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Mark

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SCHOOL OF ACCOUNTING

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4

ACCT 1511:
Accounting and Financial Management 1B

5
Total
(/80)

FINAL EXAMINATION

June 2007
Time Allowed:
Reading Time:
Total Number of Questions:

3 Hours
10 minutes
6

Answer ALL questions.


The questions are NOT of equal value.
Answers to Questions 1 to 5 must be written in ink in spaces provided in
this Booklet.
Question 6 must be answered on the separate Generalised Answer Sheet
provided using a 2B pencil.
This paper is NOT to be retained by the candidate.
DO NOT OPEN THIS PAPER UNTIL INSTRUCTED BY THE EXAM
SUPERVISOR

QUESTION 1 (10 MARKS): CASH FLOW STATEMENTS


Brickman Corporation is a medium-sized wholesaler of building materials in the state
of NSW. Its shareholders have been paid a total of $1 million in cash dividends for
the last 8 consecutive years. The policy of the Board of Directors requires that in
order for this dividend to be declared, net cash provided by operating activities in
Brickmans current years Statement of Cash Flows must be in excess of $1 million.
CEO Phil Luckys job is secure so long as he produces annual operating cash flows to
support the usual dividend.
At the end of the current year, financial controller Jack Black presents CEO Lucky
with some disappointing news: the net cash provided by operating activities is
calculated to be only $970,000. The CEO says to Jack, We must get that amount
above $1 million. Arent there some ways to increase operating cash flows by
another $30,000? Jack answers, These figures were prepared by my assistant. Ill
go back to my office and see what I can do. The CEO replies, I know you wont let
me down, Jack.
After scrutinising the Statement of Cash Flows, Jack concludes that he can get the
operating cash flows above $1 million by including a $60,000, 2-year Notes borrowed
during the current year as part of the companys Accrued Expenses account, rather
than as part of the Notes Payable account. He returns to the CEO saying, You can
tell the Board to declare their usual dividend. Our net cash flow provided by
operating activities is now $1,030,000. Good man, Jack! I knew I could count on
you, exults the CEO.

Required:
(a) Explain why Jack thinks the reclassification of the $60,000, 2-year Notes Payable
as Accrued Expenses can increase the net cash flow from operating activities. Use
the concepts underlying: (i) the indirect method, and (ii) the direct method of
calculating cash inflows and outflows from operating activities to support your
answer.

(i) Indirect method (2 marks)

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(ii) Direct method (2 marks)

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(b) Assuming that the usual $1 million cash dividends can be declared and paid at the
end of the current year, what would be the subsequent impact of this
reclassification on the companys (i) operating, (ii) investing, (iii) financing, and
(iv) total cash flows? State both the direction and size of the impact (4 marks).

(i) Operating:

(ii) Investing:

(iii) Financing:

(iv) Total cash flows:

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(c) Based on your answers above, do you agree with Jacks suggestion to reclassify
$60,000, 2-year Notes? (2 marks).

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QUESTION 2 (15 MARKS): FINANCIAL STATEMENT


ANALYSIS
You have recently graduated from UNSW with a BCom degree (with a double major
in Accounting and Finance) and have been hired by McDonald Bank, one of the most
prestigious investment banks in Asia-Pacific region, to work as an equity investment
analyst. Your first project is to help with the process of reviewing and analysing the
financial results of Coles Ltd for the financial year ended on 30 July 2006.
You have been provided with the companys concise financial statements (see pages 5
and 6) and nearly-completed worksheet on its key financial information (see page 7).
You have also been provided with the relevant corresponding financial information
about the companys major competitor, Woolworths Ltd.

Note: Use the following formulae for ratio calculations if required.


Key Ratio Formulae:
Return on Equity (ROE) = Net Profit After Tax / Shareholders Equity
Return on Assets (ROA) = Earnings before Interest & Tax (EBIT) / Total Assets
Profit Margin = Net Profit After Tax / Sales Revenue
Gross Margin = Gross Profit / Sales Revenue
Asset Turnover = Sales Revenue / Total Assets
Inventory Turnover = COGS / Average Inventory
Days Inventory on Hand = 365 / Inventory Turnover
Debtors (receivables) Turnover = Credit Sales / Average Trade Debtors
Days in Debtors = 365 / Debtors turnover
Creditors Turnover = Purchases (or COGS) / Average Accounts Payable
Days in Creditors = 365 / Creditors Turnover
Cash Flow Cycle = Days in Inventory + Days in Receivables Days in Creditors
Current Ratio = Current Assets / Current Liabilities
Quick Ratio = (Current Assets Inventories) / Current Liabilities
Interest Coverage = EBIT / Interest Expense (net)
Debt to Equity Ratio = Total Liabilities / Total Equity
Debt to Assets = Total Liabilities / Total Assets
Leverage = Total Assets / Shareholders Equity

QUESTION 2 CONTINUES ON PAGE 7


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Footnotes:
(1) The Income Statement for the year ended 31 July 2005 has not been restated
as permitted by AASB 132 Financial Instruments: Disclosure and Presentation
and AASB 139 Financial Instruments: Recognition and Measurement which have
been adopted from 1 August 2005.
(2) The profit for the year ended 30 July 2006 was $1,163.6 million. After
adjusting for the gain on disposal of Myer of $583.7 million and strategic initiative
costs of $207.4 million, the profit for the year would have been $787.3 million.

QUESTION 2 CONTINUED:
Required:
(a) Using the information from Coles 2006 concise financial statements, calculate
the missing 2006 figures in the worksheet below on key financial information.
State your answers in the boxes provided. Note that ratio formulae are
provided on page 4 (6 marks).
Coles
2006
Income Statement
Revenue from sale of goods

34,212.0

33,018.0

37,849.7

31,481.2

1,027.2

1,722.2

1,302.1

536.4
1,163.6

686.1
637.9

1,014.6

817.2
816.2

3,881.3
9,135.3
3,962.8
3,598.0

4,259.6
9,223.8
3,962.9
3,415.0

63.2

$14.61
23.12

EBIT
Profit from continuing operations
Profit for the year
[see Note 2 of Income Statement]
Balance Sheet
Total Current Assets
Total Assets
Total Current Liabilities
Total Equity
Basic EPS (cents)
As at the financial year-end date
Closing share price
Price Earnings (PE) Ratio

2005

Woolworths
2006
2005

4,027.8

3,064.5
8,775.2
3,780.7
2,002.2

51.8

90.89

79.19

$10.20
19.69

$19.93
21.93

$16.67
21.05

2.33%

20.23%

12.70%

11.29%

24.16%

11.78%

13,346.4

Trend analysis
Sales growth
Profit growth (from continuing
operations)
Liquidity Ratios
Current Ratio

1.07

0.81

Financial Structure Ratios


Leverage
Interest Coverage

2.70

3.31

4.38

18.61

6.90

8.67

(b) Comment on the Sales growth of Coles Ltd from 2005 to 2006 compared to the
sales growth of Woolworths Ltd over the same period (1 mark).

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(c) Comment on the Profit growth (from continuing operations) with reference to
the changes in the Profit for the year from 2005 to 2006 for Coles Ltd (2
marks).

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(d) What do you think of the decision by the Coles management to report $1,163.6m
as the Profit for the year in the Income Statement? Explain your answer by
referring to the footnote 2 of the Income Statement on page 5 (2 marks).

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QUESTION 2 CONTINUES ON PAGE 10

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(e) With references to a rule of thumb, discuss the change in the Current Ratios of
Coles Ltd over the last 2 years, and whether it gives rise to any cause for concern
(2 marks).

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(f) The management wishes to make a presentation to analysts in order to inform


them of the companys 2006 financial results. In the presentation, the
management is expected to provide guidance that Coles Ltds Basic EPS would be
90 cents for the year 2007. Assuming that the PE Ratio stays constant as at the
financial year-end of 2006, what do you expect the share price to be at the end of
the year 2007? (2 marks).

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QUESTION 3 (20 MARKS): ACCOUNTING POLICY CHOICE,


CORPORATE GOVERNANCE AND PROFESSIONAL ETHICS
Part A (10 marks):
ET FoneHome Ltd (ETF or The Company) is a mobile phone company listed on
the Australian Stock Exchange (ASX). The Company is considering issuing new
shares to finance the acquisition of mobile telephone spectrum licenses. The
management prepared the following Income Statement for the period ending 31st
December 2007, to be submitted to the Board of Directors for its approval:
ET FoneHome Ltd
Income Statement
For the period ending 31st December 2007
$m
2007

$m
2006

678.2

330.9

Expenses
(908.6)
Earnings Before Interest, Tax, Depreciation & Amortisation (EBITDA) (230.4)

305.7
25.2

Sales revenue

Depreciation & amortisation


Net interest (expense)/ revenue
Net profit/ (loss) before income tax
Income tax expense (30%)
Net profit/ (loss) after income tax

(35.3) (12.3)
3.3 (1.6)
(262.4)
11.3
(3.4)
(262.4)
7.9

After reviewing the draft 2007 Income Statement, the Chief Executive Officer (CEO)
is concerned that, by reporting a loss for 2007, it may cause the Companys share
price to drop and make it difficult to raise further funds from a share issue. The CEO
therefore asks the Chief Financial Officer (CFO) for suggestions regarding the
figures. The CFO suggests that the $450 million spent on marketing costs on 1st
January 2007 and currently treated as an expense, should be capitalised and amortised
over 3 years instead.

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Required:
(a) Re-calculate and prepare a new 2007 Income Statement to reflect the proposed
change in the accounting policy for marketing costs. Use 1-decimal point in
every step of the calculations as well as for the answer (4 marks).
New
2007

Old
2007

2006

678.2

330.9

Expenses

(908.6)

305.7

EBITDA

(230.4)

25.2

(35.3)

(12.3)

3.3

(1.6)

(262.4)

11.3

Sales revenue

Depreciation & amortisation


Net interest (expense)/ revenue
Net profit/ (loss) before income tax
Income tax expense (30%)
Net profit/ (loss) after income tax

(3.4)
(262.4)

7.9

(b) According to the AASB Framework, what is the appropriate treatment for
marketing costs in 2007? Apply the relevant definition and recognition criteria in
your answer (3 marks).

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(c) Discuss the cash flow implications (directional and size effects, if any) of the
proposed accounting policy change for 2007 and 2008 (3 marks).

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QUESTION 3 CONTINUES ON THE NEXT PAGE

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Part B (5 marks):
The CFO is concerned that the Board of Directors may not approve the new Income
Statement prepared in Part A. The CEO, who is also the Board Chairperson and the
Chairperson of the companys Audit Committee, however, is not as concerned about
the Board approval. The CEO believes that he will be able to persuade other Board
directors (including members of the Audit Committee who are also his golfing
partners and have little accounting expertise), and obtain approval for the revised
Income Statement.
(a) Discuss how good corporate governance regarding the roles of the Board
Chairperson and CEO could potentially have avoided the above situation from
arising (2 marks).

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(b) Discuss how good corporate governance in the role and composition of the Audit
Committee may assist in having the Revised Income Statement for 2007 being
rejected (3 marks).

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QUESTION 3 CONTINUES ON PAGE 16


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Part C (5 marks): NOT relevant in Session 2 2009


The CFO has been considering buying a property in Coogee with great sea views. He
is concerned that the value of the Company shares he owns will fall if the original
Income Statement is released, and consequently, will not be able to buy the property.
He has been reminded that the final version of the Companys Income Statement must
be submitted to the Board within the next few days. The CEO has left the CFO to
decide upon which Income Statement (old or new) should be submitted for Board
approval.
What should the CFO do? Apply the Code of Ethics for Professional Accountants to
identify threats, evaluate significance and respond to this situation.

Identify threats:

Evaluate significance:

Respond:

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QUESTION 4 (15 MARKS): COST CONCEPTS


Black Swan Ltd produces Snooze Sheep dolls which have become very popular
with the trendy university students. The company has two production departments,
Assembly and Packaging departments. The following balances were recorded on 1
March 2007 for the Assembly Department:
Inventory as at 1st March 2007:
Raw Materials
Work-In-Process
Finished Goods

$3,600
$11,000
$26,000

Required:
The following transactions have occurred during the month of March 2007 in the
Assembly Department of Black Swan Ltd. Write appropriate journal entries for each
of the transactions.
(a)

Purchased $28,400 of raw materials on account (1 mark).

(b)

Incurred $48,000 of direct labour, not yet paid (1 mark).

(c)

Raw materials were issued for production. Raw materials balance on 31st
March 2007 was $20,000 (2 marks).

(d)

Applied overhead at the rate of $18 per machine hour. Machine hours
incurred for the Assembly Department was 2000 hours (1 mark).

(e)

Actual manufacturing overhead for March 2007 comprised indirect labour,


$22,000 and depreciation expense, $12,000 (3 marks).

(f)

Black Swan Ltd treats any overhead variance to be immaterial (1 mark).

(g)

Work-In-Process balance on 31st March was $35,000 (2 marks).

(h)

Finished Goods balance on 31st March was $10,000 and Snooze Sheep dolls
were sold on an account with a 20% mark-up on the same day (4 marks).

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(a)

(b)

(c)

(d)

(e)

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(f)

(g)

(h)

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QUESTION 5 (20 MARKS): BUDGETING FOR PLANNING AND


CONTROL
Part A (5 marks):
One of the many benefits of budgets is that they can be used as a motivational tool for
employees. List two (2) essential aspects of budgets which must be present in order
for the budget to be effective and explain how they can motivate employees to
perform better.

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Part B (15 marks):


Blackjack Ltd. is a retail company specialising in state-of-the-art surgical instruments
for medical practitioners. Information about the companys operations is given
below:

Sales in November were $400,000 and are budgeted at $440,000 for December,
$300,000 for January, and $280,000 for February.

Cash collections are expected to be 60 per cent in the month of sale and 38 per
cent in the month following the sale. 2 per cent of sales each month are expected
to be uncollectible (that is, they are expected to be written off straight away).

The companys gross margin is 25 per cent of its sales revenue.

Each month, the companys inventory purchase is to be 80 per cent of the


following months sales requirement. Payments for the merchandise are expected
to be paid in the month following the purchase.

Expenses are paid in the month they incur. Variable operating expenses
(excluding bad debts) are expected to amount to 4 per cent of sales. Fixed
monthly expenses (excluding depreciation) are budgeted at $25,200.

Annual straight-line depreciation expenses are estimated to be $432,000.

Tax rate is 30%.


Blackjack Ltd
Balance Sheet
As at 30 November 2007

Assets
Cash
Accounts receivable
Inventory
Property, plant and equipment
Accumulated depreciation

$ 44,000
$ 152,000
$ 264,000
$3,100,000
($1,360,000)

Total Assets

$2,200,000

Liabilities and Owners Equity


Accounts payable
Share capital
Retained earnings

$ 324,000
$1,600,000
$ 276,000

Total liabilities and owners equity

$2,200,000

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Required:
(a) Calculate the budgeted cash collections for December 2007 (3 marks).

(b) Calculate the budgeted cash payments for December 2007 (2 marks).

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(c) Prepare the budgeted Income Statement for December 2007 (5 marks).

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(d) Calculate the projected balance in Accounts Receivable on 31 December 2007


using a T-account. Identify clearly each item in the T-account (5 marks).

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SOLUTIONS TO QUESTION 1
PART A
(i)
Under the indirect method, increases in non-debt current liabilities are added back
to net profit to derive the CFO.
Thus CFO is higher by the amount of the reclassification.
(ii)
Under the direct method, we have to reconstruct balance sheet accounts to back
out the amount of cash paid or received.
The reclassification would result in an increase in the closing balance of the Other
Payables account.
Other things equal, this translates into a corresponding decrease in the amount
calculated for cash paid for Other Payables.
The increase in CFO is reflected in the reduction in the cash paid for Other
Payables.
PART B
(i) Operating cash flows increased by $60,000
(ii) Investing cash flows remained unchanged
(iii) Financing cash flows decreased by $1,060,000
(iv) Total cash flows decreased by $1,000,000
PART C
See tutors during consultation times
SOLUTIONS TO QUESTION 2
(a)
EBIT
Sales growth
Profit growth continuing operations
Current Ratio
Leverage
Interest Coverage

850.9
3.62%
-21.82%
0.98
2.54
8.60

(b) (e)
See tutors during consultation times
(f)
Share price in 2008

=
=

$0.90 x 23.12
$20.81

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SOLUTIONS TO QUESTION 3
Part A
(a)
Sales revenue

678.2

Expenses

(458.6)

EBITDA

219.6

Depreciation & amortisation


Net interest (expense)/ revenue
Net profit/ (loss) before income tax
Income tax expense (30%)
Net profit/ (loss) after income tax

(185.3)
3.3
37.6
(11.3)
26.3

(b)
See tutors during consultation times
(c)
2007
Accounting policy choices have no cash flow implications.
2008
There is an net profit before tax of $37.6 million in 2007 so there is a tax cash outflow
impact of $11.3 million.

Part B
See tutors during consultation times.

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SOLUTIONS TO QUESTION 4
(a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)

Dr

Dr

Dr

Dr

Dr

Dr

Dr

Dr

Dr

Raw Materials
Cr
Accounts Payable

28,400

WIP
Cr

48,000

28,400

Wages Payable

WIP
Cr

Raw Materials

WIP
Cr

Overhead Control

48,000
12,000
12,000
36,000
36,000

Overhead Control
34,000
Cr
Wages Payable
Cr
Accumulated Depreciation

22,000
12,000

Overhead Control
Cr
COGS

2,000
2,000

Finished Goods
Cr
WIP

72,000

COGS
Cr
Finished Goods

88,000

Accounts Receivable
Cr
Sales Revenue

105,600

72,000

88,000

105,600

SOLUTIONS TO QUESTION 5
Part A
See tutors during consultation times.
Part B
(a) Cash collection in December
Month of sale
November
December

Sales
$400,000
$440,000

December
$152,000
$264,000
$347,200

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(b) Cash payment in December


0.75 x 440,000 =
0.8 x 330,000 =

$330,000
$264,000

Operating expenses: 0.04 x 440,000 =


Fixed expenses:
Cash payment:

$17,600
$25,200
$306,800

(c) Income Statement for December

Sales revenue
Less: Cost of goods sold (75% of sales)
Gross margin (25% of sales)
Less: Operating expenses:
Variable operating expenses 4% of sales)
Bad debts expense (2% of sales)
Depreciation ($432,000/12)
Other expenses
Total operating expenses
Income before taxes
Tax expense
Net profit after tax

December
$440,000
$330,000
$110,000
$17,600
$8,800
$36,000
$25,200
$87,600
$22,400
$6,720
$15,680

(d) Balance in Accounts Receivable (5 marks)

o/b 152,000
Sales 440,000

Accounts Receivable
Cash (sales November) 152,000
Cash (sales December) 264,000
Bad debts written off 8,800

c/b 167,200

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