Suggested Solution

Sample exam questions 2

Question 1

(a)
 The loan is not a non-current liability for the year 2018 because the company is
merely plan or having intention to apply for it in 2019.
 For a liability to be recognised in a balance sheet, the company needs to show that the
obligation to sacrifice future economic benefits is present in the current financial year
In their answers, these 2 points must be clearly related to the situation.

(b)
 The statement of CF tells us how the business has generated cash during the period
and where that cash has gone. It provides details of the sources and uses of cash that
cannot be determined from the other financial statements.
 The cash flows are classified in three categories – operating, investing and financing
activities.

(c) i- Cost of sales = 54,000+130,000-44,000 = 140,000

ii- Gross profit = 200,000 - 140,000 = 60,000
iii- Net profit = 60,000-2,000-1,500-3,500= 53,000

Question 2
A. The current ratio increased from 2.1:1(in 2018) to 3.1:1 (in 2019), suggesting that the
company has improved liquidity. However, the quick ratio decreased to 0.8:1 (in
2019) from 1.4:1 (in 2018). This is an unfavourable indication as to immediate
liquidity. This could also be explained by the slower inventory turnover in 2019 (165
days) than in 2018 (110 days), suggesting the increase in current assets in 2019 was
mainly due to the accumulation of inventory.
B. The ratios reveal that the accounts receivable turnover ratio is longer for 2019 (63
days) than 2018 (21 days), indicating that the company took longer time to receive
payments from its credit customers. This indicates the company is having problems
with collecting debts. Nevertheless, there is not much difference between the times
taken to pay accounts payable. In 2019, it took 50 days to pay its accounts payable,
whereas in 2018 it took 48 days. It is interesting to compare the difference in the
accounts receivable and accounts payable collection periods for these two years. Since
in 2019, the company allowed an average of 63 days’ credit to its customers, yet pays
accounts payable within 50 days, it will require greater investment in working capital
in 2019 than in 2018, during which it only allowed an average of 21 days to its
accounts receivable but took 45 days to pay its accounts payable.

C. In 2019, the company had a much higher gross profit percentage than in 2018.
However, the net profit percentage for the two years was identical, which was 10%.

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 This suggested that in 2019, the company had much lower cost of goods sold, but
higher operating costs than in 2018.

Question 3
A. There are two possible answers:
• To offer fewer choices to customers will reduce the level of clothing
inventory being held.
• OR, with a narrower range of clothing, the business might want to increase
the quantity of clothing to keep.
Either answer is acceptable. Award points only to ONE answer.
B. There are two possible answers:
 The business might increase in the purchase of the components from the existing
supplier, to take account of the defective element in inventory acquired. It would
have to spend longer inspection time for items received. This would lead to a rise in
inventory levels.
 OR, the business might reduce the purchase from the existing supplier to avoid the
costs of having low quality components in its assembly lines. However, the business
would need to find a new supplier who can provide a good quality of components. In
the end, the business would have a normal level of components again.

Either answer is acceptable. Award points only to ONE answer.

Question 4

a. Projected cash inflows from debtors in:

January: (60% x 20,000) + (40% x 40,000) = $28,000
February: (60% x 30,000) + (40% x 20,000) = $26,000
Cash inflows from sales in March
= 22,000 + (60% x 40,000) + (40% x 30,000) = $ 58,000
b. With a cash budget, short-term problems such as the shortage of cash can be
predicted before it has actually happened. A company can then arrange for
contingency plans, for example, to consider taking additional loans or devise
strategies to cut down costs. By preparing a cash budget, a company could also
expect that it will have excess cash in the future. With this expectation, the
company can plan for additional investments to maximise the return on the excess
cash or plan to expedite the repayment of existing loans.

Question 5

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Solution 5A
i. Assuming the business intends to adopt each proposal individually, discuss the
impact of each proposal will have on the break-even point.
 Advertising cost will increase the fixed cost, hence break-even point will
be higher
 Lower selling price will make break-even point higher because of lower
contribution.
 Lower variable cost will increase contribution margin but the equipment
will increase the fixed cost, therefore the break-even point will not change
so much if the amount of decrease in the variable costs is not so different
from the amount of increase in the fixed costs.
[Answers must be clearly explained]

Solution 5B
 The change in profit for:
Venus: (40,000 – 16,000)/16,000 = 150%
Saturn: (54,000 – 9,000)/9,000 = 500%
 Venus has higher contribution margin than Saturn, where the selling price and
variable cost per unit is higher and lower than Saturn’s, respectively. Therefore,
every increase in unit sold contributed to higher profit because of its lower variable
cost per unit. Since Venus is now operating after the break-even point, total
contribution generated by sales is more than enough to cover its huge fixed cost.
 In contrary, Saturn, which has lower contribution margin, was slower in generating
profit. Although it is now operating after the break-even point and has more than
enough revenue to pay it fixed cost, its total variable cost raise in proportion to the
increase in unit sold.

Question 6
A. Explain 2 non-financial factors a company need to consider before deciding to
approve an investment with positive NPV?
 Agreements with suppliers and customers
 The project could result in dissatisfaction among the workers for example, the
need to lay off personnel due to duplicating jobs.

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  The project could cause environmental pollution which could compromise the
company’s image.
[Answers may consist the above points or other logical factors. All points must be
clearly explained]
B. Evaluate the proposed projects below. Based on the information given, which project
would you choose to take on? Clearly explain your reasons.
Accounting rate Payback period Net present
of return value
Project 1 25% 2.25 years 69,700
Project 2 21% 5 years 93,600

 Choose Project 1 because it has higher ARR and shorter payback period. Also, the NPV
> 0. These indicate that Project 1 is more profitable than Project 2. The company could
recoup the initial investment amount in 2.25 years, which is much earlier than Project
2. Although NPV for Project 1 is smaller than Project 2, Project 1 is a good project
because its NPV is positive.
 Alternatively, assuming the company is not risk averse, they may accept Project 2
because they are willing to accept the longer payback period (higher risk) because of
the considerably higher NPV. It is also worth rewarding answers noting that both AAR
and PP ignore the time value of money.