BUS1AFB Sample Exam Questions - Solutions

The following is a set of sample questions to provide you with an idea of the type of
questions you can expect on the alternative assessment (exam).

The questions have been selected from the in-class questions (with one exception
which is identified below) as you can refer to the online recordings from the
relevant week if you are looking for additional assistance with how to answer them.

Please note, some of these questions are long, you will not be given a long question
in the assessment piece however you may be given one part of a larger question.

I cannot emphasise enough, if you can complete the pre-class, in-class and
assignment questions you will be prepared for the exam. You can narrow these
down based on the course summary and the alternative assessment (exam) guide.

Please note: when you are completing the questions if you calculate the first
concept incorrectly you will only lose marks for this concept even if it means you
cannot correctly calculate the final answer. Provided you follow the correct process
we will mark the remainder of the question based on your figures and if it is
performed correctly you will then receive all marks available for the section. We do
not keep taking marks off for consequential errors that occur due to one
calculational error. Please ensure you complete the entire question asked with this
in mind.

Page 1 of 22
Week 1
When commencing a new business or purchasing an existing business it starts with a Business Plan. What
is a Business Plan and why is it important?

A Business Plan is a written document that explains and analyses an existing or proposed business, the
goals of the firm, how it will operate and likely outcomes of the planned business.

Essentially a Business Plan is a blueprint of the business conceptually similar to house plans when designing
a new house. It has all the key information and specifications listed.

Refer to pages 32-43 of the text for an example of a “real” business plan.

There are many different facets impacting on businesses in current times. One is globalisation.

Who has heard of the term “digital disruption”? What does it mean?

New technologies that transform or re-invent existing goods and services, industries and business activities.

For example electricity only started to be used in the late 1800, candles were the only form of lighting, now
we often use candles for decoration not their original use.

What is an example of digital disruption?

Cloud computing, Big Data and data analytics, mobile phone technology, AI and social media.

Think about how much data is produced every day.

Example: Facebook/Instagram – they can run data analytics on everything you have looked at – this is why
you are provided with prompts once you have googled something.

Interesting point, the unit of measurement is a “quintillion” bytes – that was at the time of printing the
text, so it’s probably higher now!

Another interesting fact is that 90% of the data in the world has been generated in the past 2 year!

Relatively new areas are:

• Cryptocurrency – bitcoin
• AI – once manufacturing and now involved in healthcare

Page 2 of 22
Week 2
List and explain the qualitative characteristics of financial reports (both fundamental and enhancing).

Fundamental qualitative characteristics

Relevance

The characteristic of relevance implies that the information should have predictive and confirmatory value
for users in making and evaluating economic decisions.

Faithful representation

The characteristic of faithful representation implies that financial information faithfully represents the
phenomena it purports to represent. This depiction implies that the financial information is complete,
neutral and free from error.

The relevance of information is affected by its nature and materiality. Information is material if omitting it
or misstating it could influence decision making. A financial report should include all information which is
material to a particular entity.

Enhancing qualitative characteristics

Comparability

The characteristic of comparability implies that users of financial statements must be able to compare
aspects of an entity at one time and over time, and between entities at one time and over time. Therefore,
the measurement and display of transactions and events should be carried out in a consistent manner
throughout an entity, or fully explained if they are measured or displayed differently.

Verifiability

The characteristic of verifiability provides assurance that the information faithfully represents what it
purports to be representing.

Timeliness

The characteristic of timeliness means that the accounting information is available to all stakeholders in
time for decision-making purposes.

Understandability

The characteristic of understandability implies that preparers of information have classified, characterised
and presented the information clearly and concisely. The financial reports are prepared with the
assumption that its users have a ‘reasonable knowledge' (para. 2.36) of the business and its economic
activities.

Page 3 of 22
Explain the following:
a. triple bottom line reporting
b. corporate governance
c. the relationship of stakeholders to corporate governance.

a. Triple bottom line reporting:

Triple bottom line reporting refers to the economic, social and environmental performance of a company.
Elkington proposes that a company’s long-term viability is a function of how well it can balance the three
areas. The concept supports the view that companies have a duty of care to society at large. The movement
is developing performance measures to assist the analysis of social and environmental performance.

b. Corporate governance:

Generally, corporate governance refers to the direction, control and management of an entity.
This includes the rules, procedures and structure upon which the organisation seeks to meet its
objectives.
c. The relationship of stakeholders to corporate governance:

There is much debate in business literature as to whether an organisation’s sole responsibility is to its
shareholders, or whether there is a wider duty of care for organisations to identify all the values and
principles at stake. A theory called ‘stakeholder theory’ proposes that the purpose of the firm ‘is to serve as
a vehicle for coordinating stakeholder interests’, not the narrow view that the purpose is to maximise
shareholder wealth. After all, the firm is an artificial entity and the shareholder purpose of the firm is simply
based on the shareholder’s right to property. Proponents of stakeholder theory view the purpose of a firm
as far greater.

It is related to corporate governance because corporate governance is about the direction, control and
management of organisations. Therefore, the management of the nation’s capital and operations rests on
the philosophy of the company directors that have the responsibility to govern enterprises. How and to what
extent they consider all stakeholder views will have an impact on society in the long term.

List and briefly explain the ethical philosophies (teleological and deontological).
Teleological approach (sometimes called consequentialism) – concerned with the consequences of
a decision.
Utilitarianism - maximise the utility of society as a whole, rather than that of individuals. This
thinking underlies the development of economics. Generally, in business, this basic principle fits
nicely with the efficiency theme. That is, it is in the public’s best interest if businesses focus on
profitability, as this will ensure the maximum production from their limited resources.
Ethical egoism - the individual decision maker decides what is best for himself or herself. the
question remains as to what extent regulation is needed to protect the interest of the community
while not stifling the risk-taking ventures of entrepreneurs that provide the impetus for wealthy
nations. In other words, what are the rules of the game, and how and who decides on them?

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Deontological approach (sometimes called idealism) – concerned with the action or decision itself.
Kantianism - an action is morally right if it is motivated by a good will that stems from a sense of
duty.
Two definitions of the categorical imperative that have been espoused are as follows.
I ought never to act except in such a way that I can also will that my maxim should become a
universal law.
Act in such a way that you always treat humanity . . . never simply as a means, but always at the
same time as an end.
The first of these maxims is similar to the ‘do unto others as you would have them do unto you’
philosophy. If you took out credit knowing that you couldn’t pay it back, would you like a universal
law that dictates that this is acceptable practice?
Kant’s philosophy is grounded in the notion of respect for the individual, hence the requirement
that people should be treated as ends and not as a means to others’ ends.
So in deciding ‘what is the right thing to do’ some would assess the benefits (short or long term)
arising from an action, while others would consider the action based on some ethical principle or
standing regardless of the outcome of the action.

What do the following terms mean?

a. Unlimited liability
b. Mutual agency
c. Dividend
d. Preference shares
e. Unit trust
a. Unlimited liability

Unlimited liability is when the individual or partnership is fully liable for all the debts of the entity.

b. Mutual agency

Mutual agency is when a partner in a partnership is seen as being an agent for the business, having the right
to enter into contracts for the business and being bound by any partnership contract.

c. Dividend

A dividend is the distribution of part of a company’s profit to shareholders. It is usually expressed as a number
of cents per share.

d. Preference shares

Preference shares rank ahead of ordinary shares if the company goes into liquidation. Preference shares also
usually have a fixed rate of dividend, which is paid out before the ordinary shareholders’ dividend is paid.

e. Unit trust

A unit trust is a type of trust that holds a collection of assets on behalf of various parties rather than family
members. Income is distributed to the parties according to their respective unit holdings in the trust. Unit
trusts usually concentrate on a particular investment such as equity, property or cash management.

Page 5 of 22
Week 3
Knowing that you have some accounting experience, a friend has sought your advice regarding a business
that she intends purchasing. The statement of financial position for the business shows total assets of
$180 000 and liabilities of $90 000. The selling business has provided no notes to accompany the
statement of financial position. On the basis of the information provided, your friend believes the
business is worth $90 000. Advise your friend as to the accuracy of her assessment and what questions
regarding the statement of financial position she should ask the seller of the business.

The carrying amount of the net assets of the entity is $90 000 (i.e. the $180 000 assets less the $90 000
liabilities). However, this does not mean that this is what the net assets of the entity are worth. Considering
the variety of measurement bases that can be applied to an entity’s assets and liabilities and the possibility
that a business may have valuable resources that are not captured on the statement of financial position (i.e.
strong management), a statement of financial position does not portray the worth of the entity. To illustrate,
consider an entity that acquired some land at a cost of $200 000 five years ago. The entity can legitimately
report the land on the statement of financial position at its historical cost (i.e. $200 000). This will not
necessarily bear any resemblance to the current value of the land. Assuming that real estate prices have
increased, the land may currently be valued at $500 000. Therefore, carrying it at $200 000 on the statement
of financial position is not reflecting its current value. As the statement of financial position does not reflect
the current value for all assets and liabilities, valuing an entity based on the carrying amount of the net assets
may be inappropriate. Usually, it would be expected that the entity is worth more than the net assets
reported on the statement of financial position. (NOTE: we would be looking for a more succinct answer as
this is very detailed.)

This question highlights the importance of ascertaining things such as:

• the measurement bases applied to the various asset and liability classes
• the depreciation method and assumptions used to calculate depreciation
• the amount of inventory on hand
• the age of the debtors
• the underlying profitability of the business
• the cash generating capability of the business
• an independent valuation of assets such as property, plant and equipment.

You have just completed the statement of profit or loss for the reporting period. The CEO (who has no
accounting background) is reviewing the statement you have prepared, and asks you to explain why the
profit is relatively low compared to the increase in the cash at bank during the reporting period. Prepare a
report for the CEO offering some suggestions that would explain this.

I am writing to you in response to your query as to why profit for this reporting period is relatively
low compared to the increase in the cash at bank. In trying to understand the difference between
profit and cash, it is important to remember that profit is calculated as income earned less
expenses incurred for the reporting period, irrespective of whether cash has been paid/received.

Profit may not equate to cash partly due to using accrual accounting. This is because accrual
accounting recognises expenses when they are incurred and income when it is earned. In this case,
our company might have received deposits for future works to be performed resulting in an
increase in cash at bank. However, since the works have not been performed, the deposit received

Page 6 of 22
is not recognised as income. Instead, it is recognised as a liability owed by the company to its
client. This is one possible explanation why the profit is relatively low compared to the increase in
the cash at bank.

Another plausible reason for the difference is that expenses have been incurred (and deducted
from income in the calculation of profit) but the expenses have not been paid. The payment will
occur in a future period.

Another reason why profit does not equate to cash is that not all items involving cash flows are
income or expense items and affect profit. For example, money raised via a share issue will
increase cash at bank but has no impact on profit determination. Further, the calculation of profit
involves non-cash expenses such as depreciation and amortisation. Depreciation charges will
reduce reported profits but have no impact on cash balances.

Week 4
In its first year of operations, Harrington Pty Ltd earned $150 000 in services revenue, $30 000 of
which was on account and still outstanding at the end of the reporting period. The remaining
$120 000 was received in cash from customers. The company paid expenses of $40 000 in cash.
Included in the $40 000 paid is $12 000 for insurance coverage that will not be used until the
second year. Additionally, there is $22 000 still owing on account at the end of the reporting
period.

a. Apply cash accounting to calculate the first year profit of Harrington Pty Ltd.
Income = $120 000 ($30 000 is not recognised as it has not been received in cash)
Expenses = $40 000 (the $22 000 balance of expenses is not recognised as it has not been
paid)
Cash-based profit = $120 000 – $40 000 = $80 000

b. Apply accrual accounting to calculate the first year profit of Harrington Pty Ltd.
Income = $150 000 (the whole revenue is recognised as services have been rendered)
Expenses = $40 000 – $12 000 + $22 000 = 50 000 (The $12 000 for prepaid insurance is not
recognised as the benefit has not been consumed in the current period. The $22 000 is
recognised as it has been incurred even though it has not been paid)
Accrual-based profit = $150 000 – $50 000 = $100 000

c. Debate which basis of accounting you think is more useful for decision making.
The accrual basis of accounting is more useful for decision making since it recognises income and
expenses when they occur, rather than when cash has been paid or received. Cash accounting is
not satisfactory for measuring performance during a reporting period as the cash received (paid)
may not correspond to the income earned (expenses incurred). Reviewing both the performance
as reflected in the statement of profit or loss and an entity’s cash flows from operating activities
will provide the most useful information for users.

Page 7 of 22
Week 5
‘We made a profit of $124 000, so why is there only $15 000 in the bank?’, exclaimed Mr Charlton, the
owner of the local fish and chip shop. Explain to Mr Charlton the relationship between profit and cash flow,
to help him understand the reason why there is such a big difference between profit and cash in the bank.

The recording of transactions to determine a profit or loss for a period is based on accrual accounting. That
is a matching of revenues and expenses. Cash flow is concerned with when receipts and payments are made
and not the underlying transaction.

Mr Charlton should be advised to examine the cash tied up in his working capital (i.e. his current assets and
liabilities). He may find that he has a significant amount of inventory that he has paid for, but that is just
sitting there. He may also have a healthy sales figure but may not have collected debts from customers, thus
increasing cash tied up in accounts receivable. He should also examine the timing of when he pays his own
suppliers (accounts payable). Apart from working capital, Mr Charlton may have bought a new piece of
equipment or paid out a debt. An examination of a statement of cash flows will answer these sorts of
questions for Mr Charlton.

Outline how a creditor, investor and employee would interpret the statement of cash flows of Fruit
Plantations Pty Ltd.
Fruit Plantations Pty Ltd
Statement of cash flows
$ $
4 months 12 months
2019 2020
Cash flows from operating activities
Receipts from customers 476 890 1 480 100
Receipts from other income 5 000 1 000
Payments to suppliers and employees –405 333 –1 264 500
Payment of interest –5 000 –14 000
Payment of income tax 0 –45 000
Net cash inflows from operating activities 71 557 157 600

Cash flows from investing activities

Payment for buildings and equipment –200 000 –160 000
Payment for office equipment –40 000
Net cash outflows from investing activities –240 000 –160 000

Cash inflows from financing activities

Proceeds from capital contribution 200 000
Proceeds from borrowings 20 000 140 000
Repayment of borrowings 0 –29 000
Dividend paid to shareholder 0 –14 790
Net cash inflows from financing activities 220 000 96 210

Net cash inflows during the period 51 557 93 810

Cash at the beginning of the period 0 51 557
Cash at the end of the period 51 557 145 367

Page 8 of 22
A creditor would examine the overall cash position. It has increased from 2019 to 2020. They would also be
interested in the cash from operations and receipts from customers as this would indicate an ability to pay
debts as and when they fell due. They would also be interested in financing activities and whether any new
loans were taken out as this may affect the company’s ability to pay their liability and also may affect the
order in which creditors would be paid out in the event of liquidation. (The company could have offered
security to another credit/debit provider.) Generally, a creditor would be positive about the statement of
cash flows of Fruit Plantations Pty Ltd Pty Ltd.

An employee would be interested in the items discussed above as well as the purchase of new equipment. If
there are new assets purchased this indicates at the minimum that the company wants to maintain existing
operations and depending on the amount of new investment may be expanding. For an employee, this means
stable employment. Employees would interpret the Fruit Plantations Pty Ltd statement of cash flows
positively.

An investor, apart from being interested in all of the above, would also be interested in the distribution of
dividends and the debt to equity structure. The distribution of dividends represents income they will receive.
The debt to equity structure represents how much of the business the investors own compared to how much
is ‘owned’ by debtors. Depending on the investor’s risk profile they may prefer a large proportion of the
company being owned by investors. Also new share offerings can alter the proportion of exiting investor’s
ownership percentage in the future. Current investors would interpret the Fruit Plantations Pty Ltd statement
of cash flows positively.

Week 6
Horizontal Analysis – complete the question below and write a brief analysis.

2020 2019

$ $ $ M'ment % M'ment

Sales 2,100,000 1,895,000 205,000 10.82%

Cost of sales 1,575,000 1,445,000 130,000 9.00%

Gross profit 525,000 450,000 75,000 16.67%

Selling expenses 210,000 175,000 35,000 20.00%

Administrative expenses 100,000 65,000 35,000 53.85%

Total operating expenses 310,000 240,000 70,000 29.17%

Profit before income tax 215,000 210,000 5,000 2.38%

Income tax expense 64,500 60,000 4,500 7.50%

Profit 150,500 150,000 500 0.33%

• Sales has increased by more than COS which has resulted in an increased Gross Profit.
• Administrative expenses have increased by over 50%, is this because the business in scaling up or could
there be cost savings.

Page 9 of 22
Vertical Analysis – complete the question below and write a brief analysis and contrast, where
appropriate, with the horizontal analysis.

2020 2019

$ % $ %

Sales 2,100,000 100.00% 1,895,000 100.00%

Cost of sales 1,575,000 75.00% 1,445,000 76.25%

Gross profit 525,000 25.00% 450,000 23.75%

Selling expenses 210,000 10.00% 175,000 9.23%

Administrative expenses 100,000 4.76% 65,000 3.43%

Total operating expenses 310,000 14.76% 240,000 12.66%

Profit before income tax 215,000 10.24% 210,000 11.08%

Income tax expense 64,500 3.07% 60,000 3.17%

Profit 150,500 7.17% 150,000 7.92%

• Cost of Sales is a large expense relative to Sales which is to be expected. If this percentage could be
improved the profit will increase significantly.
• Interestingly Administrative Expenses are a very small component of sales revenue whereas with the
horizontal analysis they had one of the largest % movements

Page 10 of 22
 Trend Analysis – complete the question below and write a brief analysis.

2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010

$ $

Sales 2,100,000 1,895,000 1,765,000 1,705,000 1,685,000 1,755,000 1,585,000 1,565,000 1,525,000 1,465,000 1,395,000

Cost of sales 1,575,000 1,445,000 1,395,000 1,375,500 1,305,000 1,397,000 1,415,000 1,422,500 1,387,500 1,330,000 1,286,450

Gross profit 525,000 450,000 370,000 329,500 380,000 358,000 170,000 142,500 137,500 135,000 108,550

2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010

Sales 151 136 127 122 121 126 114 112 109 105 100

Cost of sales 122 112 108 107 101 109 110 111 108 103 100

Gross profit 484 415 341 304 350 330 157 131 127 124 100

Looking at the data over 11 years there is a steady increase in both sales and COS relative to the 2010 figures. There was a dip in 2016 and 2017 and it
would be interesting to know the cause to avoid in the future.

Page 11 of 22
The following table reports various financial ratios for Qantas and Virgin for 2018.

a. Given that the companies operate in the same industry, write a report explaining what the ratios suggest
about the companies’ operating, financing and investing activities.

Qantas’ ROE and ROA are higher than Virgin’s, indicating that Qantas has more ability to generate earnings
compared to Virgin. Virgin generates 1.74 cents of return per dollar of investment in assets, which is lower
than what Qantas generates (5.44 cents per dollar of assets). In relation to ROE, Qantas is able to generate
much higher return compared to Virgin (26.14 cents and (48.96) cents per dollar of owner’s investments
respectively). It is only Qantas’ ROE that exceeds the ROA, suggesting that Qantas is able to use debts
profitably (i.e. return from assets financed by debts is higher than cost of borrowings). The ROE and ROA are
impacted by profitability and efficiency so an analysis of these will be insightful to understanding the
differences in the ROA and ROE.

Qantas’ operating margin in 2018 is 9.16 per cent, indicating that Qantas earns 9.16 cents of earnings before
interest and tax per dollar of sales. From EBIT, interest and tax expenses need to be deducted to determine
profit. The net profit margin shows that Qantas earns 5.74 cents of profit per dollar of sales. The 2018 EBIT
and profit margin need to be compared with previous years’ margins to analyse the trend in profitability for
Qantas.

Virgin’s performance is not as impressive as that of Qantas. Virgin’s operating margin shows that for every
dollar of sales, Virgin generates 3.22 cents of earnings before interest and tax. After interest and tax are taken
into account, Virgin incurs 12.56 cents of loss per dollar of sales. The difference between EBIT margin and
net profit margin shows how much is paid for interest and tax by the two companies (i.e. 3.42 cents for
Qantas and 15.78 cents for Virgin per dollar of revenue). Virgin’s higher level of debts as indicated by higher
debt to equity ratio suggests that on a per dollar of revenue basis, its interest expense is higher.

The debt to equity ratio reveals that both Qantas and Virgin rely more on debt funding relative to equity
funding, as their debt to equity ratios exceed 100 per cent. Qantas has $1.20 of debts per dollar of equity,
and Virgin has an even higher proportion of debts ($2.35 of debts per dollar of equity). With high level of
debts, there is higher risk that both companies will not be able to re-pay the debts and interest (financial
risk). It is only Qantas that is able to use debts profitably to generate higher returns for shareholders, as
demonstrated by its ROE exceeding its ROA.

Current ratio suggests that Qantas and Virgin do not have sufficient current assets to cover their current
liabilities. Virgin has 78 cents of current assets per dollar of current liabilities. Qantas’ current ratio is just
lower, with 49 cents of current assets per dollar of current liabilities. Although both companies’ current ratios
are below 1, this may not indicate that they have liquidity problems. The activity cycle in airline industry is
relatively shorter than other industries, and hence companies in airline industry are able to support a lower
level of liquidity.

Page 12 of 22
Cash per share is the percentage of a firm’s share price that is immediately accessible for spending on
activities. Qantas has $1.09 per share available for spending whereas Virgin only as $0.17 per share available.

Qantas’ PER (Price Earnings Ratio) suggests that investors are prepared to pay 10.82 years of current earnings
to acquire Qantas shares.

Price-to-Book value compares a company’s share price to the value of its equity per share. Both Qantas and
Virgin’s price-to-book values are above 1. Virgin’s price-to-book value is 1.71 times, meaning that Virgin’s
share price equals to 171 per cent of the value of its equity. Qantas’ price-to-book value is higher than that
of Virgin’s, showing Qantas’ share price equals to 238 per cent of the value of its equity. This suggests that
Qantas’ and Virgin’s share prices are trading above the book value of equity.

Also review the assignment ratios that were reviewed as those businesses sold goods and had inventory
turnover, receivables turnover and creditors turnover. (Note: essentially with a question like this we would
be looking for you to briefly review each line item explaining what it is telling you about the business,
which figure is better and why. Ensure you then draw an overall conclusion in relation to the business).

Limitations of ratio analysis

Read the following quote and discuss what you think Fridson and Fernando (2002) mean by ‘passively
calculating standard ratios’.
Corporations have substantial incentives to exploit the fact that accounting principles are neither fixed for
all time nor so precise as to be open to only a single interpretation. Analysts, who appreciate the
magnitude of the economic stakes, as well as the latitude available under the accounting rules, will see
clearly that a verdict derived by passively calculating standard ratios may prove dangerously naive.
Source: Fridson, M & Fernando, A 2002, Financial statement analysis: a practitioner’s guide, 3rd edn, John
Wiley & Sons, New York.
Ratio analysis is an interpretative process rather than a pure mechanical process. Once the ratios have been
calculated it is necessary to interpret the ratios and explain changes over time or across entities.
Fridson and Fernando’s quote is also referring to the limitations associated with the ratios and the need to
be aware of, and consider the consequences of, the limitations. There are a number of limitations to ratio
analysis. Some limitations relate to the nature of the financial statements and the data disclosed (or not
disclosed), while others are inherent in the nature of the financial ratios themselves.

Ratio analysis relies on financial numbers in financial statements. Accordingly, the quality of the
ratios calculated is dependent on the quality of the entity’s financial reporting. The quality may be
affected by inadequate disclosures and details in financial statements and/or an entity’s
accounting policy choices and estimations.
Many of the ratios that we calculate rely on the asset, liability or equity numbers reported on the
statement of financial position. This report reflects the financial position of an ongoing entity at a
particular date and may not be representative of the financial position at other times of the year.
Financial statements are historical statements reflecting past transactions. Often, the past is a
good guide to the future; however, the use of information outside the financial statements needs
to be considered when forming predictions as to an entity’s future financial health.
The author means that the limitations of the analytical process need to be considered, when interpreting and
relying on ratios to form an opinion as to an entity’s financial health, both past and present. ‘Passively
calculating standard ratios’ without the consideration of the above limitations would lead to an incomplete
analysis.

Page 13 of 22
Week 7
From the following data for Fantastic Sales, calculate the receipts from accounts receivable for September,
October and November of 2021.

Credit sales are normally settled according to the following pattern: 20 per cent in the month of
the sale, 50 per cent in the month following the sale and the remainder in the second month
following the sale.

FANTASTIC SALES
Fantastic Sales receipts from accounts receivable
for three months ending 30 November 2021
September October November
$31 500
July $105 000
(105 000 x 0.3)
$45 000 $27 000
August $90 000
(90 000 x 0.5) (90 000 x 0.3)
$18 400 $46 000 $27 600
September $92 000
(92 000 x 0.2) (92 000 x 0.5) (92 000 x 0.3)
$21 200 $53 000
October $106 000
(106 000 x 0.2) (106 000 x 0.5)
$17 400
November $87 000
(87 000 x 0.2)
$94 900 $94 200 $98 000

During late 2019, Ski Lifters commenced a new business in the Alpine region to rent ski gear to
tourists. A budget has been prepared for the coming financial year. Prepare a brief report to
management on how the budget can be used as a control device to monitor actual performance.

Using the budget as a control device suggests using the budget to monitor the position of the firm. In this
case, Ski Lifters might use the budget prepared on a monthly basis by comparing actual performance against
planned performance. This will enable the identification of variances which will provide the feedback to
determine if plans need to be changed; and the variances may also serve as a starting point for reviewing
future estimates. Variances can be identified for sales and operating expenses which will assist in
understanding why the actual profit is different to that budgeted at the beginning of the year.

Page 14 of 22
Budget Travel plans to commence operations on 1 July 2021. The following data and estimates
relate to the three months ending 30 September 2021.

a. Prepare a monthly cash budget for the three months ending 30 September 2021.

BUDGET TRAVEL
Cash budget
for quarter ended September 30 2021

July Aug. Sept. TOTAL

$ $ $ $
ANTICIPATED RECEIPTS
Initial capital 32 000 32 000
Fees received 5 772 7 548 11 322 24 642

Total receipts 37 772 7 548 11 322 56 642

ANTICIPATED PAYMENTS
Advertising and marketing 2 775 2 220 1 332 6 327
Cash withdrawals 1 332 1 332 1 332 3 996
Computer equipment 7 659 7 659
Administration 1 221 1 221 1 221 3 663
Rent 1 776 1 776 1 776 5 328

Total payments 14 763 6 549 5 661 26 973

Excess (Deficit) receipts over payments 23 009 999 5 661 29 669
Bank balance at beginning of month 0 23 009 24 008 0
Bank balance at end of month 23 009 24 008 29 669 29 669

Note: fees charged not included as this relates to credit sales.

(Note: not all cash budgets require the total column, ensure you read all questions carefully).

Page 15 of 22
Week 8
Mermaid Enterprises operates a single-product entity. Data relating to the product for 2019 were as
follows.

Required

a. Calculate the break-even in both dollars and units for 2019.

Contribution margin = $20
Selling price $60
Less
variable manufacturing $28
variable marketing etc. $12 $40
Contribution margin per unit $20

Break-even = $960 000 / ($20) = 48 000 units

b. Calculate the margin of safety in both units and sales dollars.

Margin of safety =
Units = 16 000 units = Sales 64 000 units less break-even 48 000 units
Dollars = $960 000 = 16 000 units x $60

c. Calculate the profit achieved in 2019 given the annual volume of 64 000 units.
Profit = (64 000 units *$20) – $960 000 = $320 000
Or 16 000 units x $20

d. Changes in marketing strategy are planned for 2020. This would increase variable marketing and
distribution costs by $4 per unit, and reduce fixed non-manufacturing costs by $160 000 per year. Calculate
the units that would need to be sold in 2020 to achieve the same profit as in 2019.

Contribution margin will increase due to increased variable costs

Currently $20 less additional $4 variable marketing = $16

To achieve same profit as 2019 = ($800 000 + $320 000)/ ($16) = 70 000 units

e. Would you recommend the change? Explain.

Based on the increased number of units required to achieve the same profit, the change is not
recommended in the short term.

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Advantage Tennis Coaching (ATC) has been engaged to provide tennis coaching services to students at a
local private girls’ college. ATC has put forward a proposal to the University of Queensland’s School of
Human Movement (SHM) to offer some university students work experience. ATC’s qualified coaches will
plan the coaching program, supervise the SHM students as they implement the training program and
attend the Queensland Girls’ Secondary Schools Sports Association competition matches. Following are
financial data relating to the proposal.

a. Calculate the approximate number of school tennis players required for Advantage Tennis Coaching to
break even on the proposal.

Approximate number of school tennis players required to break even:

Break even number of players = Fixed costs / Contribution margin per player

= $6400 / (200 – 120) = 80 players

Proof: ($200 – 120) x 80 = 6400 – 6400 = 0

b. Calculate the contribution margin ratio.

Contribution margin per unit / Revenue per player = $80 / 200 = 40%

c. Calculate the revenue required to earn a profit of $48,000.

Use the contribution margin ratio to solve:

Sales revenue to earn a Target profit of $48 000 = ($4800 + 6400) / 0.40 = $28 000

Note: the cost ratio is 1 – 0.40 = 0.60

Proof: $28 000 – (28 000 x .60) – 6400 = $28 000 – 16 800 – 6400 = $4800

Explain market-based pricing and give an example that shows how prices would be determined using this
method.

Market-based pricing is where the price is set at the highest possible price that a customer will pay, which
will be dependent on the degree of product differentiation and competition.

Determination of the market-based price will depend on whether or not a similar product/service exists. If it
does, the sales team will need to scan the market for the going price; alternatively, if there is no competitor,
customer research will be necessary to establish what would be the highest price customers would pay.

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Week 9
Cost drivers can be based on either volume or activity. Provide an example of each.

Volume drivers use a measure of output to assign the indirect costs (e.g. labour hours, machine hours or
units of output).

Activity drivers enable costs to be assigned to activities (e.g. time taken to set up the machine, the number
of machine set-ups, the type of labour used, type of material or packaging used, number of invoices, number
of employees, number of computers).

Briefly outline four pricing practices that are illegal in Australia (pre-class question).
Illegal pricing practices in Australia include:
1) price discrimination — the practice of setting different prices of different customers
2) predatory pricing — the deliberate act of setting prices low to drive competitors out of the
market and then raising prices once competition is removed
3) collusive pricing — two or more organisations conspire to set prices above a competitive price
4) dumping — a foreign-based entity sells products in Australia at prices below the market value
in the country where the product is produced, and the price could harm an Australian industry.

Week 10
Making an investment decision between two projects
The Flametree Company Ltd has two independent projects it could invest in. The financial
operations manager has completed some analysis and has presented the information to the
board. The board has asked you for advice. The entity uses a PP criterion of not accepting any
project that takes more than 7 years to recover costs.

Required
a. Are both projects acceptable to the entity?
Based on the payback period, only Project 23 is acceptable as it meets the company’s 7-year payback
criteria. However, based on the NPV as the projects are independent, both projects are acceptable
as they have positive NPVs.

b. If the entity had a history of conservatism in its financial decision making, which project would you
advise?
As the NPVs of both projects are positive, then a conservative firm would prefer Project 23 because the
payback period is shorter by 4 years and there is only $20 000 difference in their NPVs. As we know with PP,
the shorter the time period, the less risky the investment. Project 23 also requires only half the investment
of Project 24.

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c. Which project would you advise, after taking only these decision-support tools into consideration?
Why?

Project 24 gives a higher NPV which would result in a greater increase to the net wealth of the company in
absolute terms. I would advise acceptance of this project, based on the NPVs. Both investments have their
advantages and disadvantages. While the NPV for Project 24 is higher, it does require double the investment
funds. Its project life is also for an additional 5 years and is not paid pack until 11 years into the project. So,
with Project 24 there are additional risks associated with having funds tied up for that length of time. There
are many potential risks such as higher inflation, lack of demand for investment, economic downturn for
projects extending over several periods. Whereas, Project 23 although its NPV is lower than Project 24, it
only does require half of the investment and its PP is 7 years into the investment compared to 11 years. The
life of the investment is 10 years compared to 15 years so in some respects is a less risky proposition.

Making an investment decision on a project

An inner city amateur theatre company, Theatre Empire, is planning on performing a new take on two
Shakespearean plays, Hamlet and Macbeth, at an old Sydney theatre in the inner-suburb of South Bank.
The producers of the theatre plan on alternating the performances of the two plays for a combined total
of 40 weeks, if possible. Given the size of the theatre and the expected seat-sales rate, the producers think
they can gross $420 000 at the box office. The plays will cost $48 000 to mount in the first place to cover
costs of new seats, costumes and props, and the weekly running costs are expected to be $5500.

Assume for the NPV calculations that all funds are earned and paid, except the mounting costs, at the end
of the 40 weeks. The sets, costumes and props are expected to realise $26 500 at the end of the run.

Required

a. What is the ARR?

The overall net profit is $420 000 – ($5500 x 40) – $48 000 + $26 500 = $178 500.
The average capital investment is ($48 000 + $26 500) / 2 = $37 250.
ARR = ($178 500 / $37 250) x 100 = 479%.

b. What is the PP?

Weekly running costs are $5500 and the box office takes $10 500 ($420 000 / 40) weekly (assuming an even
patronage throughout the period), so net cash inflows are $5000 weekly. At this rate, the PP is 10 weeks
($48,000 / $5,000) which is 0.25 way through the season of the two plays. Therefore, the initial $48 000 will
be paid back after 10 weeks.
Extended calculation:
Week 0 Cash outlay ($48,000)
Week 1 5,000 (43,000)
Week 2 5,000 (38,000)
Week 3 5,000 (33,000)
Week 4 5,000 (28,000)
Week 5 5,000 (23,000)
Week 6 5,000 (18,000)
Week 7 5,000 (13,000)
Week 8 5,000 (8,000)
Week 9 5,000 (3,000)
Week 10 5,000 Paid pack between weeks 9 & 10

Therefore, the initial $48 000 will be paid back after 10 weeks (you can’t have part of a week with this project).

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c. What is the NPV if the producers can earn 12 per cent elsewhere on their funds?
NPV = –48 000 + (226,500 / 1.12*)
= –48 000 + (202,232)
= $154 232
(*If you use the discount table on p461 you would take (226,500 x 0.89286) = 202,232)
Therefore, the NPV is positive $154 532 for this venture.

d. Would you advise the producers to go ahead or not? Why?

Yes. The producers should consider this as an investment if they want to make money out of the
performances. The initial outlay of $48 000 would be recovered a quarter way through the performances
(end of week 10). This is a low risk investment as the payback period is short, and the ARR is extremely high.
The investment also has a positive NPV of $154 232. However, there are possible risks that need to be
considered as one or more of the performances may be cancelled due to illness of the performers or issues
with the venue or some other unforeseen circumstances which could impact on a 40-week run of the theatre
production.

Week 11
Explain the trend in crowdfunding over the past 5 years. What types of businesses have been commonly
financed by crowdsourcing?

Crowdfunding is relatively new in Australia and was initially only available to public unlisted companies.
Legislation for equity crowdfunding first passed in Australia in May 2017 after more than two years of
consultation and debate. However, in September 2018, the government passed legislation to extend
equity crowdfunding to proprietary companies.

However, in the UK, where retail crowdfunding legislation has been in place for over 4 years, approximately
24 per cent (in 2017) of all venture capital investment was deployed through equity crowdfunding
platforms. It is expected that similar rates of adoption are likely in Australia over the next few years
(https://startups.venturecrowd.com.au /deal/detail/venturecrowd_seriesb).

Crowdfunding has been used mainly for start-ups, films and the performing arts and real estate and property
development. Examples include:
• Pebble E-Paper Watch — $10.3 million raised
• Ouya open source game console — $8.5 million raised
• Pono music player — $6 million raised
• Bitvore big data product — $4.5 million raised
• The Dash wireless smart in-ear headphones — $3.4 million raised
• Formlabs 3D printer — $2.9 million raised
• Oculus Rift virtual-reality headset — $2.4 million raised
• 3Doodler 3D printing pen — raised $2.3 million
• Canary Smart Home Security — $1.9 million raised
• DC Power Co — $2.5 million raised — 17 574 investors — largest equity-crowdfunding offer by
number of investors (https://australianfintech.com.au/crowdfunding-australia-first-4-months-
equity-crowdfunding/)
• Xinja, an Australian neobank — $2.16 million
• West Winds Gin – $3.5 million goal
• Mitta Mitta Brewing Company — $35 150
• Largest Electric Guitar Ensemble — $29 642
• Urban Xtreme Indoor Snow Sport and Adventure Centre — $38 864
• The Sago Dry Toilet in PNG — $75 000 goal
• Historic farm hut B&B — $20 000.

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A friend is thinking about starting a company manufacturing small robots for household chores. Explain to
your friend the different types of finance that would be available to him.

There are a range of sources of finance available for businesses along with government grants and
subsidiaries. For example:
• debt finance
o loans from traditional lenders
o loans from online and alternative business lenders
o microcredit (microloans)
o credit cards
• equity finance
o angel investors
o venture capitalists
o public float (IPO)
o crowdfunding
o initial coin offerings (ICO),

However, as this business venture is a start-up, it is unlikely that an IPO, bank loan or credit cards would be
an option. However, crowdfunding and angel investors are ideal for start-up businesses and have increased
in popularity in recent years.

Balanced scorecard

The four perspectives of the balanced scorecard are internal operations, innovation and improvement,
financial and customer. A list of objectives/goals and measures are presented below. Match each goal with
one of the four perspectives, and then match each measure with the most appropriate goal.

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Perspective Goals
Financial Increase shareholder value
Reduction of energy use
Customer Increase market share
Improve sales per
customer/customer group
Internal operations Improve manufacturing quality
On-time delivery by suppliers
Decrease rework time
Diversity workforce
Innovation and Develop employee skills
improvement
Introduce new products
Improve technological edge
Improve community engagement
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Measures
ROI
Product cost per unit
Earnings per share
Profit margin
Energy costs
Number of new customers
Customer profitability
Percentage of defective products
Percentage of on time deliveries
No. of rework hours
Stats of gender, age and race of
workforce
Training hours per employee
Employee turnover rate
Profit per sales person
No of patents
Technological comparison with
competitors
No. of volunteer hours