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Past exam 2
Examination Period
Faculty of Business and Economics

EXAM CODES: ACF5903

TITLE OF PAPER: – PAPER 1

EXAM DURATION: 3 hours writing time

READING TIME: 10 minutes

THIS PAPER IS FOR STUDENTS STUDYING AT: (tick where applicable)

 Berwick  Clayton  Malaysia  Off‐Campus Learning  Open Learning
 Caulfield  Gippsland  Peninsula  Enhancement Studies  Sth Africa
 Parkville  Other (specify)

During an exam, you must not have in your possession, a book, notes, paper, electronic device/s,
calculator, pencil case, mobile phone, smart watch/device or other material/item which has not been
authorised for the exam or specifically permitted as noted below. Any material or item on your desk,
chair or person will be deemed to be in your possession. You are reminded that possession of unauthorised
materials, or attempting to cheat or cheating in an exam is a discipline offence under Part 7 of the Monash
University (Council) Regulations.

No exam paper or other exam materials are to be removed from the room.
AUTHORISED MATERIALS

OPEN BOOK  YES  NO

CALCULATORS  YES  NO
(If YES, only calculators with an 'approved for use' Faculty label are permitted)

SPECIFICALLY PERMITTED ITEMS  YES  NO

If yes, items permitted are:

This paper consists of 6 questions printed on a total of ?? (?) pages.

Students must attempt to answer all parts of ALL questions except in Q1, where students must choose 6
of the 8 parts.

Candidates must complete this section if required to write answers within this paper.

STUDENT ID: ___ ___ ___ ___ ___ ___ ___ ___ DESK NUMBER: ___ ___ ___ ___

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Question 1

Briefly answer any six (6) of the following eight (8) parts to Question 1.

(a) Explain the meaning of accrual accounting and discuss why accountants use this
approach to measure profit.

(b) Predator Ltd acquired Prey Ltd at a cost of $3,900,000. The fair value of Prey Ltd’s
assets is assessed at $4,100,000 and the fair value of its liabilities at $500,000.
Calculate the amount of goodwill to be recorded in the balance sheet of Predator Ltd.
Describe how goodwill is classified in the balance sheet.

(c) “It is always best to maintain a level of working capital that is as high as possible”.
Evaluate this statement and explain your answer.

(d) The balance sheet is a financial report that details the entity’s assets, liabilities and
equity at reporting date.

(i) Outline the definition and recognition criteria for assets. Provide an example
to illustrate your answer.

(ii) The Conceptual Framework for the Preparation and Presentation of Financial
Statements (Framework) defines equity as a ‘residual’. Explain how this
amount is a residual.

(e) “Numerous measurement systems can be used to measure elements on the balance
sheet”. Discuss this statement making reference to how property, plant and
equipment is measured.

(f) Discuss the problems involved in classifying costs as either fixed or variable in cost‐
volume‐profit analysis. Discuss the assumptions used in this technique.

(g) Explain the advantages and disadvantages of using factoring as a source of short‐
term finance.

(h) Explain what the balanced scorecard is and suggest three (3) performance measures
that are relevant from an innovation and improvement perspective.

(6 x 4 = 24 marks)

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Question 2

a) Sam and Sandra Partnership provide property management services to its clients. The
following information relates to the year just ended.

Balance Sheet (extract)

As at 30 June 2014
2014 2013
Cash $59,000 $37,000
Accounts Receivable $46,000 $34,000
Prepaid Expenses $8,000 $5,000
Accounts Payable $28,000 $33,000

Income Statement
For year ending 30 June 2014
Sales Revenues $183,000
Operating Expenses 132,000
Profit 51,000

Operating expenses include depreciation of $5,000

Required:

For the period ending 30 June, 2014, calculate receipts from customers and payments to
suppliers and prepare the operating activities section of the Statement of Cash Flows.
7 marks

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Questions 2 b) and c) refer to the following Statement of Cash Flows for Tabourine
Ltd:

Cash flows from operating activities

Receipts from customers $199,000
Payments to suppliers and employees ($201,000)
Interest received $14,000
Interest paid ($8,000)
Income taxes paid ($3,000)
Net cash provided from operating activities $1,000

Cash from Investing Activities

Payments for property, plant and equipment ($30,000)
Proceeds from sale of property, plant and equipment $80,000
Net cash from Investing Activities $50,000

Cash from financing activities

Proceeds from equity $20,000
Proceeds from borrowings $20,000
Repayment of borrowings $0
Distributions Paid ($50,000)
Net cash flow from financing
activities ($10,000)

Net increase/decrease in cash for

the year $41,000
Cash at beginning of the financial
year $100,000
Cash at the end of the financial year $141,000

Required:

b) Explain the meaning of the three different types of activity reported in the Statement of
Cash Flows.

6 marks

c) As a user of this report, identify three issues that are significant in your assessment of
this company’s performance. Justify your choices by explaining why they are significant.

9 marks
(7 + 6 + 9 = 22 marks)

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Question 3

Farmers Ltd is a manufacturer which manufactures equipment for agricultural purpose.

The following information is provided by Farmers Ltd.

FARMERS LTD

Income Statement
for the year ended 30 Dec 2014

Service Revenue 180 000

Rent Revenue 15 000
Total Income 195 000

Expenses
Salaries Expense 120 000
Supplies Expense 22 000
Rent Expense 34 000
Insurance Expense 3 800 179 800
EBITDA 15 200

Depreciation Expense 3 600

Profit $11,600

FARMERS LTD
Balance Sheet (extract)
As at 30 Dec 2014
Non‐current Assets
Plant & Equipment $180,000
Accumulated depreciation $3,600
Carrying value $176,400

Required:

a) The Plant & Equipment was purchased on 1st January 2014. The Notes to the Accounts
show the method of depreciation of Plant & Equipment is straight‐line and the residual
value is estimated to be $0. What is the estimated useful life of these assets? Comment on
the reasonableness of the estimate you calculate.
4 marks
b) Auditors were engaged to review the financial statements prior to their release and they
requested the assets be depreciated over a ten year period. Calculate the profit that would
result in the period ended 30 Dec 2014 from this adjustment.
3 marks
c) Interpret the significance of this adjustment for users who rely on financial statements
generally for the purpose of their decision‐making. Explain another situation (not related to
depreciation) where critical interpretation of financial statements may be required.

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4 marks
d) In the specific case of Farmers Ltd, interpret the significance of the adjustment in (b) for
both cash flow from operations, and reported profit. (Note: this question does not require
calculation of cash flow from operations).
4 marks
(4+3+4+4=15 marks)

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Question 4
The accountant for Fast Freight Services is preparing its cash budget for November and
December 2015. The accountant, Fred, has collected the following information regarding
expected credit sales:
September October November December

Credit sales $140 000 $160 000 $200 000 $230 000

Fred has analysed the accounts receivable records for the past few years and has
determined that customers normally pay 60 per cent in the month of sale, 30 per cent in the
month following the sale, and 8 per cent in the second month following sale. The remaining
2 per cent is considered a bad debt and uncollectable.

Required
a) Prepare a Schedule of Expected Receipts from Accounts Receivable for November and
December
6 marks
Questions (b) and (c) refer to the Cash Budget below.
Toorak Travel Services
Cash budget for quarter ended September 30 2015.

July Aug Sept TOTAL

$ $ $ $
ANTICIPATED RECEIPTS
Initial capital 10000 10000
Fees received 8200 6900 15200 30300

$18,20
$6,900 $15,200 $40,300
Total receipts 0
ANTICIPATED PAYMENTS
advertising and marketing 3000 2400 2000 7400
cash withdrawals 1500 1500 1500 4500
computer equipment 8000 8000
administration 1300 1300 1300 3900
Rent 1800 1800 1800 5400
0
$15,60
$7,000 $6,600 $29,200
Total Payments 0
Excess (Deficit) receipts over payments $2,600 ($100) $8,600 $11,100
Bank balance at beginning of month 0 2600 2500 0
Bank Balance at End of Month $2,600 $2,500 $11,100 $11,100

b) Explain the structure and content of the cash budget and why the budget is important to
business managers.
4 marks

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c) The manager of Toorak Travel Services is considering purchasing new office furniture
for $10,000 cash on 1st August. Do you think this is advisable? Why?
4 marks
(6+4+4=14 marks)

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Question 5

The budgeted income statement for a manufacturing business for the year ended 30 June
2016 is shown below. The business makes only a single type of product and it sells all that
it manufactures.

Number of units sold 250,000

Revenue $10,500,000

Variable costs $8,000,000

Fixed costs $2,000,000

Net profit $500,000

Required:

(a) Calculate the breakeven point in units for this business. Show all workings.
(3 marks)

(b) If sales revenue was 10% higher than planned due to greater number of units sold,
what profit would result? Verify answer by producing a new Income Statement.
(4 marks)

(c) How many units must the business sell in 2016 in order to achieve a profit before
tax of $600,000? Show all workings.
(2 marks)
(d) Explain the meaning of the ‘relevant costs’ concept. With reference to your
explanation, give examples of a decision in which a cost item is relevant, and another
in which a cost item is not relevant.

(6 marks)

(3+4+2+6=15 marks)

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Question 6

Listerfield Ltd is considering the purchase of one of two acceptable pieces of equipment
with different designs. Each design is expected to have individual advantages and both are
expected to last 10 years. The chief accountant is quite conservative and likes to rely on the
ARR as his main decision‐making tool. The assistant accountant, on the other hand, is a new
graduate and she has worked out the expected IRRs for the two items of equipment as
shown below. The decision will be made by the Board of Listerfield Ltd.

Options

Machine A Machine B

ARR (%) 45 40

IRR (%) 14 16

Required:

a) If the Board makes the decision based on the financial considerations of ARR and IRR
only, are the rates for each option above sufficient? If not, explain what else is required.

(2 marks)

b) Assuming the information referred to in (a) confirms both options are acceptable, which
option would you choose? Explain your answer.

(4 marks)

c) Would you rely on ARR and/or IRR only to make the decision? If not, specify the
additional information required and explain reasons.

(4 marks)
(2+4+4 = 10 marks)

END OF EXAMINATION
Some questions in this exam have been adapted from the prescribed text book.

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