Specimen Paper

Introduction to Finance and Accounting for

managers
Section A – Multiple Choice Questions
Answer all questions in this section. Please circle the letter of the
answer you think is correct on the answer sheet provided.

Each question carries 1 mark

1. According to the accounting equation:

A. Equity = Assets + Liabilities
B. Liabilities= Assets + Expenses
C. Assets = Liabilities + Equity
D. Revenues = Assets + Expenses

2. The term “break-even” refers to the level of output where:

A. Total sales revenue equals total variable costs
B. There is no profit and no loss
C. Total sales revenue equals total fixed costs
D. Sales revenue per unit equals contribution per unit

3. The current liability section of the balance sheet should include:

A. Long term loan.
B. Inventory.
C. Plant and machinery.
D. Trade payables.

4. Working capital is defined as:

A. Equity plus liabilities
B. Current assets less current liabilities
C. Current assets plus liabilities
D. Total assets less current assets

5. Which of the following is the criteria before a revenue to be recognised?

A. It is probable that the economic benefits will be received from the
transaction.
B. The amount of revenue can be measured reliably.
C. Ownership and control of the items should pass to the buyer.
D. All of the above
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6. Contribution per unit is derived by:
A. Total cost less fixed cost.
B. Total sale less total cost.
C. Selling price per unit less variable cost per unit.
D. Selling price per unit plus variable cost per unit.

7. Which of the following are the purpose of budgeting?

A. Planning and setting objectives
B. Controlling and Monitoring
C. Communicating priorities for purpose of budgeting
D. All of the above

8. Which one of the following is a variable cost of a manufacturing company?

A. Raw material
B. Salary of the staff
C. Rental of the factory
D. All of the above

9. Which one of the following is considered as a non-current asset in the

statement of financial position?
A. Goodwill
B. Trade receivables
C. Plant and machinery
D. Bank loan.

10. The non-current asset section of the balance sheet should include:
A. Machinery.
B. Inventory
C. Trade receivable.
D. Trade payable

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Section B consists of ONE compulsory question

Question 1

Mizo has a chocolate shop. He sells chocolate boxes for which the following
information is provided:

Selling price per box £22

Variable costs per box (10 £10
chocolates per box X £1 per each
chocolate)
Fixed costs (salary, shop rent and £5,700
insurance)

Required:

Mizo has hired you as management accountant and asked you to work out
the following tasks:
A. Determine the break-even point for Mizo shop in terms of quantity and
in terms of sales value (see the formula sheet).
[10 marks]

B. Explain the meaning of break-even point for a business and why it is

important for a business manager.
[15 marks]

C. Mizo expects to sell 2,000 chocolate boxes every month. Determine

the expected profit for Mizo business (see the formula sheet).
[7 marks]

D. Determine the margin of safety in terms of quantity and in terms of

sales value. What information the margin of safety provide? (see the
formula sheet).

[8 marks]

Total 40 marks

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Section C consists of TWO compulsory questions

Question2

Tim has decided to set up a business, selling laptops. He has rented a small
shop to sell the laptops and laptops accessories.

Tim has drawn up the following budget for her first financial year:

Income 75,000
Direct costs:
Purchase of laptops 15,000

Cost laptops 2,500

accessories
Staff wages 3,750
Operating costs (power 4,250
etc)
Total direct costs 25,500

Indirect overhead
costs:
Manager’s pay 6,250
Shops expenses 3,750
Marketing expenses 10,000
Vehicle running costs 2,500
Total indirect overheads 22,500

Total costs 48,000

Anticipated profit 27,000

Tim tried to manage the business using this budget which she prepared well
in advance of the start of the year. She informed each section of the firm what
its budget limits were. Tim was determined to look at and find reasons for all
variances from her carefully prepared budget.

The final actual figures were as follows:

I. Income £65,000. Sales were below budget. There was reduced

demand due to their relatively high prices.

II. Purchase of laptops £13,000. Due Tim’s strong connection with

suppliers he succeeds to have a good discount on his purchase.

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 III. Cost of phones accessories was £3,500. A local shortage of laptops’
accessories meant Tim had to pay a higher price to local wholesalers.

IV. Staff wages £6,000. Unfortunately the hired staff weren’t very well-
trained and Tim had to find better staff who had to be paid more. This
extra cost wasn’t budgeted.

V. Operating costs £4,000. The price of electricity and water went down
during the year.

VI. Managers’ pay £5,000. Due to the cutting costs policy, Tim cut the
manager’s bonus.

VII. Shop expenses £4,500. Due unforeseen expenses Tim has to pay
exrta costs that what was budgeted..

VIII. Marketing expenses £12,500. An advertising campaign was run to try

to increase sales.

IX. Vehicle running costs was £2,000. Tim found a new garage which offer
low prices.

Required:

A. Prepare a clearly set out variance analysis of the business, comparing

the budget figures with the actual results. State the variances and
explain whether they are adverse or favourable.
[14 marks]

B. Reconcile the actual profit to the budgeted profit figure.

[5 marks]

C. Evaluate Tim’s use of budget and control through variance analysis.

[6 marks]

Total 25 marks

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Question 3

Tom Wear Ltd is a retail business selling clothes. Following financial

statements are set out for the year ended 31 December 2015.
Income Statement for the year ended 31 December

£000 £000
Sales revenues 587
Cost of sales
Opening inventories 95
Purchases 278
373
Closing inventories 157 216
Gross profit 371
Expenses 300
Profit of the year 71

Statement of financial position as at 31 December

£000
ASSETS
Non-current assets
Property, plant, and equipment 409
Current assets
Inventories 157
Trade receivables 120

Total assets 686

EQUITY AND LIABILITIES
Equity
Ordinary share capital 105
Retained earnings 163
268
Non-current liabilities
Borrowings-loans 130
Current liabilities
Trade payables 145
Borrowing - bank overdraft 143
288
Total equity and liabilities 686

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1) What is Tom Wear Ltd operating cash cycle?
[10 marks]

2) Discuss the relationship between the cash operating cycle and the
level of investment in working capital.

We can measure cash operating cycle by evaluating average time

between paying (trade payables) to suppliers for the inventories and
receiving cash (trade receivables) from the clients. If the level of cash
operating cycle is increasing it means we spend longer time waiting to
receive cash on the accounts from clients after we paid for inventories.
Therefore, we need to increase working capital to cover the need to buy
additional inventories which we will sell to clients. Working capital policy
should set the length of cash operating cycle.

An aggressive working capital policy will use lower level of inventories and
thus require lower levels of investment in working capital. It means that
“Opening inventories” and “Closing inventories” part will be lower and
entire “Average inventories turnover period” reduces. As a result cash
operating cycle is shorter.

The more conservative working capital policy allows larger investments in

inventories and therefore cash operating cycle is longer. Conservative
working capital policy will reduce the risk of running out of stock/
inventories. However, it will reduce the profits of the company since a
larger proportion of the cash will have to be spent on investment in
working capital.

[8 marks]

3) Tom Wear Ltd decided to pay its trade payables after 150 days in
future, rather than after 190 days as it has in the past. What effect will it
have on cash operating cycle, working capital and company overall?

If trade payables will reduce to 150 days then new operation cash cycle
will be:
213+75-150=138 days.

It increases from 98 days to 138 days which makes working capital

policy more conservative. As a result, more investment in the working
capital will be required to cover the costs of paying to suppliers sooner.

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 Thus operating cash cycle will increase, and working capital will have
to increase as well. This will reduce the profit of the company since
more investments are required to working capital to cover trade
payables payments. If Tom Wear Ltd (cash) would like to invest in
research and development of new products, or open new branches the
company will find it harder to find free resources (cash). It will be
harder to expand or bring any changes which require investments.

[7 marks]

Total 25 marks

Module convener: Moataz Elmassri

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End of paper