$120 THE UNE SEMESTER 1 EXAMINATION 1999 AFI01 : INTRODUCTION TO ACCOUNTING AND FINANCIAL MANAGEMENT PART I Time allowed: 3 Hours Suggested time allocation MARKS —{minutes) Part A: Compulsory Multiple Choice 10 10 Part B: Discussion Questions. DO only one 10 20 Part C: Problems. DO 2 out of 3 30 50 Part D: Compulsory Problems 50 90 Review paper lo Total 100 180 MATERIALS REQUIRED: Silent non-programmable calculators but will not be supplied. MULTIPLE CHOICE TO BE ANSWERED ON ANSWER SHEET PROVIDED.PART A: [rnark Si (10 marks) Compulsory Multiple Cb hy ied time 10 minutes Circle the correct answer on the answer sheet provided. Discount Traders uses a perpetual inventory system. The company sells inventory costing $3 000 at a sales price of $4 300. In recording this transaction, the accounts clerk will make all of the following entries except A B c D Credit Sales, $4 300 Credit Inventory, $4 300 Debit Cost of goods sold, $3 000 : Credit one or more accounts in the inventory subsidiary ledger for amounts totalling $3 000 2. Inwhich of the following situations should the named company not record any depreciation expense on the asset described? A. Pacific Airline is required by law to maintain its aircraft in “as good as new” condition. B. Creative Advertising owns an office building that has been increasing in value each year since it was purchased. C. South Seas Computing Suppliers has in inventory a new type of computer, designed “never to become obsolete.” D. _ None of the above ~ in each case, the named company should record depreciation on the asset described 3. The statement of cash flows is designed to assist users in assessing each of the following, except A. The ability of a company to remain solvent B, The company’s profitability C. The major sources of cash receipts during the period. D. The reasons why net cash flow from operating activities differs from net income.Which of the follow ing expenditures does not form part of the cost of an asset A demolition of an vid shop prior to building another B cost of a carpet shampoo in ¢ 100m before installing a new photocopier © painting of ¢ newly constructed building D insiallation of escalators to replace steps A partnership differs from other forms of business in which of the following ways? It is easier 10 form than a sole trader or company It can raise greater amounts of capital than a company ls profits are directly taxed by the government An owner cit be hed liable for the actions of other owners voOw> During the current year, two transactions were recorded in the Land account of Pacific Properties Ltd. One involved a debit of $320 000 to the Land account; the second wes a $210 000 credit to the Land account, Pacific Properties Lids" income statement for the year reported a loss on sale of land of $25 000. All transactions involving the Land account were cash transactions ‘These transactions would be shown in the statement of cash flows as: A. $320 000 cash provided by investing activities, and $210 000 cash disbursed for investing activities B. $210 000 cash provided by investing activities, and $320 000 cash disbursed for investing activities. C. $235 000 cash provided by investing activities, and $320 000 cash disbursed for investing activities D. _ $185 000 cash provided by investing activities, and $320 000 cash disbursed for investing activities. ‘The auditors for Milk Company Ltd found that revenue was understated and abilities were overstated. Which of the following errors could have been the cause? Making the adjustment entry for depreciation expense twice Failure to record the earned portion of fees received in advance. Failure to record interest accrued on a note payable. Failure to make the adjusting entry to record revenue which had been earned but not vet billed to clients vom>Hercules and Nena ate in partnership sharing profits equally. Their capitals are Hercules $32 400, Nena $16 200. They agree to adit Gabrielle 10 the partnership, whereby Gabrielle buys one-half of Hercules’s interest (privately for $44 000.) Afier the admission. what will be Nena’s proportion of the capital? D. None of the above The primary purpose for using an inventory cost flow assumption is to parallel the physical flow of units of inventory offset against revenue an appropriate cost of goods sold minimize income taxes maximize the reported amount of net income. one> Under the direct write-off method of accounting for bad debts. ‘A. the current year bad debts expense is less than the expense would be under the profit and loss approach 1B. the relationship between the current period net sales and current period bad debts expense illustrates the matching principle C. the allowance for doubtful debts account is debited when specific accounts receivable are determined to be worthless D_ accounts receivable are not stated in the balance sheet at net realisable Value, but at the balance of the accounts receivable control accountSECTION Bz DISCUSSION QUESTIONS (10 marks) Do Either 11 or 12. De wot attempt both, Suggesied ume 2 minuies 1} a} Professional judgement plays an important role in financial reporting. Identify three areas in which the accountant preparing financial statements must make professional judgements that will affect the content of the statements. fapprox. “4 pagel by Explain ih ved for taking a physical stocktake under both inventory systems OR 12. a) Explain why net profit differs from cash flows from operations. Include specific examples to illustrate your point . approx. *% page] b)_ Give two possitle reasons why the book value of an asset is normally not equal to the cash or trade-in value received upon its disposalSECTION C: PROBLEMS (30 marks) Do only 2 Questions from this section. Do not attempt a Su: ted time SC minutes 13 [15 marks} Equipment Rental Company had poor internal control over its cash transactions Facts about the company”s cash position at November 30, 1998 are described below The accounting records showed cash balance of $29 959.00, which included a deposit in transit of $3 420.66, The balance indicated in the bank statement was $18 299.40. Included in the bank statement were the following debit and credit items. Debits: Cheque from customer A, Lateef, deposited by Equipment Rental Co., but charged back as NSF (insufficient funds). $1500 Bank service charges for November 28 Credit: Proceeds from collection of a note receivable from Cut-rite Traders which Equipment Rental Co had Jeft with the bank’s collection department 3.000 Outstanding cheques as of November 30 were as follows Cheque No. Amount 823) $340.30 8263 800.50 8288 348.20 8294 2100.00 Melanie Chambers, the company’s cashier, has been stealing some of the company’s cash receipts for several months. Each month, Melanie prepares the company’s bank reconciliation in a way that covers up her thefts. Her bank reconciliation for November is shown below Balance per bank statement, Nov 30. $18,299.40 Add: Deposits in transit $4,320.60 Collection of note from Cut-rite Traders. 3,06 Subtotal Less: Outstanding cheques’ No, 8231 $ 340,30 8263 800.50 8288 145,20 Adjusted cash balance per bank statementBalance per accounting records, Nox 30 $29,059.00 Add Credits from bank 3,000.00 Subtotal $26.959 00 1 ess: Debits from bank NSF cheque of A Lateef $ 1500.00 Bank service charges 25.00 1,525.00 Adjusted cash balance per accounting records $25,434.00 Required: Determine the amount of cash stolen by Melanie, SHOW ALL WORKING b) Carefully review Melanie’s bank reconciliation and explain in detail how she covered up her theft. Include a listing of the dollar amounts that were concealed in various ways The total of this listing should equal the amount she stole in (a). c) Suggest two specific internal control measures which appear to be necessary for Equipment Rental Company. 14 [15 marks} Public Image, a firm specializing in marketing and publicity services uses the balance sheet approach to estimate uncollectible accounts expense. At year-end an aging of the accounts receivable produced the following classification Not yet due $ 333 000 1-30 days past due 135 000 31-60 days past due. 58 500 61-90 days past due. 13 500 Over 90 days past due 22.500 Total. f adeteta S$ 362.500 On the basis of past experience, the company estimated the percentages probably uncollectible for the above five age groups to be as follows. Group 1, 1%, Group 2, 3%; Group 3, 10%, Group 4, 20%, and Group 5, 50% The Allowance for Doubifiul Debts Account before adjustment at December 31 showed a credit balance of $8 100. Required: a) Determine the estimated amount of uncollectible accounts based on the above classification by age groupsd 3 Prepare the adjusting entry needed 10 bring the Allowance for Doubtlis! Debts A unt to the proper amount end balance in the Allowance for Doubtful peat part (bp above assuming the ve Debts Account (before adjustment jis $& 100 debit Assume that on January 10 of the fotiowing year , Pubhe Image learned that account receivable which had originated on September | of $4 530 was worthless because the customer, Video Electricals went bankrupt. Prepare the journal entry required on January 10 10 write off this account The company is considering the adoption of @ policy whereby customers whose outstanding accounts become more than 60 days past due will be required 10 sign an interest-bearing note for the full amount of their outstanding balance, What advantages would such a policy offer? [15 marks} Cooline Ltd was formed on 1 Jan, 1998 with an authorised capital of $100 000 divided into 80 000 ordinary $1 shares and 20 000 preference $1 shares,The preference shares were all issued to Steve Rambo as consideration for his business which was to be taken over by the company The assets of the business taken over and the liabilities assumed by the company are: Land and Buildings 80.000 Mortgage 67 000 Inventories 5.000 Accounts receivable 10.000 Accounts payable : 8.000 The agreement with Rambo was to be completed on 1 February of that year, the same date on which the company offered 72 000 ordinary shares to the public on terms of 40 cents payable on application by 28 February on which date 30 cents on allotment would become due, payable 31 March. Two further calls of 20 cents would be made on | May (payable by 31 May) and 1 June (payable by 30 June) of the same year. The 10 cent premium on the shares was to be considered as being included in the application amount. By the end of February, applications for 80 000 shares were received. Cash paid was refunded to unsuccessful applicants, Required: @) Prepare general journal entries (with narrations) to record the above transactions up to 31 March b) Prepare a balance sheet as at 31 Merch, 1998Required: bo Wantok Ltd Profit and Loss Statements. (in 000°s) This year Last year Sales $520 000 $460 G00 Cost of geods sold 348 400 9 000, Gross Profit $171 600, $161 000 Operating Expenses 98 200 91.000 Operating Income $ 73.400 $ 70.000 Interest Expense 18 090 12 000 Income Before Tax 55 400 58.000 Tax Expense 15,900 17.600 Net Profit $39,500 $41,000 a) Calculate the following for each year i iti iv vii SHOW current ratio quick ratio inventory tumover (inventory was $64 million two years age) equity ratio times interest earned return on assets (total assets were $386 million two years ago) retum on ordinary shareholders’ equity (ordinary shareholders’ equity was $174 million two years ago ) ALL WORKING b) Calculate common-size percentages for each year’s profit and loss statement ©) Provide a brief analysis and interpretation of your results. {approx % page]* [20 marks] Suggested time 30 minu'e: Reov Enterprises is a partnership between Die. Rua, and Tolu in which each partner share profits and losses in proportion to his tixed capital A statement of financial position for the partnership as at 30 fune 10S has been prepared Assets Liabilities Cash $8200 Accounts payable $ 10000 Inventory 20.000 Mortgage 30 000 Accounts receivable 8200 toan, Rua 20,000 Fixtures and Fittings 7000 $60,000 Plant $104 000 Less: Provision for Depreciation __26 000 78 000 Partners’ Equity Capital $12 000 Dua, Current 00) 14.000 Rua, Capital $18 090 Rua, Current 1400 19.400 Tolu, Capital $24.00 Tolu, Current __4 000 28 900 $ 61.400 1 On 1 July 1998, without any further trading taking place, the three partners voluntarily decided to dissolve the partnership. The partnership collected $8 000 from its debtors and the other assets realised the following amounts Fixtures and Fittings $ 5.000 Plant 70 000 Inventory 25.000 Tolu has been overpaid on his salary entitlement by $3 600 and Dua’s current account has priority over the other partners’ entitlement, Expenses associated with the dissolution were $3 800. [Hint: Make the salary adjustment in Realisation account. Required: Prepare the following ledger accounts to close the books of the partnership a) The Realisation account b) The partners’ equity accounts ©) The Cash account END OF PAPER