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FP0008
International Foundation Programme

Accounting and Finance

Monday 16 May 2022: 8am GMT

Submission for this examination remains open for 4 hours.

Full instructions on uploading your answers are provided in the VLE.

Candidates should answer ALL questions.

Answer ALL required parts of Question 1 (30 marks), Question 2 (25 marks), BOTH
required parts of Question 3 (25 marks), ONE part of Question 4 (20 marks).

Candidates are strongly advised to divide their time accordingly.

Extracts from compound interest tables are given after the final question on this
paper.

A calculator may be used when answering questions on this paper and it must
comply in all respects with the specification given with your Admission Notice. The
make and type of machine must be clearly stated on the front cover of the answer
document.

All calculations and workings that support your answers must be shown in order to
gain full marks. Written answers must be in your own words. Do not use quotations
from your study materials.

© University of London 2022

UL22/0349 Page 1 of 11
1.

a)

i) Arwen’s year end date is 31 December 2022. An extract from Arwen’s

statement of financial position at that date shows

Trade receivables £50,266

Provision for doubtful debts £3,210

A debt of £1,506, which has been confirmed as irrecoverable, is included in

trade receivables at 31 December 2022. Arwen’s policy is to make a
provision for doubtful debts of 5% at the year end.

Show the double entry required to make Arwen’s year end adjustments with
regard to trade receivables and show the statement of financial position
values for trade receivables and the provision for doubtful debts at 31
December 2022. Show the double entry in journal format. (6 marks)

ii) Barra operates a property rental business. At 31 December 2022, one of

Barra’s tenants, who pays £9,050 in annual rental payments, has paid the
quarterly instalment of rent for January to March 2023 on 2 December 2022.

Show the double entry required to make Barra’s year end adjustments for
this tenant and show how each entry will change the statement of financial
position or income statement. Show the double entry in journal format.
(2 marks)

(8 marks)

b) Corrie, a sole trader, sells a single product for £25 per unit. Variable costs are
per unit are £13. Total fixed costs each year are £255,000 and Corrie
forecasts that annual production and sales will be 22,000 units.

Required:

i) Calculate breakeven point in units and show sales revenue at breakeven

point. (2 marks)

ii) Calculate the margin of safety percentage based on Corrie’s annual

forecast. (2 marks)

UL22/0349 Page 2 of 11
 iii) Inflation is increasing prices rapidly. Show the effect on Corrie’s profit if, as
expected, fixed costs increase by 10% and variable costs per unit increase
by £2. (2 marks)

iv) Given the inflationary environment, explain to Corrie, what, if any, changes
will need to take place in the business if the expected changes in costs in
iii) take place? Use any calculation. (2 marks)

(8 marks)

c) Dudley plc is assessing an investment to replace some of its machinery. The

costs on 1 January 2022 will be £160,000. The expected economic life of the
machinery is 5 years, commencing in 2022. Dudley depreciates its machinery
using the straight-line method. Dudley expects to sell the machinery for
£20,000 at the end of its economic life. The following cash inflows are
expected :

2022 2023 2024 2025 2026

£10,000 £25,000 £85000 £65,000 £50, 000

Dudley’s finance director uses a 6% interest rate when making investment

decisions.

Required:

i) Calculate the net present value (NPV) and the payback period of the
project. Advise Dudley whether the project should go ahead.
(4 marks)

ii) Dudley has the choice of investing in the machine replacement in i) or

investing in a more expensive piece of machinery with an economic life of
10 years. The NPV of this project is £77,802 and the payback period is at
the start of the fifth year.

Advise Dudley on which project to choose and explain your advice.

(2 marks)

(6 marks)

UL22/0349 Page 3 of 11
 d) The Eunice Consultancy is a partnership with two partners, X and Y. Eunice’s
trial balance at the financial year end of 31 December 2022 shows the
following amounts:

At 31 December 2022 Partner X Partner Y

£ £
Capital accounts: opening balance 240,000 160,000
Drawings for 2022 45,000 30,000
Salaries for 2022 10,000 15,000

The partnership profit sharing ratio agreed is 1.5: 1 (X: Y). Interest on opening
capital has been agreed at 5% each year. The profit for the year ended 31
December 2022 is £150,000.

i) Show the appropriation of profit for the year ended 31 December 2022.
(4 marks)

ii) Show the Capital accounts for X and Y for the year ended 2022, using all
the information above. Show the Capital accounts in ‘T account’ format
with clear labelling. (4 marks)

(8 marks)

(30 marks)

UL22/0349 Page 4 of 11
2.

The balances below have been extracted from the accounting records of Franklin
Limited at 31 December 2022:

Dr Cr
£ £
Fixtures and fittings at cost 62,000
Fixtures and fittings: accumulated depreciation at 1.1.2022 6,045
Disposal account (office furniture) 2,000
Inventory at 1.1.2022 118,000
Trade receivables 55,250
Sales 1,105,000
Purchases 646,000
Administration expenses 275,000
Buildings at cost 700,000
Buildings: accumulated depreciation at 1.1.2022 140,000
Trade payables 68,000
Bank account 34,795
10% Debentures: 2032 250,000
Debenture interest paid in full for the financial year ending 25,000
31.12.2022
Share capital: 320,000 shares of 50p 160,000
Retained profits at 1.1.2022 150,000
Dividend paid 15,000
Share premium 50,000
1,931,045 1,931,045

You are given the following information:

Inventory at 31 December 2022 at cost was £142,000.

Depreciation is to be provided as follows:

UL22/0349 Page 5 of 11
 Buildings: 2% per year on a straight line basis

Fixtures and fittings: 5% per year on a reducing balance basis.

During the year ended 31 December 2022, a set of office furniture, included in
Fixtures and fittings in the trial balance above, was sold for cash of £2,000. The
set of office furniture cost £7,500 in the year ending 31 December 2020. A full
year’s depreciation is provided in the year of acquisition while no depreciation is
to be provided in the year of disposal.

While the proceeds of sale were credited to the disposal account, no other entries
were made in the accounts in relation to this sale.

Corporation tax of £50,000 on the current year’s profits is to be provided.

Required:

Prepare an income statement and a statement of movements in equity for the

year ended 31 December 2022 and a statement of financial position at 31
December 2022 for Franklin Limited.

(25 marks)

UL22/0349 Page 6 of 11
3.

Herman is analysing performance for one of its products, the Olio. The budgeted
sales units for June were 70 units. The budget information for the month of June
for Olio is below:

Budget - June Budget Total

per unit

£ £ £

Selling price 40

Direct materials 4 Kgs at £1.50/ kg 6

Direct labour 0.5 hour at £14/ 7

hour

Variable overheads 0.5 hour at £10/ 5

hour

Contribution 22 1,540

Fixed costs for June 700

Profit 840

The actual sales units for June were 75 units. The actual information for the
month of June for Olio is below:

Actual - June Actual per Total

unit
£ £ £
Selling price 41
Direct materials 3 Kgs at £3/ kg 9
Direct labour 0.6 hour at £12/ hour 7.2
Variable overheads 0.6 hour at £8/ hour 4.8
Contribution 20 1,500
Fixed costs for June 700

Profit 800

UL22/0349 Page 7 of 11
Required:
a) Copy the operating statement for June below into your examination answer
and complete the statement by calculating the relevant price/ rate and
efficiency variances. Herman’s accountant has already calculated the sales
price and sales volume contribution variance.

Your answer must show all workings and calculations to gain full marks.

Favourable Adverse Total

£ £ £
Budgeted profit 840
Sales: price 75
(75 x £41 - £40)
Sales: volume 110
contribution
£22 x (75 units - 70 units)

Materials: price
Materials: volume
Labour: rate
Labour: efficiency
Variable overheads: rate
Variable overheads:
efficiency
Fixed overheads:
spending
Actual profit 800

(18 marks)

b) Using three different examples, from your answer in a), explain to Herman’s
operations manager how they can use this information to improve the
business performance of the Olio. (7 marks)

(25 marks)

UL22/0349 Page 8 of 11
4. Answer either a) OR b).

a)

i) Explain the difference between the following statements and state whether
each will be prepared by a financial or a management accountant:

• Cashflow statement

• Cashflow forecast

(5 marks)

ii) Contrast financial accounting and management accounting, stating five

differences. (5 marks)

iii) Explain the difference between ‘cash’ and ‘profits’. Explain the importance of
cash and profits to an investor (shareholder) in a public limited company.
(10 marks)

(20 marks)

b) Compare the financial performance of two public limited companies, Gladys

plc and Imani plc, using the information presented below. Both companies
operate in the same industry sector. Comment on each ratio in the table
below and state which company may be more attractive to a prospective
shareholder.

UL22/0349 Page 9 of 11
 Financial ratios Gladys plc Imani plc

Profitability

Return on capital employed 21.42% 17.07%

Operating profit % 10.5% 9.84%

Asset turnover 2.04 times 1.73 times

Liquidity

Current ratio 4.2: 1 2.3: 1

Working capital

Inventory period 79 days 76 days

Receivables period 41 days 82 days

Payables period 46 Days 114 days

Financial risk

Gearing 28.95% 24.07%

(20 marks)

END OF PAPER

UL22/0349 Page 10 of 11
Extracts from compound interest tables
Present value of £1

% 1 2 3 4 5 6 7 8 9 10
Period
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621

% 11 12 13 14 15 16 17 18 19 20
Period
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402

Annuity of £1

% 1 2 3 4 5 6 7 8 9 10
Period
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791

% 11 12 13 14 15 16 17 18 19 20
Period
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991

UL22/0349 Page 11 of 11