ACC10007

Financial Information for Decision Making

Sample Final Examination 2

Weighting: 50% of total assessment

Time allowed: 3 hours
Reading time: 10 minutes

Instructions:

Please attempt ALL questions

Please answer all questions in the answer booklet provided.

Good luck

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Question 1 (10 marks)
Hawthorn Industries
Balance Sheet as at 30th June 2014 and 2015
2014 2015
$ $
Current Assets
Cash --------- 2,400
Accounts receivable 56,600 81,400
Stock 24,400 30,400
Prepaid expense – Rent -------- 10,000
81,000 124,200
Non Current Assets
Vehicle 50,600 60,600
Less Accumulated
---------
depreciation (5,060)
Building 20,000 20,000
70,600 65,540

Total Assets 151,600 199,740

Current Liabilities
Accounts payable 37,200 65,200
Accrued expenses - wages - 1,720
Bank overdraft 16,600 --
53,800 66,920
Non Current Liabilities
Loan - 15,000
Total Liabilities 53,800 81,920

Equity
Capital 50,000 50,000
Retained earnings at beg. 47,800 47,800
Add Net profit - 66,020
Less Drawings - (46,000)

Total Equity 97,800 117,820

Total Liabilities and Equity 151,600 199,740

2
 Hawthorn Industries
Profit or Loss Statement for the year ended 30 June 2015

$ $
Sales 456,000

Less Cost of goods sold 251,000

Gross profit 205,000

Less expenses

Van running expenses 38,000

Electricity expense 5,400

Depreciation 5,060

Interest 1,200

Wages expense 49,320

Premise rent expense 40,000

Total expenses 138,980

Net Profit 66,020

Required: Prepared a Cash Flow Statement for Hawthorn Industries for the year ended 30th
June 2015.

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Question 2 (22 marks) Part A (15 marks)
Woolco is a company which manufactures jumpers. In the past few years, the company has
experienced declining profits The CEO has called for a review to determine whether the
jumpers are profitable. The most recent financial results are presented below:

$ $
Sales revenue (90,000 units) 900,000

Manufacturing Cost of Goods

Sold:
Direct material 100,000
Direct labour 350,000
Variable factory overhead 60,000
Variable Sales 20,000
commissions(constant per unit
sold)
Variable Delivery costs 55,000 585,000
(constant per unit sold)

Fixed costs 270,000

Profit 45,000

Required:
i) Calculate the number of units required for the company to breakeven
ii) Calculate the margin of safety.
iii) How are the break even units related to margin of safety units?
iv) What is the contribution margin ratio
v) If labour is a scarce resource for Tweed Company how might the business maximise
its profits?
Part B (7 marks)
In a strategy meeting, the manufacturing director said, ‘If we raise the price of our product, the
company’s break-even point will be lower’. The financial director responded by saying, ‘Then
we should raise our price. The company will be less likely to incur a loss’. Do you agree with
the manufacturing director? Give reasons. Do you agree with the financial director? Explain
your answer.

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Question 3 (17 marks)
Part A
East Ltd uses a predetermined overhead rate in applying overheads to product costs, using
direct labour costs for cost centre X and machine hours for cost centre Y. The following
details the estimated forecasts for 2014.
Cost Centre X Cost Centre Y
Direct labour hours 9,000 3,500
Direct labour costs $200,000 $ 70,000
Machine hours 1,000 10,000
Production overheads $ 70,000 $150,000

Required:
a) What is the predetermined overhead rate cost for centres X and Y?
b) What would be the overhead rate costs if we used machine hours for X and direct labour
hours for Y?
c) What is the main limitation of full costing?

Part B
‘Outside the relevant range, cost behaviour patterns may not hold.’ Explain this statement.

Part C

In estimating the costs of products, manufactures usually identify direct material, direct labour
and manufacturing overhead costs. What modifications may be made to these classifications
in estimating service costs?

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Question 4 (21 marks) Part A (10 marks)
Kothare Cutlery produces unique knives for use in up market restaurants. Production capacity
is 40,000 knives per year. Due to the closure of some up market restaurants due to the
current economic climate and therefore less discretionary income among customers, Kothare
Cutlery now has spare capacity of 4,000 knives per year. However, one very successful
restaurant, Vue de Clare, has recently contacted Kothare Cutlery to place a one-off order for
6,000 knives.
Budgeted costs for 40,000 knives are:
• Variable manufacturing costs $1,600,000 Fixed manufacturing costs $1,800,000
Knives normally sell for $200 each, and Vue De Clare has offered to pay$180 per knife. Vue
de Clare has also requested that each knife be presented wrapped in a cloth containing the
company’s name. This extra item would involve a machine costing $40,000 and would need
to be purchased by Kothare Cutlery. The machine could not be used for other products.
Required:
a) From a financial perspective, should Kothare Cutlery accept the special order?
b) What other factors should be considered before the order is accepted?

Part B (11 marks) Complete the table by classifying the costs according to their probable
response to changes in activity levels over the relevant range.
Cost type Business Variable Semi-variable Fixed
Flour Baker

Equipment depreciation Farmer

Electricity Restaurant

Flowers Florist

Vehicle registration Bus company

Equipment repairs Builder

Telephone charges Accountant

Landing fees Airline

Logs Sawmill

Insurance Electrical
repairs
Sales commission Retailer

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Question 5 (10 marks)
1. Which of the following is NOT an issue to be taken into account when deciding between
long-and short-term borrowing?
a) Flexibility
b) Balance Sheet Disclosure
c) Re-funding
d) Interest rates

2. Which of the following is an advantage of using retained profits as an internal source of

finance?
a) There are no issue costs
b) It is a ‘cost free’ source of funds
c) The amount raised is certain
d) Options a) and c)

3. Which of the following statements is incorrect?

a) A rights issue is an example of a share issue
b) A bonus issue is an example of a share issue
c) A non-renounceable rights issue is an example of a share issue
d) A private placement is an example of a Debt issue

4. Liquidity refers to the ability of a company to

a) pay off long-term debt
b) raise equity capital
c) acquire the necessary assets to operate the business
d) meet short-term obligations as they mature

5. The category of financial ratios that helps users to assess the ability of the business to
generate returns for its owners is:
a) Profitability
b) Efficiency
c) Liquidity
e) Gearing
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Question 6: (20 marks)
Jessie Ltd
Balance Sheet as at 30 June 2014

Current Assets Current Liabilities

Accts Receivable 7,000 Bank overdraft 4,000
Inventory 5,000 Accounts payable 2,000
Prepaid Rent 500 12,500 Accrued wages 500 6,500
Non Current Assets Non Current Liabilities
Equipment 40,000 Loan 16,500
Less Acc Depn (4,500) 35 ,500
Total Liabilities 23,000
Equity
Capital 20,000
Retained earnings 5,000 25,000

Total Assets $48,000 Total Liabilities & Equity $48,000

Transactions for the year ending 30 June 2015

1 Credit Purchases stock $18,000
2 Cash Sales $30,000 (cost of sales $9,400)
3 Credit Sales $17,000 (cost of sales $7,400)
4 Paid Accounts Payable $13,000
5 Paid wages $9,000, wages owing @ end $1,000
6 Collection from Accounts Receivable $16,000
8. Interest paid on the loan $ 500
9. Paid Rent $8,250 incl. prepaid $250 for 2016
10. Depreciation of Equipment 15% of cost
12. Bad debts written off $ 200

Required:
1. Complete the worksheet
2. Prepare a properly classified Profit or Loss Statement for the year ending 30 June 2015
3. Prepare a properly classified Balance Sheet as at 30 June 2015

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Jessie Ltd Total Assets = Liabilities + Owners' Equity
Non
Worksheet Current Assets Non Current Assets Current Liabilities Current Owners' Equity

Notes

Balance @ beginning $

Transactions / Adjustments

Balance @ end