assume that the project with the higher IRR is also the one
with the higher NPV at a particular discount rate.
IRR ignores the absolute size of project cash flows.
IRR may not be unique (certain projects may have more than one IRR).
Question 5
Taylor Ltd manufactures specialist adhesive which it sells in one size of bag. Each
bag has a standard cost of £80 made up as follows:
Direct materials 15 kilos @ £3 per kilo £45

Direct labour 5 hours @ £4 per hour £20
Variable overheads 5 hours @ £2 per hour £10
Fixed overheads £5
£80
• Variable overheads are charged on a direct labour hour rate.

• The standard selling price of a bag of adhesive is £100.
• The monthly budget is based on production and sales of 1,000 units.
• Actual figures for the month of April are as follows:
Sales 1,400 bags @ £102

Production 1,400 bags
Direct materials 22,000 kilos @ £4 per kilo
Direct labour 6,800 hours @ £5
Variable overheads £11,000
Fixed overheads £6,000
There are no inventories of materials at the beginning or end of the period.
Required
(a) Prepare an operating statement showing all appropriate variances, which

reconciles actual profit with budgeted profit for April. (You should calculate
only a spending variance for fixed overhead).
(14 marks)
(b) Write a brief commentary for management on the information shown in your
report.
(6 marks)
Total 20 marks
L&P (2013), Chapter 18.
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This is a question which tests candidates’ ability to apply standard costing, budgeting and
variance analysis to a given set of data. Your answer should set out clearly all of your workings
and cross-refer these to the final operating statement and relevant variances. It is important that
you identify variances as either favourable or adverse (unfavourable). These techniques are
clearly demonstrated by example in the subject guide and you should be prepared to apply them
in questions at this level. Part (b) required a commentary on the results in (a), good answers
would make connections between variances in this analysis to provide sensible informed insight
into the results rather than memorised textbook answers.
(a) Operating Statement – April:

£
Budgeted profit 20,000
Sales variance – Price 2,800
– Volume 10,000
32,800
Cost variances Fav. Adv.

Materials – Price (22,000)
– Volume (3,000)
Efficiency
Labour – Price (6,800)
– Volume 800
Efficiency
V. Overhead – Price 2,600
– Volume 400
Efficiency
F. Overhead – Spending (1,000)
3,800 32,800 (29,000)
Actual Profit 3,800
(b) Commentary:
• Overall budgeted profits of £20,000 have not been achieved due principally to material
cost overruns.
• Sales volume has increased even after a 2p increase in sales price. If costs had been on
target a profit of £32,800 could have been achieved.
• Materials suffered a large price rise and management should investigate the cause of this,
for example, have we changed supplier, purchased better quality or is this a result of a
market price increase?
• Material usage was also worse than budget (may mean better quality of material is
unlikely). Management should investigate wastage and production processes.
• Labour rates have increased. This could be due to higher skilled staff mix, bonus
schemes, overtime or a response to higher market rates.
• The efficiency of labour is better than anticipated; this could be due to higher skilled
employees or production process efficiencies. The amount is relatively small compared to
other cost variances.
• Variable overheads have cost less than anticipated. An analysis of the components would
reveal where the reductions have occurred. The efficiency savings will relate to the
labour efficiency referred to above.
• Fixed overheads have increased and management should investigate the components of
this cost.
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Question 6
On April 1 2017 Manfred set up in business manufacturing children’s bicycles. It is

now June and, although he has seen some encouraging growth in demand, he needs
some help to prepare for a meeting with the bank manager in a few days’ time to
discuss the progress of the business. He is particularly concerned about his future
cash flows and, based upon the following data and assumptions, wishes to construct
a cash budget for the next three months that is the period July - Sept 2017 using
the following estimates:
1. Expected bank balance as at 1 July 2017 is £600.

2. Actual and forecast sales (in units) at £80 per unit for 2017:
April May June July Aug Sept
60 70 80 90 100 80
3. 20% of customers are expected to pay in the month of sale, 25% to pay in the
following month and 45% to pay two months after the sale. 10% of the
customers are expected to never pay.
4. Direct labour of £18 per unit is expected to be paid in the month of production.
5. Raw materials of £24 per unit are expected to be paid for 1 month after the
goods are used in production.
6. Other variable production expenses amount to £16 per unit. These are expected
to be paid 25% in the month of production and 75% in the following month.
7. Production in units (actual and forecast) are:
April May June July Aug Sept
70 80 80 120 80 50
8. Predicted fixed expenses of £1500 per month include depreciation of £300 per
month and are paid for one month in arrears.
9. Manfred is planning to buy a new paint spray machine costing £800 in July
2016 and pay for it in August 2016.
10. You may assume that the revenues per unit and costs per unit are expected to
be constant over the planning period.
Required
(a) Prepare the monthly Cash Budget for the three months July to September 2017.
(14 marks)
(b) Prepare a statement showing planned profit for the three month period July to
September 2016. (N.B. A statement is required only for the three-month
period, not for each individual month.)
(6 marks)
Total 20 marks
Subject guide, Chapter 14 pp. 204–206.
Perks R, and Leiwy D. (2010). Chapter 15 pp. 366–369.
The preparation of budgets is a key learning outcome of the course. This question provided a
relatively complex scenario which required a logical and well-structured approach to extracting
the figures and preparing the budgets. A columnar answer was the most effective approach to
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presenting this cash budget. Part (b) required you to prepare a statement of planned profit on an
accruals basis rather than the cash basis in (a); many candidates ignored the instruction to
prepare this for the three months in total not for each month.
(a) Cash Budget:

July August September
£ £ £
Receipts 5,560 6,280 6,520
Payments
Materials 1,920 2,880 1,920
Labour 2,160 1,440 900
Variable costs 1,440 1,760 1,160
Fixed costs 1,200 1,200 1,200
Machine 800
Total Payments 6,720 8,080 5,180

Net cash flow (1,160) (1,800) 1,340
Opening Cash Balance 600 (560) (2,360)
Closing Cash balance (560) (2,360) (1,020)
(b) Profit statement:

Sales 21,600
Costs
Materials (270 × 24) (6,480)
Labour (270 × 18) (4,860)
Variable Overhead (270 × 16) (4,320)
Fixed overhead (3,600)
Depreciation (900)
Bad Debts (21,600 × 10%) (2,160)
(720)
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Exam 11 May 2017, questions and answers

Principles of accounting (University of London)

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Examiners’ commentaries 2017

Examiners’ commentaries 2017

Information about the subject guide and the Essential reading

What the examiners are looking for

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AC1025 Principles of accounting

Section B consists of questions on financial accounting. Question 1 is compulsory and is worth 30

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Examiners’ commentaries 2017

Examination revision strategy

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AC1025 Principles of accounting

Examiners’ commentaries 2017

Information about the subject guide and the Essential reading

Comments on specific questions – Zone A

Answer all questions from this section.

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Examiners’ commentaries 2017

Correct answers are shown in bold.

Which of the following represents the statement of financial position equation?

A assets = liabilities + equity

i. A sole trader’s financial statements are private; a company’s financial

A (i) and (ii) only

i. Restaurant tables and chairs at cost

A All except (i),(iii) and (v)

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AC1025 Principles of accounting

The loss on sale would be:

The following is an extract of balances for a company for the year:

Gross profit has already been calculated as being £85,000.

The correct net profit for the year is:

On 1 March the opening inventory of a company was 12 units costing £8 each.

Cost of sales for March were:

Working: 636 − (31 × 9) = 357.

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Examiners’ commentaries 2017

Statement of financial position as at 31 December

Working: 230 + 40 − 80 − 15 = 175.

i. Decrease in working capital.

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AC1025 Principles of accounting

The amount to be shown as Equity in the Statement of Financial Position as at 31

Working: 123 + 25 − 5 + 30 = 173.

Ordinary share capital (50p shares) £200,000

Working: PE = £12/(£480/200) × 2. RoE = 480/(200 + 380 + 80).

Working: 900/3 = 300 × 6% = 18.

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Examiners’ commentaries 2017

What are the annual fixed costs of Bill’s company?

Working: (240,000 × 25%) + 180,000/(12 − 4).

What is the total labour cost variance for the year?

Working: 66,000 × (2 × 8) − 1,000,000.

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