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Please do not google answers. They tend to be bad!

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Question 1

Show the impact of each of the following transactions on the financial accounting reports for the entire year. The reporting year is January –
December. The company applies international accounting financial reporting standards (IFRS). Disregard taxes! (Illustrative example: A
company buys inventory for CU 50 and pays cash). NOTE THAT THE QUESTION SHOULD BE ANSWERED ON A SPECIAL
SHEET.

A) The company acquires a new machine with a useful life of ten years. The acquisition cost amounts to 5 000. The acquisition
took place on July 1 and it started using the machine immediately.
a. The company has acquired a long-term non-current asset with a useful life of 10 years therefore it will be
depreciated over 10 years at a rate of 500/year. The asset was used for exactly half a year during the current
financial year therefore 250 will be recognized as depreciation during the year.
b. There is no mention of cash being involved hence it is assumed that the purchase was done on loan and since the
asset is long term, the liability is also assumed long term
c. Impact on financial reports at year end:
• Balance sheet
• Assets: 4750 (5000 less 250 depreciation)
• Equity: -250
• Liabilities: 5000
• Income statement: 250 depreciations

B) The company pays dividends of 8 000.

a. Paying dividends is a financing activity therefore the transaction will be reflected in the “Cash flow from financing activities”
in the cash flow statement
b. There will be no impact on income statement
c. Impact on balance sheet:
• Assets: Cash and cash equivalents : -8000
• Equity: -8000

C) The company has delivered goods to a customer at a value of 700. The invoice has not been sent by the end of the year, but will
be in January next year.
a. As per matching principle, sale should be recorded in the year in which it has been made even if cash is not received.
In the case of non receipt of cash, a trade receivable in the same amount is created
b. Impact on financial report:
• Income statement:
• 700 revenue
• COGS: no mention in the question hence none assumed
• Cash flow statement
• No impact as this has not been invoiced and therefore assumed that no cash has been
received
• Balance sheet
• Asset/Cash and cash equivalents: +700
• Equity: +700

D) The company has been accused of bribing some officials in another country. The expected fine is estimated to 750.
a. The fines are non-deductible business expenses therefore there will be no impact on Income statement
b. Since this amount has not been paid yet, there will be no impact on cash flow statement
c. A provision for 750 will be created and will be adjusted from equity
• Provision: 750
• Equity: -750

E) A customer pays in advance a value of 400.

a. Customer has not received the product of services yet therefore no sale will be recognized till the sale is complete. No impact on
income statement will be observed
b. A positive inflow in “Cash from Operating Activities” will be recorded in the amount of 400
c. Balance sheet:
• Cash: +400
• Trade payable: 400

F) The company has acquired raw materials during the year for 12 000. Out of those, raw materials with a purchase price of 150
remains in inventory at the end of the year. The net selling price for half of what remains (i.e. with an acquisition cost of 75) is 90
and the other half it is 65. Your answer should not include the initial purchase, but only the adjustments at the end of the year.
a. The current assets are recorded on the balance sheet at lower of cost or net realizable value (NRV).

Half 1 Half 2 Total

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 Cost 75 75 150
Selling price 90 65 155
NRV 75 65 140
Adjustment -10

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 Example A B C D E F
Revenue 700

Cost of sales

Employee expenses

-250
Depreciation, amortization and write-
downs

Other operative
expenses
Financial income

Financial expenses

Profit before tax

Example A B C D E F
-50 400
Cash flow from operating
activities
Cash flow from investing
activities
-8000
Cash flow from financing
activities
Cash flow of the year -50 -8000

Example A B C D E F
4750
Tangible non-currents assets

Intangible non-current assets

Financial non-current
assets/Investments
Inventory +50 -10

Trade receivables 700

-50 -8000 400

Cash and cash equivalents

Total assets +-0 4750 -8000 700

Equity -250 -8000 700 -750 -10

Loans 5000

Provisions 750

Trade payables 400

4750 -8000 700 -750 400 -10

Total equity and liabilities

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Question 2

Below you find five different accounting based expressions. Your task is to briefly describe the content, meaning and
structure etc of these words/expressions: (5 points)
b. Expenses
• Reporting standards define expenses as decreases in economic benefits arising out of acquiring assets or
availing of services during an accounting period. The decrease in these economic benefits can be in the
form of depleting assets (cash or in kind) of increase in liabilities (trade payables or loans) against the
aforementioned assets or services.
• Expenses can be divided into two types based on the longevity of benefits expected to be extracted because
of them. If the benefit of an expense transcends one accounting period then it is classified as a “Capital
Expenditure” whereas an expense that benefits only the current accounting period is classified as an
“Operational Expense”.
• Examples: Buildings and machinery with useful life of more than one year are examples of capital
expense. Salaries, administration costs are required to run day to day business and are examples of
operational expenses.
c. Provisions
• Reporting standards define provisions as claims and/or liabilities for which the either the amount or timing
or both are uncertain. These may arise out of legal requirements (legal obligation) or the company may
have indicated through its actions or policies that build the expectation for the company to discharge of
those responsibilities for example warranties, refunds etc. Under both types of obligations, it is probable
that the entity will have to dispense economic resources to satisfy the obligation. If it is not probable, then
a contingent liability will be recorded
• IAS 37 elaborates the recognition and recording of provisions on the following three cases:
• Provision cannot be booked for future operating losses as that would negate the matching
principle
• Provision for restructuring costs can only be book if a constructive obligation has arisen due
to dissemination of restructuring information to the impacted stakeholders
• Provision against an onerous contract – onerous contracts are defined as contracts for which
unavoidable economic costs of fulfilling the obligations of contract outweigh the economic
benefits to be received from it.
d. Working capital
• Working capital or net working capital is the difference of company’s current assets its current liabilities. It is
representative of the company’s short term liquidity i.e. its abilities to meet its short term requirement.
• If the net working capital is negative, then the company has more obligations and might need to raise
financing for short term
• On the other hand, is the net working capital is positive, then the company has sufficient resources to run
smoothly in the short run. However, caution needs to be applied here. If the net working capital is too high,
then it might indicate trouble in making sales (and therefore a pile up of inventory) or is unable to find viable
investment options for excess cash.
e. Current assets
• Current assets are defined as assets owned by the company which can be liquidated in short term i.e. within
one year. This asset class includes:
• Cash
• Inventory (raw material & finished products)
• Cash equivalents (T-bills, bonds etc)
• Account receivables
• Prepaid liabilities etc
f. Cash flow from financing activities
• A company needs funds to run its operations and the most common sources of funds are:
• Owners (Equity partners)
• Long Term Creditors (banks, bonds issues to general public etc)
• CFF represents the way a company chooses to raise funds to maintain or grow its business. All sources of
funds have a cost associated with it. Dividends are paid to the equity holders while an interest is paid to the
creditors. For equity, there is generally no expiry date however loans/bonds expire at a certain point in time.
• A positive CFF means that the company is trying to raise funds and may be going through a growth phase
for which more funds are required. This would most likely be positive indicator of company’s outlook for
the future. A negative CFF may indicate that the company has reached a maturity stage at which point the
need for more funds has dwindled and is now only servicing its existing debts or paying dividends. In the
worst case scenario, a negative CFF would mean the company is winding up and is paying back the funds
to its lenders.

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Question 3

Below you find the financial statements for Essity and a DuPont chart. Please answer briefly the questions.

a) Please calculate the return on capital employed, profit margin and capital turnover for Essity 2022.
2022 SEK EUR
Operating Profit 9,479 893
Financial Incomce 173 16
Avg Assets 210,600 18,935
Avg Equity 72,536 6,791
Non-current Liabilities 65,483 6,122
Sales 156,173 14,713
Capital Employed 138,019 12,913

Ratio Formula SEK EUR

ROCE (Operating profit + financial income)/Capital Employed 6.99% 7.04%
Profit Margin (Operating profit + financial income)/Sales 6.18% 6.18%
Capital Turnover Sales/Capital Employed 1.13 1.14
•

b) Make an X in the Dupont graph for their relevant position.

c) Discuss whether you think that Essity was creating value in 2022 or not!

d) Give four examples, two for each part of the measure, as to how Essity can improve its return on capital employed.

• There are 2 parts to the DuPont relationship

1. Net profit margin

2. Capital Turnover

2022 2021

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 SEK EURmt SEK EURm1
Percentage of Total Assets
m l m 1
Inventories 13.7% 13.7% 11.0% 11.0%
Trade receivables 12.3% 12.3% 11.4% 11.4%
Current tax assets 0.5% 0.5% 0.5% 0.5%
other current receivables 2.7% 2.7% 3.3% 3.3%
Current financial assets 2.3% 2.3% 0.7% 0.7%
Cash and cash
equivalents 2.0% 2.0% 2.2% 2.2%

Net Profit Margin:

By looking at the ratios of current assets as a percentage of total assets, we see a sharp increase in inventories which could indicate an over
optimistic budgeting of sales causing an increase in inventory levels. Increased inventory levels come at a high cost in the form of :
1. Reserved capital & financing cost of the capital
2. Warehousing & handling cost
3. Write-off due to obsolescence
4. Limits reinvesting of funds
Company needs to look into the increased inventory level and implement corrective measures to bring them back to previous levels. This will
help improve profitability.

Similar increase can be seen in trade receivables which means that the company’s cash collection practices have been relaxed and therefore its
debtors are taking advantage and deploying this capital in their businesses. If this trade receivable was recovered on time, then the same could be
reinvested in business, put in other short term investments or used to loan payback. All of these activities would have resulted in a higher net
profit margin.

Capital Turnover:
Capital turnover could be influenced by increasing sales or reducing the capital employed.
By looking at the YoY increase in the non-current liabilities, we see that a sharp increase is observed in non-current financial liabilities. There
can be multiple reasons to take up long term loans however looking at the balance sheet, we can assume that the loan was taken to ramp up
production and increase inventory levels in anticipation of more sales. Therefore, focused efforts are needed to increase sales and liquidate
the stock. If the sales forecast is now deemed over-optimistic, then the forecast needs to be revised and the company should retire some
of the loan to reduce the capital employed.
The company also needs to look into the non-current provisions as they have increased by 24% over the last year. The provisions generally tend
to move in line with sales figures as they pertain more to warranties and bad debts etc. however last year sales numbers are not included in the
data. Reducing the provisions will lead to reduced employed capital and a result in a higher capital turnover.

2022 vs 2021
YoY increase
SEKm EURmtl
Non-current financial liabilities 23% 13%
Provisions for pensions -36% -41%
Deferred tax liabililies 15% 6%
Other non-current provisions 24% 13%
Other non-current Iiabililies 1291% 1250%
Total non-current llabllllles 20% 10%

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Consolidated balance sheetm
202 202
2 1
Note SEKm EURm SEKm EURm1
tl 1
ASSETS
Non-current assets
Goodwill DI 44,786 4,D27 37,803 3,696
Other intangible assets DI 25,346 2279 21,806 2,132
Property, plant and D2 62,898 5,655 58,918 5,760
equipment
Investments in
associates and joint
ventures F3 291 26 239 23
Shares and participations 6 I 7 1
Surplus in furided C4 1,965 177 1,439 141
pension plans
Non-<:urrent financial E2 123 11 412 40
assets
Deferred tax assets 85 2,545 229 2,012 197
Other non-current assets 1,6 145 1,411 138
20
Total non-current assets 139,580 12.55 124,047 12.128
0
Current assets
Inventories 03 28,888 2,597 19,339 1,891
Trade receivables E3 25,990 2,337 19,871 1,943
Current tax assets 85 1,152 104 952 93
other current receivables 04 5,761 517 5,787 566
Current financial assets E2 4,941 444 1,150 112
cashandcash E2 4,28 386 3,904 382
equivalents 8
Total current assets. 71.020 6,385 51,003 4,987
Total assets B2 210,600 18,93 175,050 17.115
5
1) Translation to EURis provided for the
convenience of the 1112 1023
reader.The tdlowing closing exchange rates were
used;

202 202
2 1
Note SEKm EURm SEKm EURm
tl 11
EQUITY AND LIABILITIES
Equity ll:]
Owners of the Parent
company
Share capital 2,350 211 2,350 230
Reserves ES 11,477 1,032 6,309 617
Retained earnings 53,519 4,812 51,215 5,007
Equity anrlbutableto
owners ol the Parent 67,346 6,055 59,874 5,854
company
Non-controlling interests 9•,218 829 8,633 844
Total equity 7•6,564 6,884 68,507 6,698
Non-current llabllltles
Non-current financial E4 58,242 5,236 47,443 4,639
liabilities
Provisions for pensions C4 2,671 240 4,149 406
Deferred tax.liabililies B5 8,718 784 7,574 740
Other non-<:urrent D6 491 44 396 39
provisions
Othernon-<:urrent D5 1,196 108 86 8
Iiabililies
Total non-current 71,318 6,412 59,648 5,832
llabllllles
Current llabllltles
Current financial E4 13273 1,193 10,746 1,051
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liabilities
Trade payables 25,644 2,306 18,030 1,763
Current tax liabilities B5 1,589 143 1,576 154
Current provisions D6 1,217 109 73 72
6
Other current liabilities D5 20,995 1,888 15,807 1,545
Total current llabllltles 62,718 5,639 46,895 4,585
Total llabllltles 134,036 12,051 106,543 10,417
Total equity andl 210,600 18,93 175,050 17,1,1
llabllltles 5 5

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 35

30

25
Margin (%)

20

15

10

0
0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5 4,0 4,5 5,0
Capital turnover (times)

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Question 4

World Gourmet Coffee Company (WGCC)

World Gourmet Coffee Company (WGCC) is a distributor and processor of different blends of coffee. The company buys coffee beans from
around the world and roasts, blends and packages them for resale. WGCC currently has 15 different coffees, which it offers to coffee shops
in 1 kilogram bags. The major cost lies in the raw materials, but there is also a substantial amount of production overhead in the automated
roasting and packing processes. The company uses relatively little direct labour.
Some of the coffees are very popular and sell in large volumes, while few of the newer blends have very low volumes. WGCC prices its
coffee at full production cost, including allocated overhead, plus a sales margin of 30%. If this method leads to prices that are significantly
higher than the market price, the price is adjusted downwards. The company competes primarily on the quality of its products, but customers
are also price conscious.
Data for the next year’s budget include production overhead of €3 000 000 which has been allocated on the basis of each product’s direct
labour cost. The budgeted direct labour cost for the next year totals €600 000.
Based on the expected sales, purchases and use of raw materials (mostly coffee beans) will total €6 000 000.
The expected direct costs for 1kg bags for two of the company’s products are as follows:

Kona Malaysian

Direct Material cost €3,20 €4,20

Direct Labour cost €0,30 €0,30

WGCC’s controller believes the conventional full costing system may be providing misleading cost information. She has
developed an analysis of the budgeted indirect production costs (overhead) for the next year:

Activity Activity driver Quantity of Budgeted cost (€)

activity driver

Purchasing Purchase orders 1 158 579 000

Material handling Setups 1 800 720 000

Quality control Batches 720 144 000

Roasting Roasting hours 96 100 961 000

Blending Blending hours 33 600 336 000

Packaging Packaging hours 26 000 260 000

Total production cost € 3 000 000

Data for next year’s production of Kona and Malaysian coffees are shown in the following table. There will be no raw material inventory for
either of these products at the beginning of the year.

Kona Malaysian

Budgeted sales 2 000kg 100 000kg

Batch size 500kg 10 000kg

Setups 3 per batch 3 per batch

Purchase order size 500kg 25 000kg

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 Roasting time (per 100kg) 1hr 1hr

Blending time (per 100kg) 30mins 30mins

Packaging time (per 100kg) 0.1hr 0.1hr

1. Using the WGCC’s current costing system:

a. Determine the company’s allocation key using direct labour cost as the single cost driver
Production Overhead 3,000,000
Direct labor cost 600,000
Overhead rate 5
1.5 for Kona
Overhead cost per kg allocation based on direct labor cost
1.5 for Malaysian

b. Determine the product cost and selling prices of 1kg of Kona coffee and 1kg of Malaysian coffee.
Per Kg Costs
Kona Malaysian
Material Cost 3.20 4.20
Labor Cost 0.30 0.30
Production OH 1.5 1.5
Total Cost 5.0 6.0
Sales Margin 30% 30%
Sale price 6.5 7.8

c. Critically evaluate the company’s costing system based on the chosen allocation base.

The company is using a straightforward and easy method to allocate indirect costs to each product. While the method is easier to understand and
implement, it does not offer accurate and precise costing for products and WGCC has a 15 product line which underline the need for having a
better and more sophisticated costing method in place.
The current method in place covers all costs but doesn’t point towards the cost drivers. WGCC has complex processes and each product may have a
different need for every process. Using the same cost basis for all processes does not allocate the costs correctly as we have seen in the case of 2
product lines where the cost base i.e. the direct labor cost was same for both product lines however the other processes had a varying degree of
complexity and requirement. Using the current method allocated the same overhead costs to both product lines which is not justifiable.
Using the current costing method also hampers WGCC’s ability to forecast the overheads if it decides to change the product mix going forward. For
example, under the current method, both product lines are allocated €1.5 per unit however the actual allocation is more than twice that amount. If
WGCC were to expand these product lines, the overhead costs are might go through the roof and management will be none the wiser using current
costing method!

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 2. Calculate a new product cost using ABC for 1kg of Kona coffee and 1kg of Malaysian coffee.
Kona Malaysian
Budgeted sales 2000kg 100000kg
Batch size 500kg 10000kg
Setups 3perbatch 3perbatch
Purchase order size 500kg 25000kg
Roasting time (per 100kg) 1hr 1hr
Blending time (per 100kg) 30mins 30mins
Packaging time (per 100kg) 0.1hr 0.1hr

Number of orders 4 4
Number of batches 4 10
Total Setups 12 30
Roasting Hours 20 1000
Blending hours 10 500
Packaging hours 2 100

Total Cost Cost per kg

Activity Quantity of activity Budgeted Cost per Kon Kon Malaysi
Activity Malaysian
driver driver cost (€) actvity a a an
Purchase 2,00
Purchasing 1158 579,000
orders 500 0 8,000 1.00 0.08
Material 4,80
Setups 1800 720,000
handling 400 0 144,000 2.40 1.44
Quality
Batches 720 144,000
control 200 800 8,000 0.40 0.08
Roasting
Roasting 96100 961,000
hours 10 200 200,000 0.10 2.00
Blending
Blending 33600 336,000
hours 10 100 50,000 0.05 0.50
Packaging
Packaging 26000 260,000
hours 10 20 2,000 0.01 0.02
7,92
3,000,000
0 412,000 3.96 4.12
Total Direct
costs 3.50 4.50
Total Product
Cost 7.46 8.62
Sale Margin 30% 30%
Sale Price 9.70 11.21

3. Compare the costs of the products calculated in Questions 1 &2. Provide an explanation as to why the product costs using the
current system are different to those using ABC.
Cost Kona Malaysian
Full costing system based cost 5.0 6.0
ABC based cost 7.46 8.62
(2.46
Difference
) (2.62)
%Difference -49% -44%

Price Kona Malaysian

Full costing system based
price 6.5 7.8
ABC based price 9.70 11.21
(3.20
Difference
) (3.41)
%Difference -49% -44%

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The current costing system is simplistic and only uses direct labor costs as a basis to allocate overheads to all the product lines whereas in
reality, these product lines use more overheads as explained in the earlier responses as well. WGCC has complex processes and each product
may have a different need for every process. Using the same cost basis for all processes does not allocate the costs correctly as we have seen in the
case of 2 product lines where the cost base i.e. the direct labor cost was same for both product lines however the other processes had a varying
degree of complexity and requirement. Using the current method allocated the same overhead costs to both product lines which is not justifiable.

a. Make a recommendation for the pricing of the two products based on your analysis.
• The company is underpricing the products because of current cost allocation method which would mean that
other products (13 other product lines exist) are being overpriced. The company needs to re-visit product pricing
for all the products however for the lines under review i.e. Kona and Malaysian, the recommended prices are €9.7
and € 11.21 respectively.
4. Should WGCC implement ABC? Critically evaluate the current costing system. Discuss the important factors they should
consider in order to make the decision of changing the costing system.
Factors to consider when deciding on a ABC costing method:
 Diverse product ranges
o If an organization makes multiple products and there is a significant difference in the production volume
of these products
 Share of overhead cost
o Overheads are generally fixed costs and do not vary with the production volume. If overheads make up a
significant portion of cost, then it is important to accurately attribute those costs to relevant products.
Otherwise, the product pricing and therefore profitability of all product lines will not be precise.
 Business complexity
o If the production process involves diverse and complex processes such as order and/or batch sizes over
multiple product lines, then costing each product also becomes complex and a sophisticated method is
required to accurately assign cost to each product
 Cost of implementing ABC method
o If the benefit outweigh the cost of implementing the ABC method, then implementing it is a no-brainer.
WGCC meets all the criteria that necessitate the implementation of ABC method.
 WGCC has 15 product lines and accurate costing would help in better decision making
 A lot of different processes are involved in getting the product ready i.e. the business is complex
 Overheads are a significant portion of overall production costs (53% in Kona and 48% in Malaysian)
 We have already seen that the company is making a loss in selling the products because of poor costing method. Application of
this method on all product lines will result in greater value for the company.
Verdict: WGCC should definitely opt for ABC mehod.

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