Student ID Number:

Student Name:

TIME-CONSTRAINED ASSESSMENT – ONLINE

[SUGGESTED SOLUTION]
Semester 2 2021
COURSE NAME: Accounting Essentials

COURSE CODE: ACCT502

TIME ALLOWED: 2 hours (To be completed in 3 hours)

DATE: Thursday 20 October 2021

TOTAL MARKS: 100

ASSESSMENT INSTRUCTIONS, ACADEMIC INTEGRITY GUIDELINES AND ADDITIONAL INFORMATION

– READ ALL BEFORE COMMENCING

ASSESSMENT INSTRUCTIONS:

1. Please email your Course Coordinator and BEL Exam Office (cherrie.yang@aut.ac.nz, BEL:
belexams@aut.ac.nz ) immediately if you have any technical issues with your online
assessment submission on Blackboard using your AUT email address. Include in your email a brief
explanation of the issue, your Student ID, Course code, a screenshot of the issue including the time
stamp. Email subject line: (Online Submission: Course Name – Course Code - Student ID – Student
Name)
2. This is an individual assessment – there must be no discussion or collaboration with anyone else. No
component of this assessment may be shared with any person, in any manner other than your course
coordinator or BEL Exam office.
3. Open the header of the document and insert your name and ID number
4. You have one attempt to submit this assessment. Ensure frequent saving and do not leave the
assessment before clicking Save and Submit.
5. Submit as per the instructions via BB

SUMMARY:
Section Marks
Section 1 Income Statement 25
Section 2 Analysis and interpretation of financial statements 20
Section 3 Cost-volume-profit analysis 30
Section 4 Budgeting 25
Total 100

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ACADEMIC INTEGRITY GUIDELINES

AUT takes Academic Integrity very seriously and you are reminded that the following actions may be
deemed to constitute a breach of the General Academic Regulations Part: Academic Discipline, Section 2
Dishonesty During Assessment or Course of Study

• 2.1.1 copies from, or inappropriately communicates with another person

• 2.1.3 plagiarises the work of another person without indicating that the work
is not the student’s own – using the full work or partial work of another person without giving due
credit to the original creator of that work
• 2.1.4 collaborates with others in the preparation of material, except where this has been approved
as an assessment requirement.
• 2.1.5 resubmits previously submitted work without prior approval of the assessment board
• 2.1.6 using any other unfair means

ADDITIONAL INFORMATION

• Your assessment responses must be your own work. You may be required to orally defend your
responses to assessment questions.
• You must quote or paraphrase and reference any material that you take/use/adapt from somewhere
else

You are permitted to:

- Consult the textbook.
- Consult University-provided course materials on Blackboard or in printed form.
- Consult reference material from the University library or from credible online sources e.g.
recognised publishers, government, educational institutions, research organisations.
- Consult notes that you have produced yourself.

You are NOT permitted to:

- Change any question
- Have someone else do assessment questions for you.
- Receive from, help or ask another student with assessment questions or hints.
- Refer to or re-use identical or similar question solutions as might be found on social media, chat
forums, ‘study help’ type websites, study note sharing websites or via other means.
- Communicate or collaborate with another student or person in anyway during the assessment
without explicit permission from a university staff member (other than to authorised University staff
members).
- Let your assessment responses become available or visible to other students.
- Provide the assessment questions, assessment materials or assessment responses to another
student or person via any means (other than to authorised University staff members).
- Post or communicate assessment questions or other materials via forums, chat boards, ‘study help’
type websites, instant messaging platforms, photograph and send via mobile devices to others.
- Cut and paste from any other material without referencing.

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Section 1: Income Statement (25 Marks)

The following are financial information from Sunshine Coast Ltd for the 12 month reporting period ended 30
June 2021 on a cash basis:

Sales $ 416,100

COGS $ 246,000

Gross Profit $ 170,100

Advertising $ 8,400

Administration $ 28,200

Insurance $ 5,160

Interest $ 7,140

Rent $ 13,800

Salary and Wages $ 42,600

Profit $ 64,800

Required:

1. Prepare an Income Statement for the year ended 30 June 2021 on an accrual basis. You will need to
consider including the following information:
• The accounts receivable and accounts payable balances at the start of the reporting period were
$24,600 and $14,700, respectively. At the end of the reporting period, accounts receivable was
$31 800 and accounts payable was $29,640.
• An advertising invoice of $4,440 had not been paid.
• The business has equipment that cost $60,600. It has a useful life of five years and an expected
residual value of $6,600.
• The insurance expense represents the 12-month premium on a policy that was purchased on 30
April 2021.
[17 marks]

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Sunshine Coast Ltd
Income Statement 2 marks
for the year ended 30 June 2021

Sales $ 416,100 $ 423,300 2 marks

COGS $ 246,000 $ 260,940 2 marks

Gross Profit $ 170,100 $ 162,360 1 mark

Advertising $ 8,400 $ 12,840 2 marks

Administration $ 28,200 $ 28,200 1 mark

Depreciation $ 10,800 2 marks

Insurance $ 5,160 $ 860 2 marks

Interest $ 7,140 $ 7,140 1 mark

Rent $ 13,800 $ 13,800 1 mark

Salary and
Wages $ 42,600 $ 42,600 1 mark

Profit $ 64,800 $ 46,120

2. Angela Joss, the CEO Sunshine Coast Ltd, is confused about why the profit under the accrual basis is different
from the cash-based profit. Prepare a memo explaining why accrual accounting is more useful than cash
accounting to measure financial performance. Refer to the income statement you prepared in requirement
1, provide two examples to justify your argument. [8 marks]

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). The timing of cash payments and cash receipts has the potential to
distort performance in a period if a cash basis of accounting is used to measure financial performance.
Therefore, accrual accounting is preferred to cash accounting as it better reflects an entity’s performance
during a particular accounting period. (2 marks)

For example, Sunshine Coast Ltd has paid for a one-year insurance policy which was only used for 2 months
at the end of the accounting period. Recognising the whole amount of insurance paid does not reflect the
real expense incurred during the period, which is only 2 out of 12 months’ premium that has been paid. (3
marks)

Depreciation expense is another example that causes the difference between cash-based profit and
accrual-based profit. As depreciation expense is a non-cash item, it will not be included in the determination
of cash-based profit even though it reflects the expense incurred by Sunshine Coast Ltd to account for the
equipment’s future economic benefits that have been used up during the accounting period. (3 marks)

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Section 2: Analysis and interpretation of financial statements (20 marks)

Wilson Ltd., a new medium-sized company operating in the agri-food sector, produces quality prepared food
products. The following table illustrates the average performance of other companies in the same sector for
2020.

Industry Average Results 2020

Return on equity (ROE) 27%

Asset turnover 2
Current ratio 6.5
Debt to equity ratio 70%

The table below shows some financial information for Wilson Ltd. Extracted from its Income Statement and
Balance Sheet in 2020 and 2019.

2020 $ 2019 $
Net profit 200,000 190,000
Sales revenues 2,100,000 1,600,000
Current assets 801,000 855,000
Non-current assets 950,000 703,000
Current liabilities 155,000 345,000
Non-current liabilities 660,000 500,000

1. Calculate the following ratios for Wilson Ltd (all ratios must be rounded up to 2 decimal places). For the
year 2020:
• Return on Equity (ROE)
• Asset turnover
• Current ratio
• Debt to equity ratio
[8 marks]

The financial ratios for Wilson Ltd. For the year 2020:

• Return on Equity (ROE) = Net profit / Average equity

Equity in 2020 = Total assets – Total liabilities
= (801,000 + 950,000) – (155,000 + 660,000)
= 1,751,000 – 815,000
= $936,000
Equity in 2019 =(855,000 + 703,000) – (345,000 + 500,000)
= 1,558,000 – 845,000
=$713,000
Average equity in 2020 = (936,000 +713,000)/2
=$824,500
Return on Equity (ROE) in 2020 = 200,000/824,500 =24.26% (3 marks)

• Asset turnover = Sales revenues / Average total assets

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Total assets in 2020 = 1,751,000
Total assets in 2019 = 1,558,000
Average total assets = (1,751,000 + 1,558,000)/2
= 1,654,500
Asset turnover in 2020 = 2,100,000 /1,654,500 = 1.27 times (3 marks)

• Current ratio = Current assets / Current labilities

Current ratio for 2020 = 801,000 / 155,000
= 5.17 (1 mark)

• Debt to equity ratio = Total liabilities / Total equity

= 815,000 / 936,000 = 87.07% (1 mark)

2. Analyse the profitability and liquidity of Wilson Ltd. for 2020 in reference to the industry average results
shown in the table above, and make recommendations for Wilson Ltd. [12 marks]

Comparison of ratios
Wilson Industry average
ROE 24.26% 27%
Current ratio 5.17 6.5

• Profitability
The ROE for Wilson is 24.26%, which measures the return on capital invested in the business. This ratio
is below the average performance of companies in the same industry. However, it is a new company
and its ROI still compares favourably with the prevailing interest rates currently available on deposit
accounts. (3 marks)

Recommendations for Wilson Ltd.

Wilson Ltd will want its ROE to be as high as possible and to remain above the bank interest rate. To
improve its position it needs to reduce its capital employed figure or improve its net profit by, for
example, controlling its expenses/overheads or trying to increase its sales. (3 marks)

• Liquidity
The average industry result in 2020 had a very healthy level of working capital. It had $6.5 available to
pay for every $1 of liabilities. Maintaining this healthy working capital is essential for a businesses’
cash flow. Wilson Ltd has $5.17 available to pay for every $1 owed, a little below the ideal ratio. It
should make every effort to maintain its current ratio so that it can pay its short-term debts as they fall
due. If the liquidity position of a new business is poor and it cannot pay its current liabilities it may
have to go into liquidation. (3 marks)

Recommendations for Wilson Ltd to improve the liquidity position:

o Effective cash flow forecasting in order to avoid liquidity problems.

o Effective credit control will reduce the risk of bad debts.
o Effective stock control will reduce the amount of money tied up in stock.
o Increase cash sales. (3 marks)

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Section 3: Cost-volume-profit analysis (30 marks)

1 Wormy Comp is a manufacturer of plastic worm farms. Data relating to their one product for
2020 is as follows:

Annual volume 18,000

Selling price per unit $560
Variable manufacturing cost per unit $230
Annual fixed manufacturing costs $2,800,000
Variable marketing and distribution costs per unit $45
Annual fixed non-manufacturing costs $1,800,000

Required:
A. Calculate the break-even units for 2020 [3 marks]
CM = SP - VC
CM = 560 - (230 +45)
CM = $285
B/E = FC/CM
B/E = (2,800,000 + 1,800,000)/285
B/E = 16,141 units

B. Calculate the margin of safety in units [2 marks]

MOS = Sales – break-even
MOS = 18,000 – 16,141
MOS = 1,859 units

C. Calculate the profit achieved in 2020 given the annual volume of 18,000 [3 marks]
Contribution (18,000*285) 5,130,000
Fixed Costs 4,600,000
Profit 530,000

D. Covid-19 has increased the prices of plastic. This increased the variable manufacturing cost to $250 per
unit. However, the company has managed to reduce their factory rental by $100,000, which has saved
money on fixed manufacturing costs. Calculate the units that would need to be sold in 2021 to achieve
the same profit as 2020. Comment on the impact of Covid-19 on the costs for 2020 using the relevant
figures you calculated above. [7 marks]
New CMA = SP – VC
New CM = 560 – (250 + 45)
New CM = $265
To achieve same profit, with reduced fixed costs:
(530,000 + 4,500,000)/265 = 18,982 units would need to be sold. (3 marks)

Comment on the impact of Covid-19 on the costs for 2020 using the relevant figures you have
calculated. (4 marks)
• Need to sell approximately 1,000 more
• Plastic costs have risen 8.7%
• An increase in sales % would be required
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• Other alternatives may need to be considered to ensure costs are covered
• Advertising may need to increase when customers are in lockdown
• Lockdown and other restrictions may affect not only raw material prices but also shipping
costs
• Shipping time/supply chain issues may add to the costs
• Workers being displaced or no longer able to get to the workplace during lockdown may
affect the ability of the business to function as usual.

Reasonable answers accepted

2. Safety First is a manufacturer of life jackets, life vests and buoyancy aids. They have provided the
following information relating to the sales of their products in 2020:

Life Jackets Life Vests Buoyancy aids

Sales mix (8,500 units) 2,000 2,600 3,900
Selling price $120 $110 $85
Variable cost/unit $45 $30 $25

Total Fixed costs = $515,000

Required:

A. Calculate the break-even point in total units and units per product for 2020, using the following table:
[5 marks]
Life Jackets Life Vests Buoyancy Aids Total
Unit sales 2,000 2,600 3,900 8,500
Contribution margin 75 80 60
Sales mix % 23.53% 30.59% 45.88%
WACM $17.65 $24.47 $27.53 $69.65

Breakeven point = 515,000/$69.65 = 7,395 units (2 marks)

Life Jackets (7,395 * 23.53%) 1,741 units (1 mark)

Life Vests (7,395 * 30.59%) 2,263 units (1 mark)
Buoyancy Aids (7,395 * 45.88%) 3,393 units (1 mark)

B. Calculate the profit for 2020 [2 marks]

Life Jackets Life Vests Buoyancy Total

Aids
Contribution margin 75 * 2,000 = 80 * 2,600 = 60 * 3,900 = 592,000
150,000 208,000 234,000
Fixed costs 515,000
Profit 77,000 (2 marks)

C. Safety First is rearranging its store and wants to ensure that they make the best use of the limited space
available to maximise sales possibilities. They have 150 metres of space available, and the 3 products use
up space as follows:
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Life Jackets Life Vests Buoyancy
Aids
Contribution margin per product $75 $80 $60
Minimum shelf space required per 2.5 1.2 1.5
product

How should the shelf space (150 metres) be allocated to the 3 products to maximise the profits? Justify your
reasons for the space allocation using the relevant figures calculated above. [8 marks]

CM per limiting factor

Life jackets 75/2.5 = $30/m
Life Vests 80/1.2 = $66/m
Buoyancy Aids 60/1.5 = $40/m

Therefore divide up the space to maximise life vests which have best CM per limiting factor:
Life Jackets – minimum 2.5 metres (1 mark)
Life Vests – maximum (150-(2.5+1.5)) = 146 metres (1 mark)
Buoyancy Aids – minimum of 1.5 metres (1 mark)

Refer to the calculation above and provide a thorough justification about the result. (5 marks)

According to the calculations of the CM, life jackets and Buoyancy Aids are the least profitable products
per limited shelf space ($30/m & $40/m). Therefore, these two products should be allocated only the
minimum shelf space required per product (2.5m & 1.5m). On the other hand, Life vests are the most
profitable products for the company concerning the limiting factor (CM/shelf space = $66/m). Therefore,
the company should allocate the rest of the available shelf space to this product (150-(2.5+1.5)) = 146m.

Section 4: Budgeting (25 marks)

Bitcom Limited had undertaken the following budget planning and actual income statements for the
month of December 2020.

The budget is planned to sell 700 boxes at $700 each. The budget shows that it takes 20 kg of raw
material to produce 1 box of product. Each kg costs $14. The direct labour costs are budgeted at 10
hour per box produced, and the hourly rate for direct labour is $10. Fixed production and fixed
administrative expenses are budgeted at 140,000 and 60,000 each.

Required:

1. Prepare the budgets alongside the actual results for the month of December 2020 and calculate
the individual variances, indicating whether each variance is favourable or unfavourable. Show all
workings.
[15 marks]

Budget Data Actual Variance Favourable or

Unfavourable
Sales in units 700 units 700
Sales $490,000 √ $525,000 35,000 √ F (1/2 √)
Direct materials cost $196,000 √ $210,000 14,000 √ U (1/2 √)

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Direct labour cost $70,000 √ $80,850 ($10.5 per 10,850 √ U (1/2 √)
hour x 11 hours)
Fixed production cost $140,000 √ $155,000 15,000 √ U (1/2 √)
Fixed administrative $60,000 √ $70,000 10,000 √ U (1/2 √)
expense
Net Profit $56,000 √ $9,150 46,850 √ U (1/2 √)
(1 mark for each correct √ - total 15 marks)

2. Explain the possible causes of the variances in a maximum of 12 sentences. [10 marks]

Explanations for variances:

1. Favourable Sales in $ variance – was due to higher selling price of $750 compared to the
budgeted selling price of $700.
2. Unfavourable Direct Material costs variance – may be due to higher costs charged by the
suppliers. The expected DM cost per unit was $280 whereas the actual DM cost per unit was
(210,000/700) = $300.
3. Unfavourable Direct Labour costs variance – may be due to higher labour rate paid as a result
of union’s demand or government regulation. The DL per unit paid was (73500/700) = $105
compared to the budgeted rate of $100.
4. Uavourable Fixed production costs – could be due to higher than expected maintenance and
repair costs carried out due to longer working hours and processing lower quality materials
5. Unfavourable Fixed administrative expense variance – could be due to higher than expected
salaries, insurance actually paid. An example could be hiring a more qualified person to do the
same job but at a higher salary package
6. Unfavourable Net Profit – while earning more sales but incurred more than expected direct
costs and the costs to support production lines and to pay administrative costs
(2 marks for each correct answer given above to a total of 10 marks).

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