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MASTER OF BUSINESS ADMINISTRATION

(MBA)

QUESTION BANK

FINANCIAL AND MANAGERIAL


ACCOUNTING

Copyright © 2011
REGENT Business School
All rights reserved; no part of this book may be reproduced in any form or by any means,
including photocopying machines, without the written permission of the publisher
Financial and Managerial Accounting: Question Bank MBA

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Financial and Managerial Accounting: Question Bank MBA

TABLE OF CONTENTS

Topic Page
Chapter 1 Introduction to Financial Accounting 5
Chapter 2 Profit Measurement and Year-end Adjustments 25
Chapter 3 Inventory Valuation 31
Chapter 4 Cash Flow Statements 37
Chapter 5 Analysis and Interpretation of Financial
Statements 47
Chapter 6 Working Capital Management 59
Chapter 7 Capital Budgeting (Long-term Planning) 65
Chapter 8 Budgeting and Costings 69
Chapter 9 Cost-Volume-Profit Analysis 79

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Chapter 1

Introduction to Financial
Accounting

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Question 1.1

On 1 January 2011, R Keane, an accountant, had the following assets and liabilities:
R
Furniture and office equipment 2 000
Office supplies (stationery, stamps, pencils, ink, etc.) 500
Accounts receivable (debtors) 6 000
Cash at bank 4 000
Accounts payable 3 000
Capital – R Keane 9 500
His transactions for the month of January were:
Documentary evidence

(a) Jan 2 Purchased office supplies costing R160 credit. Supplier‟s invoice
(b) 11 Purchased additional equipment for R1400, Supplier‟s
paying R800 by cheque with the balance on invoice/cheque
account.
(c) 13 Received R3 500 from debtors and banked this Duplicate receipt and
sum. deposit slip
(d) 17 P Keane paid R500 which he had won at the Duplicate receipt and
races into his business bank account. deposit slip
(e) 19 Paid accounts payable by cheque R1 600. Cheque counterfoil
(f) 24 R Keane cashed a cheque for R300 for his Cheque counterfoil
personal use.
(g) 25 Charged clients with amounts owing for Duplicate invoice
accounting fees R1 200.
(h) 29 Paid January rent by cheque R200. Landlord‟s
invoice/cheque
(i) 31 Paid wages for the month by cheque R150. Signatures of
employees and
cheque counterfoil
(j) 31 Depreciation on furniture and office equipment is
estimated to be R50.
(k) 31 Determined by taking inventory that the cost of
the office supplies used was R280.

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REQUIRED:
(a) Record the above transactions in the schedule provided. (Accounting
equation)
(b) Using only the accounts and account titles given:
(i) Enter the opening balances and record the above transactions
in the ledger accounts.
(ii) Prepare a trial balance at the end of January 2011.
(iii) Prepare R Keane‟s balance sheet at 31 January 2011.
(iv) Balance the ledger accounts.

Note:
At this stage all income and expense items are directly entered into. The capital
account purely to indicate that income will increase owners‟ equity while
expenses and drawings will decrease owners‟ equity. However, in the next
activity separate accounts will be opened for income and expense items and a
separate account for drawings.

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Solution to 1.1

(a)
ASSETS = LIABILITIES + CAPITAL
Furniture & Office Accounts Bank = Accounts + Capital
Equipment supplies receivable payable R Keane
2 000 500 6 000 4 000 3 000 9 500
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)

(b)(i) LEDGER R KEANE


CAPITAL

ACCOUNTS PAYABLE

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FURNITURE AND EQUIPMENT

OFFICE SUPPLIES

ACCOUNTS RECEIVABLE

BANK

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(b)(ii)
R KEANE
TRIAL BALANCE AT 31 JANUARY 2011
DR CR
R R
Capital
Accounts payable
Furniture and equipment
Office supplies
Accounts receivable
Bank

(a)
ASSETS = LIABILITIES + CAPITAL
Furniture & Office Accounts Bank = Accounts + Capital
Equipment Supplies receivable payable R Keane
2 000 500 6 000 4 000 3 000 9 500
(a) +160 +R 160
(b) +1 400 -800 +R 600
(c) -3 500 +3 500
(d) +500 +500
(e) -1 600 -1 600
(f) -300 -300
(g) +1 200 +1 200
(h) -200 -200
(i) -R150 -R150
(j) -R50 -R50
(k) -R280 -R280
R3 350 R380 R3 700 R4 950 R2 160 R10 220

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(b) (i) LEDGER R KEANE


CAPITAL
* Expenses
24 Bank (Drawings) 300 1 Balance 9 500
29 Bank (Rent Expense) 200 17 Bank 500
29 Bank (Wage Expense) 150 25 Accounts Receivable
(Fee Income) 1 200
31 Furniture & Equipment
(Depreciation) 50
31 Office Supplies (Office
Supplies Expense) 280
Balance c/d 10 220
11 200 11 200
Balance b/d 10 220
ACCOUNTS PAYABLE
19 Bank 1 600 1 Balance 3 000
1 Office Supplies 160
Balance c/d 2 160 11 Furniture and
Equipment 600
3 760 3 760
Balance b/d 2 160

FURNITURE AND EQUIPMENT


1 Balance 2 000 31 Capital (Depreciation) 50
11 Bank 800
11 Accounts Payable 600 Balance c/d 3 350
3 400 3 400
Balance b/d 3 350

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OFFICE SUPPLIES
1 Balance 500 Capital (Office 280
Supplies Expense)
1 Accounts Payable 160 Balance c/d 380
660 660
Balance b/d 380

ACCOUNTS RECEIVABLE
1 Balance 6 000 13 Bank 3 500
25 Capital (Fee Income) 1 200 Balance c/d 3 700
7 200 7 200
Balance b/d 3 700

BANK
1 Balance 4 000 11 Furniture and 800
Equipment
13 Accounts Receivable 3 500 19 Accounts Payable 1 600
17 Capital 500 24 Drawings/Capital 300
29 Capital (Rent Expense) 200
31 Capital (Wages 150
Expense)
Balance c/d 4 950
8 000 8 000
Balance b/d 4 950

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(b)(ii)
R KEANE TRIAL BALANCE AT 31 JANUARY 2011
DR CR
R R
10 Capital 10 220
20 Accounts payable 2 160
30 Furniture and equipment 3 350
31 Office supplies 380
41 Accounts receivable 3 700
42 Bank 4 950
12 380 12 380

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(b) (iii) THE ANNUAL FINANCIAL STATEMENTS


(1) Balance Sheet or Position Statement
R KEANE
BALANCE SHEET AT 31 JANUARY 2011

R R
CAPITAL NON-CURRENT ASSETS
R Keane (see note) 10 220 Furniture and equipment, at cost
less depreciation 3 350

CURRENT LIABILITIES CURRENT ASSETS


Accounts payable 2 160 Inventory – office supplies 380
Accounts receivable 3 700
Cash at bank 4 950
_______ 9 030
R 12 380 R 12 380
======= =======

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(2) Capital Statement


NOTES TO BALANCE SHEET
CAPITAL – R KEANE
R
Balance 1 January 9 500
Introduced by owner 500
10 000
Net profit 520
10 520
Less: Drawings 300
Balance 31 January R10 220

Question 1.2

Refer to the transactions listed in 1.1.


Use the following account titles and the accounts provided below:
REAL ACCOUNTS
Capital
Drawings
Accounts payable
Furniture and equipment
Office supplies
Accounts receivable
Bank

NOMINAL ACCOUNTS
Rent expense
Wages expense
Depreciation expense
Office supplies expense
Bookkeeping fees revenue
Profit and loss summary

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REQUIRED:
(i) Enter the opening balances and record the transactions in the appropriate
titled ledger accounts.
(ii) Prepare a trial balance at the end of January 2011.
(iii) Prepare the income statement for the month ended 31 January 2011 and
the balance sheet on that date.
(iv) Record closing entries to the profit and loss summary and capital
accounts in the ledger accounts provided.
(v) Balance the real accounts.

Solution to 1.2

(i) LEDGER – R KEANE


REAL ACCOUNTS
CAPITAL

DRAWINGS

ACCOUNTS PAYABLE

FURNITURE AND EQUIPMENT

OFFICE SUPPLIES

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ACCOUNTS RECEIVABLE

BANK

ACCUMULATED DEPRECIATION ON FURNITURE AND EQUIPMENT

NOMINAL (TEMPORARY CAPITAL) ACCOUNTS


RENT EXPENSE

WAGES EXPENSE

DEPRECIATION EXPENSE

OFFICE SUPPLIES EXPENSE

FEE INCOME

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PROFIT AND LOSS SUMMARY

(ii) R KEANE TRIAL BALANCE AT 31 JANUARY 2011


DR CR
R R

REAL ACCOUNTS
Capital
Drawings
Accounts payable
Furniture and equipment
Office supplies
Accounts receivable
Bank
Accumulated Depreciation on Furniture and equipment

NOMINAL ACCOUNTS
Rent expense
Wages expense
Depreciation expense
Office supplies expense
Fee income

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SOLUTION TO 1.2

(i) LEDGER – R KEANE


REAL ACCOUNTS
CAPITAL
Jan 1 Balance b/d 9 500
17 Bank 32 500
10 000
DRAWINGS
Jan 24 Bank 32 300

ACCOUNTS PAYABLE
Jan 19 Bank 32 1 600 Jan 1 Balance b/d 3 000
1 Office Supplies 30 160
Balance c/d 2 160 11 Furniture and
Equipment 20 600
3 760 3 760
Feb 1 Balance b/d 2 160

FURNITURE AND EQUIPMENT


Jan 1 Balance b/d 2 000
11 Bank 32 800
11 Accounts Payable 12 600
3 400

OFFICE SUPPLIES
Jan 1 Balance b/d 500 Office Supplies Exp 43 280
11 Accounts Payable 12 160 Balance c/d 380
660 660
Feb 1 Balance b/d 380

ACCOUNTS RECEIVABLE
Jan 1 Balance b/d 6 000 Jan 13 Bank 32 3 500
25 Fee Income 50 1 200 Balance c/d 3 700
7 200 7 200
Feb 1 Balance b/d 3 700

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BANK
Jan 1 Balance b/d 4 000 Jan 11 Furniture and Equip 20 800
13 Accounts Receivable 31 3 500 19 Accounts Payable 12 1 600
17 Capital 10 500 24 Drawings 11 300
29 Rent Expense 40 200
31 Wages Expense 41 150
Balance c/d 4 950
8 000 8 000
Feb 1 Balance b/d 4 950
ACCUMULATED DEPRECIATION ON FURNITURE AND EQUIPMENT
Jan 31 Depreciation 42 50

NOMINAL (TEMPORARY CAPITAL) ACCOUNTS


RENT EXPENSE
Jan 29 Bank 32 200 Jan 31 Profit and Loss 60 200

WAGES EXPENSE
Jan 29 Bank 32 150 Jan 31 Profit and Loss 60 150

DEPRECIATION EXPENSE
Jan 31 Accum Depreciation 33 50 Jan 31 Profit and Loss 60 50

OFFICE SUPPLIES EXPENSE


Jan 31 Office Supplies 30 280 Jan 31 Profit and Loss 60 280

FEE INCOME
Profit and Loss 60 1 200 Jan 25 Accounts Receivable 31 1 200

PROFIT AND LOSS SUMMARY


EXPENSES INCOME
Rent Expense 40 200 Fee Income 50 1 200
Wages Expense 41 150
Depreciation Exp 42 50
Office Supplies Exp 43 280
NET PROFIT 520
1 200 1 200

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(ii)
R KEANE
TRIAL BALANCE AT 31 JANUARY 2011
DR CR
R R
REAL ACCOUNTS
Capital 10 000
Drawings 300
Accounts payable 2 160
Furniture and equipment 3 400
Office supplies 380
Accounts receivable 3 700
Bank 4 950
Accumulated Depreciation on Furniture and equipment 50
NOMINAL ACCOUNTS
Rent expense 200
Wages expense 150
Depreciation expense 50
Office supplies expense 280
Fee income 1 200
13 410 13 410

Note
The trial balance above is prepared after all external transactions for the period
have been recorded and before the financial statements are prepared. If the
accountant is satisfied that all the balances are „normal‟, that transactions have not
been omitted or incorrectly classified; he will use this trial balance to prepare the end
of period financial statements.

(iii) THE ANNUAL FINANCIAL STATEMENTS

(1) Balance Sheet or Position Statement

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R KEANE
BALANCE SHEET AT 31 JANUARY 2011

R R
CAPITAL NON-CURRENT ASSETS
R Keane (see note) 10 220 Furniture and equipment, at cost
less depreciation 3 350

CURRENT LIABILITIES CURRENT ASSETS 9 030


Accounts payable 2 160 Inventory – office supplies 380
Accounts receivable 3 700
Cash at bank 4 950
_______
12 380 12 380
======= =======

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(2) Capital Statement


NOTES TO BALANCE SHEET
CAPITAL – R KEANE
R
Balance 1 January 9 500
Introduced by owner 500
10 000
Add Net profit 520
10 520
Less: Drawings 300
Balance 31 January R10 220
(3) Profit and Loss or ‘Income’ Statement’
R KEANE
INCOME STATEMENT FOR THE MONTH ENDED 31 JANUARY 2011
R
Revenue
Fee Income 1 200

Less: Expenses

Rent 200
Wages 150
Depreciation – furniture and equipment 50
Office supplies 280

680
NET PROFIT R520
=====

NOTE
Closing entries are commonly referred to as internal transactions as they
merely move the balances arising from external transactions from individual
expense and income accounts to the profit and loss summary account. The
balance of the profit and loss account (net profit or loss) is then transferred
(the profit and loss account is closed) to the capital account. In other words
income and expenses are returned to the capital account in summarised form

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(net profit or loss). This is why the nominal accounts are sometimes called
„temporary capital accounts‟ – income and expenses are taken out of the
capital account „temporarily‟ so that they can be summarised to arrive at net
profit but then the net profit is returned to the capital account.

Closing entries summarise a set of previously recorded external transactions


which have been analysed in separate expense and revenue accounts.
Make sure you understand this distinction – it is important.

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Chapter 2

Profit Measurement and Year-end


Adjustments
(Income Statement and Balance Sheet)

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Question 2.1

2. The following is a list of balances extracted from the financial records of Xero
Ltd on 30 November 20.12.
R
Debtors 185 000
Land and buildings 320 000
Inventories 153 000
Bank overdraft 116 000
Equipment 207 000
Loan from Kia Bank 260 000
Motor vehicles 38 000
Creditors 86 000

REQUIRED:
2.1.1 Prepare the balance sheet of Xero Ltd at 30 November 20.12.

Provide an interpretation of the balance sheet by making reference to the


following:
2.1.2 The liquidity of the business
2.1.3 The mix between current and non-current assets
2.1.4 The financial structure of the balance sheet (finance provided by owners and
outsiders)

Solution to 2.1
2.1.1
Xero Ltd
Balance Sheet at 30 November 20.12
ASSETS
Non-current assets 565 000
Land and buildings 320 000
Plant and equipment 207 000
Motor vehicles 38 000
Current assets 338 000
Inventories 153 000
Accounts receivable 185 000

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Total assets 903 000

EQUITY AND LIABILITIES


Equity 441 000
Non-current liabilities 260 000
Loan from Kia Bank 260 000
Non-current liabilities 202 000
Accounts payable 86 000
Bank overdraft 116 000
Total equity and liabilities 903 000

2.1.2 The liquidity of the business


Liquid assets amounting to R338 000 (R153 000+R185 000) is available to
meet the short-term obligations of R202 000 (R86 000+R116 000). Whilst the
liquid assets are greater, none of it is cash and furthermore it is not easy to
convert inventories to cash at short notice. Also, a large amount is tied up in
accounts receivable and if debtors do not abide by the credit terms and/or if
credit terms are greater than 30 days, the business may experience liquidity
problems.

2.1.3 The mix between current and non-current assets


Current assets total R338 000 whilst the non-current assets equal R565 000.
When too much of funds are tied up in non-current assets, the business could
be vulnerable to business failure. This is because non-current assets are
typically not easy to turn into cash in order to meet short-term debts.
Converting many non-current assets into cash may lead to substantial losses
as such assets are not always worth in the open market what the business
paid for them or what they may be worth to the business.

2.1.4 The financial structure of the balance sheet


The own capital (equity) is 1.70 times greater than the outside capital (long-
term liability). However, the long-term liability of R260 000 brings with it the
obligation to pay interest and make large capital repayments at regular
intervals.

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Question 2.2 Dolphins Ltd presented the income statement below for its most
recent financial year.

R
Sales 743 000
Cost of sales 402 000
Gross profit 341 000
Operating expenses 145 000
Income from operations 196 000
Other income 1 100
Other expenses 26 000
Profit before tax 171 100
Income tax 60 000
Net profit 111 100

Answer the following questions:


2.2.1 Explain the difference between “sales” and “other income”.
2.2.2 Dolphins Ltd would like to earn a large gross profit by selling its products at a
much higher price than its cost. Describe two factors that may prevent it
from doing so.
2.2.3 Explain how cost of sales, operating expenses and other expenses are
different from one another.
2.2.4 Explain why cost of sales, operating expenses, other expenses and income
tax are listed separately in the income statement rather than being lumped
together as one item?
2.2.5 Explain why the income statement presented above is inadequate to provide
a proper interpretation of the financial result of Dolphins Ltd for the financial
year.

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Solution to 2.2
2. Dolphins Ltd
2.2.1 Sales reflect the amount an enterprise earns by selling its products. It is
revenue generated through the enterprise‟s primary operating activities.
Other income is not directly related to the enterprise‟s primary operating
activities. They are considered non-operating items and are reported
separately on the income statement, example interest on investment.

2.2.2 Competition is one factor that will prevent it from doing so.
The products must be also be priced at amounts that customers are willing
to pay.

2.2.3 Cost of sales refers to the cost to the enterprise of goods sold to customers.
It is an expense linked directly with the revenue generated through sales.
Operating expenses are costs of resources incurred as part of operating
activities that are not directly associated with specific goods.
Other expenses are expenses not directly related to the enterprise‟s
primary operating activities. They are considered non-operating items.

2.2.4 A separate disclosure is required as each item is relevant to various decision


makers (concept of materiality). If they were grouped together it would
diminish the ability of decision-makers to make important economic
decisions. The separate listing also distinguishes expenses that result from
the enterprise‟s primary operating activities.

2.2.5 The income statement of the previous year is not provided to enable one to
make a comparison of the performance of the enterprise over the past year.
Income statements of the previous years will enable users to do a trend
analysis.

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Chapter 3

Inventory Valuation

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Question 3

PERPETUAL RECORDING METHOD

The following are the assumed inventory transactions for Shavers Hardware for the
month of January 2012:

January 1 Inventory on hand, 20 units purchased at R2 each.


5 Purchased 60 units at R3 each.
10 Purchased 35 units at R4 each.
11 Sold 30 units.
15 Purchased 40 units at R5 each.
19 Sold 50 units.
22 Purchased 100 units at R4 each.
30 Sold 60 units

All units are sold at a selling price of R10 per unit.

REQUIRED:
Use the perpetual inventory records provided below and over the page to determine
the cost of goods sold during January and the cost of inventory on hand at
31 January 2012 for each of the following methods:
(i) FIFO (first-in-first-out)
(ii) LIFO (Last-in-first-out)
(iii) Moving average

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Solution to Q3

PERPETUAL INVENTORY RECORD (FIFO)


DATE REF PURCHASED SOLD BALANCE
Qty Unit Total Qty Unit Total Qty Unit Total
Cost Cost Cost Cost Cost Cost
Jan 1 Bal 20 R2 R 40
5 60 R3 R180 20 R2 R220
60 R3
10 35 R4 R140 20 R2 R360
60 R3
35 R4
11 20 R2 R 70 50 R3 R290
10 R3 35 R4
15 40 R5 R200

19 50

22 100 R4 R400

30 35
25

Information Cost of sales Should agree


from supplier‟s information for with balance on
invoices „cost of sales entry‟ ledger account
for inventory‟

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PERPETUAL INVENTORY RECORD (LIFO)


DATE REF PURCHASED SOLD BALANCE
Qty Unit Total Qty Unit Total Qty Unit Total
Cost Cost Cost Cost Cost Cost
Jan 1 Bal 20 R2 R 40
5 60 R3 R180 20 R2 R220
60 R3
10 35 R4 R140 20 R2 R360
60 R3
35 R4
11 30 R4 R120 20 R2 R240
60 R3
5 R4
15 40 R5 R200

19 40
5
5

22 100 R4 R400

30 60

PERPETUAL INVENTORY RECORD (Moving Average)


DATE REF PURCHASED SOLD BALANCE
Qty Unit Total Qty Unit Total Qty Unit Total
Cost Cost Cost Cost Cost Cost
Jan 1 Bal 20 R2 R 40
5 60 R3 R180 80 R2,75 R220
10 35 R4 R140 115 R3,13 R360
11 30 R3,13 R 94 85 R3,13 R266
15 40 R5 R200 125 R3,73 R466
19
22
30

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PERPETUAL INVENTORY RECORD (FIFO)


DATE REF PURCHASED SOLD BALANCE
Qty Unit Total Qty Unit Total Qty Unit Total
Cost Cost Cost Cost Cost Cost
Jan 1 Bal 20 R2 R 40
5 60 R3 R180 20 R2 R220
60 R3
10 35 R4 R140 20 R2 R360
60 R3
35 R4
11 20 R2 R 70 50 R3 R290
10 R3 35 R4
15 40 R5 R200 50 R3 R490
35 R4
40 R5
19 50 R3 R150 35 R4 R340
40 R5
22 100 R4 R400 35 R4 R740
40 R5
100 R4
30 35 R4 R265 15 R5 R475
25 R5 100 R4

Information Cost of sales Should agree


from supplier‟s information for with balance on
invoices „cost of sales entry‟ ledger account
for inventory‟

PERPETUAL INVENTORY RECORD (LIFO)


DATE REF PURCHASED SOLD BALANCE
Qty Unit Total Qty Unit Total Qty Unit Total
Cost Cost Cost Cost Cost Cost
Jan 1 Bal 20 R2 R 40
5 60 R3 R180 20 R2 R220
60 R3
10 35 R4 R140 20 R2 R360
60 R3
35 R4
11 30 R4 R120 20 R2 R240
60 R3
5 R4
15 40 R5 R200 20 R2 R440
60 R3
5 R4

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40 R5
19 40 R5 R200 20 R2 R205
5 R4 20 55 R3
5 R3 15
R235
22 100 R4 R400 20 R2 R605
55 R3
100 R4
30 60 R4 R240 20 R2 R365
55 R3
40 R4

PERPETUAL INVENTORY RECORD (Moving Average)


DATE REF PURCHASED SOLD BALANCE
Qty Unit Total Qty Unit Total Qty Unit Total
Cost Cost Cost Cost Cost Cost
Jan 1 Bal 20 R2 R 40
5 60 R3 R180 80 R2,75 R220
10 35 R4 R140 115 R3,13 R360
11 30 R3,13 R 94 85 R3,13 R266
15 40 R5 R200 125 R3,73 R466
19 50 R3,73 R187 75 R3,73 R279
22 100 R4 R400 175 R3,88 R679
30 60 R3,88 R233 115 R3,88 R446

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Chapter 4

Cash Flow Statements

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Question 4.1
Torrent Ltd’s income statement for the year ended 31 December 2011 and the
balance sheet as at 31 December 2010 and 2011 are as follows:
Income statement
R million (m)
Revenue 623
Less Cost of sales (353)
Gross profit 270
Less Distribution costs 71
Administrative expenses 30 (101)
169
Rental income 27
Operating profit 196
Less Interest payable (26)
Profit on ordinary activities before taxation 170
Less Tax on profit on ordinary activities (36)
Profit on ordinary activities after taxation 134
Retained profit brought forward from last year 123
257
Less Dividend paid on ordinary shares (60)
Retained profit carried forward 197

Balance sheet as at 31 December 2010 and 2011


2010 2011
Rm Rm
Non-current assets
Property, plant and equipment
Land and buildings 310 310
Plant and machinery 325 314
635 624
Current assets
Stock 41 35
Trade debtors 139 145
180 180

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Current liabilities
Bank overdraft 56 89
Trade creditors 54 41
Corporation tax 23 18
133 148
Net current assets 47 32
Total assets less current liabilities 682 656
Less Non-current liabilities
Debenture loans 250 150
432 506
Equity
Ordinary share capital 200 300
Share premium account 40 -
Revaluation reserve 69 9
Retained profit 123 197
432 506

During 2011, the business spent R67 million on additional plants and machinery.
There were no other non-current asset acquisitions or disposals. There was no share
issue for cash during the year. The interest payable expense was equal in amount to
the cash outflow.

Required:
Prepare the cash flow statement for Torrent Ltd for the year ended 31 December
2011.

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Solution to Question 4.1


Torrent Ltd
Cash flow statement for the year ended 31 December 2011
Rm Rm
Cash flow from operating activities
Net profit, after interest, before taxation
(see Note 1 below) 170
Adjustments for:
Depreciation (Note 2) 78
Interest expense (Note 3) 26
274
Decrease in stock (41-35) 6
Increase in trade debtors (145-139) (6)
Decrease in trade creditors (54-41) (13)
Cash generated from operations 261
Interest paid (26)
Corporation tax paid (Note 4) (41)
Dividend paid (60)
Net cash from operating activities 134
Cash flows from investing activities
Payments to acquire plant and machinery (67)
Net cash used in investing activities (67)
Cash flows from financing activities
Redemption of debenture stock (250-150) (Note 5) (100)
Net cash used in financing activities (100)
Net decrease in cash and cash equivalents (33)
Cash and cash equivalents at 1 January 2011
Bank Overdraft (56)
Cash and cash equivalents at 31 December 2011
Bank overdraft (89)

To see how this relates to the cash of the business at the beginning and end of the
year it can be useful to provide a reconciliation as shown below:

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REGENT Business School 40
Financial and Managerial Accounting: Question Bank MBA

Analysis of cash and cash equivalents during the year ended 31 December 2011
Rm
Cash and cash equivalents at 1 January 2011 (56)
Net cash outflow (33)
Cash and cash equivalents at 31 December 2011 (89)

Notes:
1 This is simply taken from the profit and loss account for the year.
2 Since there were no disposals, the depreciation charges must be the
difference between the start and end of the year‟s plant and machinery
values, adjusted by the cost of any additions.
Rm
Book value, at 1 January 2011 325
Add Additions 67
392
Less Depreciation (balancing figure) 78
Book value, at 31 December 2011 314

3 Interest payable expense must be taken out, by adding it back to the profit
figure. We subsequently deduct the cash paid for the interest payable during
the year. In this case the figures are identical.

4 Companies pay 50% tax during their accounting year and 50% in the following
year.
Thus the 2011 payment would have been half the tax on the 2010 profit (that is,
the figure that would have appeared in the current liabilities at the end of 2010),
plus half of the 2011 tax charge (that is, 23 + (½ x 36) = 41).

5 It is assumed that the cash payment to redeem the debentures was simply
the difference between the two balance sheet figures.
It seems that there was a bonus issue of ordinary shares during the year.
These increased by R100m.
At the same time, the share premium account balance reduced by R40m (to
zero) and the revaluation reserve balance fell by R60m.

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REGENT Business School 41
Financial and Managerial Accounting: Question Bank MBA

Question 4.2

You are presented with the following balance sheet and income statement of
Velocity Limited:
30.06.2011 30.06.2010
R R
Gross Revenue 110 000 90 000
Less: Cost of Sales 60 000 55 000
Gross Profit 50 000 35 000
Add: Dividends received 3 600 3 600
Rent received - 300
Gross Income 53 600 38 900
Less: Expenses 21 600 20 900
Salaries and Wages 16 000 15 000
Interest paid 2 500 1 800
Depreciation 1 000 1 000
Insurance 600 500
Other Administrative expenses 1 500 2 600
Net income before taxation 32 000 18 000
Less: S A Normal Tax 10 000 8 000
Net income after tax 22 000 10 000
Less: Dividends declared 12 000 (10 000)
Retained income for the year 10 000 0

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REGENT Business School 42
Financial and Managerial Accounting: Question Bank MBA

VELOCITY LIMITED
BALANCE SHEET AS AT 28 FEBRUARY 2011
30.06.2011 30.06.2010
R R
Capital Employed
Share Capital 80 000 60 000
Distributable Reserves (Retained Earnings) 10 000 -
Shareholders Equity 90 000 60 000
Long term Loan 5 000 12 000
95 000 72 000
====== ======
Employment of Capital
Fixed Assets 46 000 39 000
Land and Buildings at cost 40 000 32 000
Machinery at book value (carrying value) 6 000 7 000
Investment at cost 33 000 22 000

Net Current Assets 16 000 11 000


Current Assets 26 200 26 000
Inventory 18 800 20 000
Accounts receivable 7 400 5 700
Accrued income (rent) - 300

Less: Current Liabilities 10 200 15 000


Bank overdraft 4 200 5 000
Accounts payable 6 000 10 000
______ ______
95 000 72 000
====== ======

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REGENT Business School 43
Financial and Managerial Accounting: Question Bank MBA

Note:
No machinery was purchased or sold during the period.
All purchases and sales were made on credit whereas the
amounts of all other expenses were paid for in cash.
Cash received from customers amounted to R108 600 and cash
paid to suppliers R80 900

REQUIRED:
Draw up the Cash Flow Statement of Velocity Limited for the year ended
30 June 2011.

Solution to 4.2
VELOCITY LIMITED
CASH FLOW STATEMENT FOR THE YEAR ENDED 30 JUNE 2011
Notes 2011
R
Cash receipts from investments 108 600
Cash paid to suppliers 80 900
Cash generated from operations 1 27 700
Interest paid (2 500)
Dividends received 3 600
Dividend paid (12 000)
Taxation paid (10 000)
Cash inflows from operating activities 6 800

Cash flows from investing activities (19 000)


Additions to land and buildings (8 000)
Acquisitions of investments (11 000)

Cash flows from financing activities 13 000


Issue of shares 20 000
Repayment of long term loan (7 000)

Increase in cash and cash equivalents 800


Cash and Cash equivalents at beginning of year (5 000)
Cash and cash equivalents at end of year 4 200
======

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REGENT Business School 44
Financial and Managerial Accounting: Question Bank MBA

Note 1: Cash generated from operations R

Net income before taxation 32 000


Adjustment for: Depreciation 1 000
Interest paid 2 500
Dividends on investments (3 600)
Operating profit before changes in working capital 31 900
Changes in working capital (4 200)
Decrease in stock 1 200
Increase in debtors (1 400)
Decrease in creditors (4 000)
Cash generated from operations 27 700
=====

Question 4.3
Required
Study the extracts of the Cash flow statement of Siya Limited for the year ended
30 November 2012 and state your observations.

Extracts of Cash Flow Statement for the year ended 30 November 2012 R
Cash generated from operations 270 000
Cash flow from investing activities (750 000)
Additions to plant and equipment (Property and machinery) (1 000 000)
Sale of investments 250 000
Cash flow from financing activities 800 000
Proceeds from issue of ordinary shares 750 000
Increase in Long-term borrowings 50 000
Net increase in cash and cash equivalents 320 000
Cash and cash equivalents at beginning of year 180 000
Cash and cash equivalents at end of year 500 000

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REGENT Business School 45
Financial and Managerial Accounting: Question Bank MBA

Solution to 4.3
Siya Limited‟s operations appear to be quite profitable (Cash
generated from operations is R270 000). The company appears to be
on an expansion spree. The company‟s expansion is most likely funded
by the issue of shares (R750 000) and the divestment of non-current
investment (R250 000) although funds were available from operations
(R270 000) and long term borrowings (R50 000). The company seems
to be building up a large cash balance. One needs to explore the
reasons for increasing the cash balance.

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REGENT Business School 46
Financial and Managerial Accounting: Question Bank MBA

Chapter 5

Analysis and Interpretation of


Financial Statements

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REGENT Business School 47
Financial and Managerial Accounting: Question Bank MBA

Question 5.1

The following information relates to Synon Limited:

SYNON LIMITED
ABRIDGED BALANCE SHEET AT 30 JUNE
Note 2011 2010
R R
ASSETS
Non-current assets 173 000 180 000
1*
Property, plant and equipment 158 000 165 000
Investments at cost 15 000 15 000

Current assets 139 400 117 600

Inventories 67 000 60 000


Trade and other receivables** 71 900 56 800
Cash and cash equivalents 500 800

Total assets 312 400 297 600


========= =========
EQUITY AND LIABILITIES
Capital and reserves 192 400 196 600

Capital 180 000 180 000

Ordinary shares issued at R1 each 180 000 180 000

Accumulated profits 12 400 16 600

Non-current liabilities 40 000 40 000


Interest-bearing borrowings:
15% R100 debentures 40 000 40 000

Current liabilities 80 000 61 000

Trade and other payables** 50 000 61 000


Short-term loan 30 000 -

Total equity and liabilities 312 400 297 600

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REGENT Business School 48
Financial and Managerial Accounting: Question Bank MBA

SYNON LIMITED
INCOME STATEMENT FOR THE YEAR ENDED 30 JUNE
2011 2010
R R
Revenue* 300 000 284 000
Cost of sales (233 000) (225 000)
Inventory (opening) 60 000 50 000
Purchases* 240 000 235 000
300 000 285 000
Inventory (closing) (67 000) (60 000)
__________ __________
Gross Profit 67 000 59 000
Selling, administrative and general expenses (30 200) (28 800)
Administrative expenses 23 200 20 800
Depreciation 7 000 8 000
__________ __________
Profit from operations 36 800 30 200
Investment income 1 500 1 000
Financing costs – interest (6 000) (6 000)
__________ __________
Profit before tax 32 300 25 200
Income tax expenses (14 000) (11 000)
__________ __________
Net profit for the year 18 300 14 200
========== ==========
* All purchases and sales were on credit.

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REGENT Business School 49
Financial and Managerial Accounting: Question Bank MBA

REQUIRED:
Calculate the following ratios:
Profitability
(1) Return on ordinary equity (ROE)
(2) Return on assets (ROA)
(3) Net profit percentage
(4) Gross profit percentage
Liquidity
(5) Current ratio
(6) Acid test ratio
(7) Debtors‟ collection period
(8) Creditors‟ payment period
(9) Inventory turnover rate

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REGENT Business School 50
Financial and Managerial Accounting: Question Bank MBA

Solution to 5.1
(1) Return on ordinary equity (ROE)

Earnings of ordinary shareholders (before tax) x 100


Ordinary shareholders‟ equity

2010: R25 200 R196 600 x 100 = 12,82%


2011: R32 300 R192 400 x 100 = 16,78%
There was a marked improvement of 3,96% over the year.

(2) Return on assets (ROA)

Profit before interest and tax x 100


Total assets

2010: R(25 200 + 6 000) R 297 600 x 100 = 10,48%


2011: R(32 300 + 6 000) R 312 400 x 100 = 12,26%
There was an improvement of 1,78% over the year. This improvement partly
explains the improvement in the return on equity.

(3) Net profit percentage

Profit from operations x 100


Revenue

2010: R30 200 R284 000 x 100 = 10,63%


2011: R36 800 R300 000 x 100 = 12,27%
There was an improvement of 1,64% over the year.

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REGENT Business School 51
Financial and Managerial Accounting: Question Bank MBA

(4) Gross profit percentage

Gross profit x 100


Revenue

2010: R59 000 R284 000 x 100 = 20,77%


2011: R67 000 R300 000 x 100 = 22,33%
There was an improvement of 1,56% over the year, which explains the
improvement in the net profit percentage as well as the overall improve-
ment reflected by all the profitability ratios calculated.

(5) Current ratio

Current assets : Current liabilities


2010: R117 600 : R61 000 = 1,93 : 1
2011: R139 400 : R80 000 = 1,74 : 1
The generally accepted ratio is 2:1. The ratio of Synon Limited is
therefore below the required standard for both years.

(6) Acid test ratio

Current assets less inventory : Current liabilities


2010: R(117 600 – 60 000) : R61 000 = 0,94 : 1
2011: R(139 400 – 67 000) : R80 000 = 0,91 : 1
The generally accepted ratio is 1:1. The ratio of Synon Limited is below
the standard and indicates a liquidity problem, especially when the large
short-term loan is considered, which must be repaid within twelve months.

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REGENT Business School 52
Financial and Managerial Accounting: Question Bank MBA

(7) Debtors‟ collection period

Trade debtors (receivables) x 365 days


Credit sales

2010 2011
R 56 800 x 365 days R 71 900 x 365 days
284 000 300 000
= 73 days = 87.5 days

There was an increase in the collection period from 2010 to 2011. The
collection period must be improved- try to encourage early payment from
customers/debtors

(8) Creditors‟ collection period

Trade creditors (payables) x 365 days


Credit purchases

2010 2011
R 61 000 x 365 days R 50 000 x 365 days
235 000 240 000

= 94.75 days = 76 days

There was a decrease in the payment period from 2010 to 2011.

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REGENT Business School 53
Financial and Managerial Accounting: Question Bank MBA

(9) Inventory turnover rate

Cost of sales
Inventory

2010 2011
R225 000 R233 000_____
R60 000 R67 000

= 3.75 times = 3,48 times


The inventory turnover rate has improved slightly from 2010 to 2011.

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REGENT Business School 54
Financial and Managerial Accounting: Question Bank MBA

Question 5.2

A colleague has approached you for advice in respect of a possible in investment


in MAC LTD. The financial press recently ran a brief analysis of the company
and this is attached as Appendix A below:

In addition, the press report indicated that MAC LTD is a large retailer with stores
situated around the country. The report concluded that MAC LTD is a desirable
company in which to invest although the company has had some problems in the
past, these have been largely rectified by a restructure of operations which took
place in 2007. The report however did not give any basis for the conclusion as to
why the share would make a good investment.

REQUIRED:
Prepare a review of the ratios‟ in respect of MAC LTD that are presented in
Appendix A below. Your review should highlight the points of strength or
weakness and the likely reasons for such strengths and weaknesses.

APPENDIX A
MAC LTD
Financial ratio’s extracted from the financial statements for the year ending
31 December:
2005 2006 2007 2008 2009
1. Turnover (R000‟s) 210 915 233 190 282 195 312 435 341 865

2. Sales Annual Growth - 10.6% 21% 10.7% 9.4%


3. Gross Profit Margin 18.4% 18.5% 14.5% 15% 15.3%
4. Net Operating Profit 5.7% 3.6% 6.9% 7.6% 7.1%
Margin
5. Operating Profit Return 9.8% 6.02% 11.6% 13.8% 13.4%
on Total Assets

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REGENT Business School 55
Financial and Managerial Accounting: Question Bank MBA

6. Times Interest Earned 1.4 x 0.9 x 2.7 x 3.5 x 3.4 x


7. Times Dividend Cover 2.9 x - 3.0 x 3.0 x 3.0 x
8. Return on Equity 6.7% (1.2)% 14.7% 19.4% 17.9%
9. Earnings per Share 53.25c (8.25)c 115.5c 173.25c 180.75
(cents) c
10. Dividends per Share 18c 0c 38.25c 57.75c 60.75c
(cents)
11. Total Liabilities to 200% 245% 287% 249% 225%
Shareholders Equity
12. Interest Bearing Debt 102% 139% 169% 127% 104%
(LTL) to Shareholders
Equity
13. Current Ratio 1.57 1.45 1.21 0.95 0.99
14. Acid Test Ratio 1.02 1.00 0.98 0.65 0.82

Solution to 5.2
REVIEW OF FINANCIAL RATIOS
(1) Turnover and sales growth
Turnover has shown a continuous increase of approximately a turnover of
10% p.a. with 2005 showing a very high increase of 21%. This ratio
would indicate that the company is maintaining its market share and
possibly increasing this market share. The inflationary index would be
considered in order to establish if there has been a real increase in
market share. The fact that the company could only show a large
increase in turnover for only one year indicates a very competitive
industry in which the company operates.

(2) Gross profit margin


Up to 2006 the company‟s gross margin has been approximately 18.5%.
And thereafter has fallen to approximately 15%.
The falling G.P. margin can be attributable to either an increase in cost of
sales or a decrease in selling price. The change in G.P. margin took
place in the same year that sales experience a large increase in turnover.

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REGENT Business School 56
Financial and Managerial Accounting: Question Bank MBA

The company could have stimulated sales by applying a smaller mark up


on the cost price or cut the selling price of their goods. In this case it
would appear that the market is price sensitive – not wise for the
company to increase its margins any further.

(3) Operating profit margin


The operating profit margin is increasing since 2006 when it was at its
lowest. However the sale sin 2006 was greater than in 2005. This meant
that the company was operating inefficiently. Since 2007 however the
company would appear to be more efficiently run with operating costs as
a percentage of turnover remaining fairly constant except for the increase
in 2009.

(4) Dividends per share and earnings per share:


2009 2008 2007 2006 2005
Percentage increase in EPS 4% 50% 1 500% (115%) -

The change in earnings per share has indicated widely fluctuating


percentages. This would be due to items such as interest and taxation as
the operating profit of the company remained static when compared to
turnover. The company faces an interest risk, which is indicated by the
negative earnings per share in 2006, the fairly low interest cover ratios
and high debt/equity ratios. The company must attempt to decrease their
expense in terms of debt by repaying debt where possible or control
interest expense by re-negotiating with their bankers. The repayment of
debt has occurred to a certain extent. The company has maintained a
constant dividend ratio of three times, except in 2006 when no dividend
was paid. While this ratio is considered a safe margin and allows for the
dividend to be easily maintained in the future, the company should
consider increasing this ratio to allow for cash retention in the company.
This additional cash could be used to decrease liabilities or funding for
expansion purposes.

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REGENT Business School 57
Financial and Managerial Accounting: Question Bank MBA

(5) Return on assets


This ratio has increased considerably since 2006, which indicates the
higher levels of efficiency that have been introduced in the company.
Sales, costs and assets drive the return of assets.

(6) Return on equity


The return on equity is driven by the return on assets, leverage and
taxation. The company is highly levered but the benefits of such leverage
cannot be determined without further information on interest and liabilities.
The drop in 2009 is of concern as it indicates that the effects of leverage
may not be working that well for shareholders.

(7) Debt/equity ratios


The interest levering debt/equity ratio has been reduced to more
acceptable levels since 2007. This would reduce the strain of interest on
the company‟s net profit. The total debt/equity ratio has however
remained excessively high, which indicates that the company makes use
of its short-term possibility interest free debt. This may be of benefit on
the company in terms of cash flows but shows a large liquidity strain on
the company when they have to be paid or if the levels were to reduce
due to a change in the economy. Overall the ratios are risk indicators and
even though the interest times cover has remained constant the company
must be considered to be risky. This higher level of risk will mean that
shareholders will require additional returns from the company.

(8) Current Ratio


The company is making extensive use of short term debt. While this is not
bad working capital management, the company appears to be depleting its
cash reserves which should be available for payment of such debt. The
current ratio has fallen below 1 and this indicates a high level of liquidity risk.

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REGENT Business School 58
Financial and Managerial Accounting: Question Bank MBA

Chapter 6

Working Capital Management

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REGENT Business School 59
Financial and Managerial Accounting: Question Bank MBA

Question 6.1

Ayoba Limited
The financial manager was presented with the following information:

2011 2012
R R
Stock: Raw materials 145 800 180 000
Work in process 97 200 93 360
Finished goods 129 600 142 875
Purchase of raw materials 702 600 720 000
Cost of goods sold 972 000 1 098 360
Sales 1 080 000 1 188 000
Debtors 259 200 297 000
Trade Creditors 105 300 126 000

In planning for the year 2013, it is estimated that if the period of credit allowed to
customers were reduced to 60 days, this would result in a 25% reduction in
sales, but would probably eliminate about R30 000 per annum in bad debts. It
would be necessary to spend an additional R20 000 per annum on credit control.
The company presently relies heavily on overdraft finance with an after tax cost
of 9%.

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REGENT Business School 60
Financial and Managerial Accounting: Question Bank MBA

REQUIRED:
a. Calculate the length of the working capital cycle for the past two years.
b. State the possible actions and disadvantages.

Solution to 6.1
Ayoba Limited
a.
2011 2012
Days Days
Raw Materials Stockholding
(Raw Materials Stock Purchases) x 365 76 91
Hint: (2012) 180 000/720 000 x 365
Production Time 37 31
(W.I.P. Cost of Sales) x 365
Finished Goods Stockholding
49 47
(Finished Goods Cost of Sales) x 365
Credit given to customers
88 91
(Debtors Sales) x 365
250 260

Less: Finance from Suppliers


55 64
(Trade Creditors Purchases) x 365
Cash to Cash Cycle 195 196

(2) Possible Actions and Disadvantages


2.1 Reduce raw materials shareholders.

2.2 Obtain more finance form suppliers by delaying payments. This could
result in deterioration in commercial relationships or even loss of
reliable sources of supply, discounts may also be lost.

2.3 Reduce work in progress by reducing production volume. This would


lead to loss of business and the need to cut back on labour resources.

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REGENT Business School 61
Financial and Managerial Accounting: Question Bank MBA

2.4 Reduce finished goods by re-organising production schedule and/or


distribution methods. This may affect efficiency with which customer
demand can be satisfied.

2.5 Reduce credit given to customers by individuals and following up


outstanding amounts quickly or possibly offering discount incentives.
The main disadvantages would be the potential loss of customers as a
result of this policy.

Question 6.2

The working capital (or cash to cash) cycle which requires financing, is the length
of time between payment for material entering into stock and receipt of the
proceeds of sales. The following data was extracted from company statements
for the previous year:

Credit purchases R 518 400


Credit sales R 864 000
Opening stock R 215 690
Closing stock R 170 000
Debtors R 172 800
Creditors R 89 480

REQUIRED:
a. Calculate the length of the working capital cycle by making use of the
ratios, days stock on hand; debtors collection period and creditors
settlement period (365 days in a year)

b. Calculate the stock turnover times for the previous year.

c. List possible actions that might be taken to reduce the length of the
working capital cycle, and the possible disadvantages of each.

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REGENT Business School 62
Financial and Managerial Accounting: Question Bank MBA

Solution to 6.2
a. Debtors collection period
172 800 x 365 = 73 days
864 000
Days stock
170 000 x 365 = 100 days
564 090*
* Calculation of cost of goods sold
Opening stock 215 690
+ Purchases 518 400
- Closing stock 170 000
564 090
Creditors settlement period
89 480 x 365 = 63 days
518 400
Cycle 73 + 110 – 63 = 120 days

b. Stock turnover times = 864 000/192 845* = 4,48 times


* Average of opening + closing stock

c. Debtors: Stricter debtors control to ensure timely payments


Discounts for earlier payments
Factoring of debtors
Possibility of losing clients

Stock: Carrying less stock for the same turnover


Shorten order and delivery periods
Stock-outs can be costly because it could lead to production delays
and not having stock of finished goods available for sale
Creditors: Keep back payments of creditors
Reschedule suppliers debt
Could lead to late or withholding deliveries

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REGENT Business School 63
Financial and Managerial Accounting: Question Bank MBA

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REGENT Business School 64
Financial and Managerial Accounting: Question Bank MBA

Chapter 7

Capital Budgeting

(Long-term Planning)

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REGENT Business School 65
Financial and Managerial Accounting: Question Bank MBA

Question 7.1

Debbie Ltd has the opportunity to invest in a project with the following estimated
future cash flows:
Year 1 R 2 400 000
2 3 000 000
3 4 000 000
4 3 200 000
5 1 800 000
The cost of the project is R 8 million. Ignore taxation. The company‟s required
rate of return (cost of capital) is 14%. The project has a zero residual value.

The following PV Formula is given:

12% 14% 16%


Period 1 0,893 0,877 0,862
2 0,879 0,769 0,743
3 0,712 0,675 0,641
4 0,636 0,592 0,522
5 0,567 0,519 0,476
6 0,507 0,456 0,410

REQUIRED:
Calculate the following for the project:
1. The payback period
2. The discounted payback period
3. Net present value

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REGENT Business School 66
Financial and Managerial Accounting: Question Bank MBA

Solution to 7.1
1. The Payback Period
Cost (R8 000 000)
Inflow Year 1 2 400 000
R 5 600 000

Inflow Year 2 R 3 000 000


R 2 600 000

Year 3 R2 600 000


R4 000 000
= 0,65

The payback is approximately 2 years and 8 months (0,65 x 12 mths)

2. Discounted payback period

Cost (R8 000 000)


Year 1 2 104 800
R 5 895 200
Year 2 R 2 307 000
R 3 588 200
Year 3 2 700 000
R 888 200

Year 3 888 200


R1 894 400
= 0,47

The discounted payback period is approximately 3,5 years.

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REGENT Business School 67
Financial and Managerial Accounting: Question Bank MBA

3. Net Present Value


R P.V.F(14%) Present
Value
Cost 1,000 (R8 000 000)
Net Cash Flows: Year 1 2 400 000 0,877 R2 104 800
Year 2 3 000 000 0,769 2 307 000
Year 3 4 000 000 0,675 2 700 000
Year 4 3 200 000 0,592 1 894 400
Year 5 1 800 000 0,519 934 200
Net Present Value R1 940 000

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REGENT Business School 68
Financial and Managerial Accounting: Question Bank MBA

Chapter 8

Budgeting and Costings

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REGENT Business School 69
Financial and Managerial Accounting: Question Bank MBA

BUDGETING
8.1 “Budgets are half used if they serve only as a planning device”.
Comment on this statement.

8.2 What are the principal considerations involved in preparing a production


budget?

8.3 The following is the sales forecast (in units) of NMC Ltd that
manufactures two products viz. product X and product Y:

November 20.11 December 20.11 January 20.12


Product X 3 000 4 500 4 000

Product Y 4 000 6 000 5 000

The selling price per unit of product X is R20 and the selling price of
product Y is R30.

Required:
 Prepare a sales budget for the period 1 November 20.11 to 31 January
20.12.

8.4 Byte Solutions makes and sells computers. On 31 March 20.11, the
entity had 60 computers in inventory. The company‟s policy is to
maintain a computer inventory of 5% of the following month‟s sales.

The sales forecast for the second quarter of the year is:
April 1 200 computers
May 1 000 computers
June 900 computers

Required:
Draw up a production budget for April and May 20.11.

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REGENT Business School 70
Financial and Managerial Accounting: Question Bank MBA

BUDGETING
Solution to 8.1- 8.4
8.1 A budget is a planning device as it guides executives to anticipate the
influence and impact of a given set of events on the firm‟s business and
its resources. A budget also serves as an effective tool for managerial
control by providing a proper yardstick for the evaluation of actual
performance.

8.2 Quantity required to meet projected sales.


Opening and closing levels of inventories.
Maximum production capacity of the firm.
Available storage facilities.
Amount of investment required.

8.3 Sales budget

Product November December January


Units/price R Units/price R Units/price R
Product 3 000 @ 60 000 4 500 @ 90 000 4 000 @ 80 000
X R20 120 R20 180 R20 150
Product 4 000 @ 000 6 000 @ 000 5 000 @ 000
Y R30 R30 R30
180 270 230
000 000 000

8.4

Production budget April May


Sales forecast (in units) 1 200 1 000
Desired closing inventory of finished goods 50 45
Total budgeted production needs 1 250 1 045
Opening inventory of finished goods (60) (50)
Required production 1 190 995

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REGENT Business School 71
Financial and Managerial Accounting: Question Bank MBA

Question 8.5

The members of Mumbai Kings Ltd decide to prepare a cash budget for
November and December 2011. The following information is available:

Actual Budgeted
August September October November December
R R R R R
Sales:
Cash 194 500 235 700 275 000 250 500 368 000
Credit 287 300 350 000 410 000 400 400 697 000
Purchases 510 000 490 000 495 000 520 000 680 000
Salaries & 72 600 72 600 72 600 72 600 72 600
Wages
Sundry 17 800 18 400 22 000 22 600 25 700
Expenses

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REGENT Business School 72
Financial and Managerial Accounting: Question Bank MBA

Additional information
1. Cash in respect of credit sales is collected as follows:
50% within 30 days
30% within 60 days
15% within 90 days
The balance is written off as irrecoverable.

2. The following discounts are allowed on sales:


10% on cash sales
7.5% on credit sales if accounts are settled within 30 days.

3. All salaries, wages and sundry expenses are paid in cash.

4. Sundry expenses include depreciation of R4 200 per month.

5. Seventy-five (75%) of all purchases are on credit and paid within 30 days.
The balance is paid in cash.

6. A year-end bonus to employees totalling R20 000 will be paid in


December.

7. The cash in the bank on 31 October 2011 was R21 500.

REQUIRED:
Prepare a cash budget for the period 1 November and 31 December
2011.

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REGENT Business School 73
Financial and Managerial Accounting: Question Bank MBA

Solution to 8.5

CASH BUDGET
November December
Opening Balance 21 500 (7 580)
Cash Receipts: 563 170 691 885
Sales after discount 225 450 331 200
Cash from debtors* (Note 1) 337 720 360 685
Total cash available 584 670 684 305
Less: Cash payments 592 250 674 100
Cash paid to creditors 371 250 390 000
Cash purchases 130 000 170 000
Salaries and wages 72 600 92 600
Sundry expenses 18 400 21 500
Closing Balance (7 580) 10 205

*Note 1: Cash from debtors


November December
August 43 095 -
September 105 000 52 500
October 189 625 123 000
November - 185 185
December - -
337 720 360 685

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REGENT Business School 74
Financial and Managerial Accounting: Question Bank MBA

Question 8.6

COSTINGS
The following data have been extracted from the budgets and standard cost of
ABC Ltd., a company which manufactures and sells a single product.
R
Selling price (per unit) 45.00
Direct material cost (per unit) 10.00
Direct wages per unit 4.00
Variable overhead 2.50

Fixed production overhead costs are budgeted at R100 000 per quarter.
Normal production levels are thought to be 320 000 units per annum.
Budgeted selling and distribution costs are as follows:
Variable R1,50 per unit sold
Fixed R20 000 per quarter

Budgeted administration costs are R30 000 per quarter. The following pattern
of sales and production is expected during the first three months (quarter) of
2012:
January – March
Sales (units) 60 000
Production (units) 70 000

There is to be no stock on 1 January 2012.

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REGENT Business School 75
Financial and Managerial Accounting: Question Bank MBA

REQUIRED:
Prepare profit statements for the quarter using:
8.6.1 Marginal costing
8.6.2 Absorption costing

8.6.3 Reconcile the profits reported for the quarter January – March 2012 in
your answer to (1) above.

Solution to 8.6

Calculation of unit costs R


Direct material cost 10.00
Direct wages cost 4.00
Variable overhead cost 2.50
Variable manufacturing cost 16.50
Fixed manufacturing cost (R400 000 320 000) 1.25
Total Manufacturing cost 17.75

Profit Statement
8.6.1 Marginal Costing R
Production costs: Variable 1 155 000 (70 000 x R16.50)
Less: Closing stock (165 000) (10 000 x R16.50)
990 000
Selling and distribution costs: Variable 90 000
Total variable costs 1 080 000
Revenue from sales 2 700 000
Contribution 1 620 000
Fixed production costs (100 000)
Fixed selling & distribution costs (20 000)
Fixed administration costs (30 000)
Budgeted profit 1 470 000

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REGENT Business School 76
Financial and Managerial Accounting: Question Bank MBA

8.6.2 Absorption Costing R


Total production costs 1 242 500 (70 000 x R17.75)
Less: Closing stock (177 500) (10 000 x R17.75)
1 065 000
Add: Under absorption of production
Overhead 12 500 (10 000 x R1.25)
Total Selling and distribution costs 110 000
Administration costs 30 000
1 217 500
Revenue from sales 2 700 000
Budgeted profit 1 482 500

8.6.3 The difference in profits of R12 500 is due to the fact that part of the
fixed production overheads (10 000 x R1.25 per unit) are included in the
closing stock valuation – not recorded as expense marginal costing system –
fixed manufacturing costs – recorded as expense.

Question 8.7

STANDARD COSTING AND VARIANCES

Tringer Toys has developed a new toy called Brainbuster. The company has
a standard cost system to help control costs and has established the following
standards for the Brainbuster toy:
Direct Materials 8 diodes per toy @ 30c per diode
Direct Labour 1,2 hours per toy @ R7,00 per hour
Variable manufacturing overhead 1,2 hours @ R3 per hour

During August, the company produced 5 000 Brainbuster toys. Production


data on the toy for August follow:

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REGENT Business School 77
Financial and Managerial Accounting: Question Bank MBA

Direct materials 70 000 diodes were purchased for use in production at a


cost of 28c per diode. Some 20 000 of these were still in
inventory at the end of the month.
Direct labour 6 400 direct labour hours were worked at a cost of
R 480 000
Variable manufacturing overheads costs incurred R17 600

REQUIRED:
Compute the following variances:
a. Material price variance
b. Materials quantity variance
c. Labour rate variance
d. Labour efficiency variance
e. Variable overhead spending variance
f. Variable overhead efficiency variance

Solution to 8.7
a. Material price variance
70 000 (.28 - .30) = 1 400 Favourable (F)

b. Materials quantity variance


.30 (50 000 kg – 40 000 kg) = 3 000 Unfavourable/ Adverse (U)

c. Labour rate variance


6 400 hours (7.50 – 7.00) = 3 200 U

d. Labour efficiency variance


7(6 400 hrs – 6 000 hrs) = 2 800 U

e. Variable overhead spending variance


6 400 hours (3.00 – 2.75) = 1 600 U

f. Variable overhead efficiency variance


3(6 400 hours – 6 000) = 1 200 U

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REGENT Business School 78
Financial and Managerial Accounting: Question Bank MBA

Chapter 9

Cost-Volume-Profit Analysis

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REGENT Business School 79
Financial and Managerial Accounting: Question Bank MBA

Question 9.1

Sharp Ltd produces a single product that sells for R30 per unit. Variable costs
to manufacture and sell are R16 per unit. Fixed costs and expenses are
budgeted at a total of R 54 600 per period.

REQUIRED:
Answer the following independent questions:
1. Calculate the break even point in Rands.
2. Calculate the income to be expected on sales of R 240 000.
3. Calculate the sales revenue required to produce net income of R7 000.
4. If fixed costs were to be increased by R 25 760, calculate the increase
in sales revenue that would be required to cover the increase.
5. If the selling price is decreased by 20%, what percentage increase in
the number of units sold is necessary to offset this decrease in sales
price.

Solution to 9.1
1. Break Even Point (Rands) = 54 600
46.67%

= R117 000

2. Sales (8 000 x R30) = R240 000


Variable Costs (8 000 x R16) = R128 000

Marginal Contribution = R112 000


Less: Fixed Costs 54 600
Net Income 57 400

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REGENT Business School 80
Financial and Managerial Accounting: Question Bank MBA

3. Let Y = Sales Revenue Required


Net Income + Fixed Costs = Y x marginal income contribution %
7 000 + 54 600 = 0.4667Y
Therefore Y = R132 000

4.Let Y = Increase in Sales Revenue


Increase in Fixed Costs = Y x marginal income contribution %
25 760 = 0.4667Y
Therefore Y = R55 200

5. Current Break Even Sales (units) = R54 600


R14
= 3 900 units
Cut in Selling Price 20% x R30 = R6
New Selling Price = R24

New Marginal Contribution per unit:


Sales price per unit = R24
Variable cost per unit = R16
Marginal contribution per unit = R8

New break even sales = R54 600


R8
= 6 825 units
6 825 = 1.75 therefore 75% increase in unit sales
3 900

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REGENT Business School 81
Financial and Managerial Accounting: Question Bank MBA

Question 9.2

The budget of Zebra Ltd for 2007 includes the following information:
Expected sales for the year 20 000 units
Variable cost per unit R 6.00
Fixed overheads for the year R 25 000

REQUIRED:
a. The average total investment in the company is R150 000, and the
expected return on that investment is 20%. Calculate the selling price
per unit if the shareholders are to obtain the expected return on
investment (before tax.).

b. Assuming that the selling price is R10 per unit:


1. Calculate the budgeted break-even value.
2. Calculate the budgeted margin of safety ratio.
3. Calculate the number of units, which must be sold if the
shareholders wish to earn the expected return on investment
(before tax).
4. Calculate the budgeted net profit after tax for 2007 if the taxation
rate is 40%.

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REGENT Business School 82
Financial and Managerial Accounting: Question Bank MBA

Solution to 9.2

a. Total investment R150 000 x 20% = R30 000. Therefore net profit required
is R30 000.
Sales = FC + VC + Profit
= 25 000 + (6 x 20 000) + 30 000
20 000 units = 175 000
Selling price = 175 000/20 000 = R8.75

b. (1) Breakeven sales = Fixed costs_____


(Value) Marginal income ratio MI ratio = 10 – 6/10 = 40%

= 25 000
40%

= R62 500

(2) Budgeted sales = 2 000 units x R10 = R200 000


Breakeven sales = R62 500

Sales – Breakeven sales = 200 000 – 62 500


Sales 200 000
= 68.75%

(3) Return on investment = R30 000 (see above)

Fixed Cost + Profit = 25 000 + 30 000


MI per unit 4

= 13 750 units

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REGENT Business School 83
Financial and Managerial Accounting: Question Bank MBA

(4) Units Value


R
Sales 20 000 200 000
Less: Variable costs 20 000 120 000
Marginal income 80 000
Less: Fixed costs 25 000
Net profit 55 000
Taxation 22 000
Net profit after tax 33 000
======

(5) Net profit after tax R45 000


Taxation 40%
Therefore Profit after tax = 60%

Net profit before tax = 45 000 x 100 = R75 000


60

Fixed costs = 25 000 + 21 000 = R46 000

Fixed Cost + Profit = 46 000 + 75 000


MI ratio 40%

= R302,500

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REGENT Business School 84
Financial and Managerial Accounting: Question Bank MBA

Question 9.3

Lishke Sales Company is the exclusive distributor for a new product. The
product sells for R60 per unit and has a CM ratio of 40%. The company‟s
fixed expenses are R360 000 per year.

REQUIRED:
1. What are the variable expenses per unit?
2. What is the break-even point in units and in sales (Rand)?
3. What sales level in units and in sales (Rand) is required to earn an
annual profit of R90 000?
4. Assume that through negotiation with the manufacturer the Lishke
Sales Company is able to reduce its variable expenses by R3 per unit.
What is the company‟s new break even point in units and in sales
(Rand).

Solution to 9.3
Item Total Per Unit %
Sales 60 100
Variable Expense 36 60
Contribution Margin 24 40
Fixed Expense 360 000
Net Income

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REGENT Business School 85
Financial and Managerial Accounting: Question Bank MBA

1. Variable expense per unit = R36


[Selling price per unit @ R60 x (100% - 40%)]

2. Break-even point in sales (Rand)


Fixed expenses/Contribution margin %
360 000/40%
R900 000

Break-even point in units


R900 000/60 per unit
15 000 units
3.
Item Total Per Unit %
Sales 1 125 000 60 100
Variable Expense 675 000 33 60
Contribution Margin 450 000 27 40
Fixed Expense 360 000
Net Income 90 000

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REGENT Business School 86
Financial and Managerial Accounting: Question Bank MBA

Sales level in units = R1 125 000/R60


= 18 750 units
Sales level in rand = R1 125 000

4. Sales R60 per unit (100%)


Variable expenses R33 per unit (55%)
Contribution margin R27 per unit (45%)

Break-even point in sales (Rand)


Fixed expenses/Contribution margin %
360 000/45%
R800 000

Break-even point in units


R800 000/60 per unit
13 334 units

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REGENT Business School 87