Professional Documents
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Mark
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SCHOOL OF ACCOUNTING
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ACCT 1511:
Accounting and Financial Management 1B
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Total
(/80)
FINAL EXAMINATION
June 2007
Time Allowed:
Reading Time:
Total Number of Questions:
3 Hours
10 minutes
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Required:
(a) Explain why Jack thinks the reclassification of the $60,000, 2-year Notes Payable
as Accrued Expenses can increase the net cash flow from operating activities. Use
the concepts underlying: (i) the indirect method, and (ii) the direct method of
calculating cash inflows and outflows from operating activities to support your
answer.
(i) Operating:
(ii) Investing:
(iii) Financing:
(c) Based on your answers above, do you agree with Jacks suggestion to reclassify
$60,000, 2-year Notes? (2 marks).
Footnotes:
(1) The Income Statement for the year ended 31 July 2005 has not been restated
as permitted by AASB 132 Financial Instruments: Disclosure and Presentation
and AASB 139 Financial Instruments: Recognition and Measurement which have
been adopted from 1 August 2005.
(2) The profit for the year ended 30 July 2006 was $1,163.6 million. After
adjusting for the gain on disposal of Myer of $583.7 million and strategic initiative
costs of $207.4 million, the profit for the year would have been $787.3 million.
QUESTION 2 CONTINUED:
Required:
(a) Using the information from Coles 2006 concise financial statements, calculate
the missing 2006 figures in the worksheet below on key financial information.
State your answers in the boxes provided. Note that ratio formulae are
provided on page 4 (6 marks).
Coles
2006
Income Statement
Revenue from sale of goods
34,212.0
33,018.0
37,849.7
31,481.2
1,027.2
1,722.2
1,302.1
536.4
1,163.6
686.1
637.9
1,014.6
817.2
816.2
3,881.3
9,135.3
3,962.8
3,598.0
4,259.6
9,223.8
3,962.9
3,415.0
63.2
$14.61
23.12
EBIT
Profit from continuing operations
Profit for the year
[see Note 2 of Income Statement]
Balance Sheet
Total Current Assets
Total Assets
Total Current Liabilities
Total Equity
Basic EPS (cents)
As at the financial year-end date
Closing share price
Price Earnings (PE) Ratio
2005
Woolworths
2006
2005
4,027.8
3,064.5
8,775.2
3,780.7
2,002.2
51.8
90.89
79.19
$10.20
19.69
$19.93
21.93
$16.67
21.05
2.33%
20.23%
12.70%
11.29%
24.16%
11.78%
13,346.4
Trend analysis
Sales growth
Profit growth (from continuing
operations)
Liquidity Ratios
Current Ratio
1.07
0.81
2.70
3.31
4.38
18.61
6.90
8.67
(b) Comment on the Sales growth of Coles Ltd from 2005 to 2006 compared to the
sales growth of Woolworths Ltd over the same period (1 mark).
(c) Comment on the Profit growth (from continuing operations) with reference to
the changes in the Profit for the year from 2005 to 2006 for Coles Ltd (2
marks).
(d) What do you think of the decision by the Coles management to report $1,163.6m
as the Profit for the year in the Income Statement? Explain your answer by
referring to the footnote 2 of the Income Statement on page 5 (2 marks).
(e) With references to a rule of thumb, discuss the change in the Current Ratios of
Coles Ltd over the last 2 years, and whether it gives rise to any cause for concern
(2 marks).
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$m
2006
678.2
330.9
Expenses
(908.6)
Earnings Before Interest, Tax, Depreciation & Amortisation (EBITDA) (230.4)
305.7
25.2
Sales revenue
(35.3) (12.3)
3.3 (1.6)
(262.4)
11.3
(3.4)
(262.4)
7.9
After reviewing the draft 2007 Income Statement, the Chief Executive Officer (CEO)
is concerned that, by reporting a loss for 2007, it may cause the Companys share
price to drop and make it difficult to raise further funds from a share issue. The CEO
therefore asks the Chief Financial Officer (CFO) for suggestions regarding the
figures. The CFO suggests that the $450 million spent on marketing costs on 1st
January 2007 and currently treated as an expense, should be capitalised and amortised
over 3 years instead.
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Required:
(a) Re-calculate and prepare a new 2007 Income Statement to reflect the proposed
change in the accounting policy for marketing costs. Use 1-decimal point in
every step of the calculations as well as for the answer (4 marks).
New
2007
Old
2007
2006
678.2
330.9
Expenses
(908.6)
305.7
EBITDA
(230.4)
25.2
(35.3)
(12.3)
3.3
(1.6)
(262.4)
11.3
Sales revenue
(3.4)
(262.4)
7.9
(b) According to the AASB Framework, what is the appropriate treatment for
marketing costs in 2007? Apply the relevant definition and recognition criteria in
your answer (3 marks).
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(c) Discuss the cash flow implications (directional and size effects, if any) of the
proposed accounting policy change for 2007 and 2008 (3 marks).
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Part B (5 marks):
The CFO is concerned that the Board of Directors may not approve the new Income
Statement prepared in Part A. The CEO, who is also the Board Chairperson and the
Chairperson of the companys Audit Committee, however, is not as concerned about
the Board approval. The CEO believes that he will be able to persuade other Board
directors (including members of the Audit Committee who are also his golfing
partners and have little accounting expertise), and obtain approval for the revised
Income Statement.
(a) Discuss how good corporate governance regarding the roles of the Board
Chairperson and CEO could potentially have avoided the above situation from
arising (2 marks).
(b) Discuss how good corporate governance in the role and composition of the Audit
Committee may assist in having the Revised Income Statement for 2007 being
rejected (3 marks).
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Identify threats:
Evaluate significance:
Respond:
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$3,600
$11,000
$26,000
Required:
The following transactions have occurred during the month of March 2007 in the
Assembly Department of Black Swan Ltd. Write appropriate journal entries for each
of the transactions.
(a)
(b)
(c)
Raw materials were issued for production. Raw materials balance on 31st
March 2007 was $20,000 (2 marks).
(d)
Applied overhead at the rate of $18 per machine hour. Machine hours
incurred for the Assembly Department was 2000 hours (1 mark).
(e)
(f)
(g)
(h)
Finished Goods balance on 31st March was $10,000 and Snooze Sheep dolls
were sold on an account with a 20% mark-up on the same day (4 marks).
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(a)
(b)
(c)
(d)
(e)
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(f)
(g)
(h)
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Sales in November were $400,000 and are budgeted at $440,000 for December,
$300,000 for January, and $280,000 for February.
Cash collections are expected to be 60 per cent in the month of sale and 38 per
cent in the month following the sale. 2 per cent of sales each month are expected
to be uncollectible (that is, they are expected to be written off straight away).
Expenses are paid in the month they incur. Variable operating expenses
(excluding bad debts) are expected to amount to 4 per cent of sales. Fixed
monthly expenses (excluding depreciation) are budgeted at $25,200.
Assets
Cash
Accounts receivable
Inventory
Property, plant and equipment
Accumulated depreciation
$ 44,000
$ 152,000
$ 264,000
$3,100,000
($1,360,000)
Total Assets
$2,200,000
$ 324,000
$1,600,000
$ 276,000
$2,200,000
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Required:
(a) Calculate the budgeted cash collections for December 2007 (3 marks).
(b) Calculate the budgeted cash payments for December 2007 (2 marks).
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(c) Prepare the budgeted Income Statement for December 2007 (5 marks).
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SOLUTIONS TO QUESTION 1
PART A
(i)
Under the indirect method, increases in non-debt current liabilities are added back
to net profit to derive the CFO.
Thus CFO is higher by the amount of the reclassification.
(ii)
Under the direct method, we have to reconstruct balance sheet accounts to back
out the amount of cash paid or received.
The reclassification would result in an increase in the closing balance of the Other
Payables account.
Other things equal, this translates into a corresponding decrease in the amount
calculated for cash paid for Other Payables.
The increase in CFO is reflected in the reduction in the cash paid for Other
Payables.
PART B
(i) Operating cash flows increased by $60,000
(ii) Investing cash flows remained unchanged
(iii) Financing cash flows decreased by $1,060,000
(iv) Total cash flows decreased by $1,000,000
PART C
See tutors during consultation times
SOLUTIONS TO QUESTION 2
(a)
EBIT
Sales growth
Profit growth continuing operations
Current Ratio
Leverage
Interest Coverage
850.9
3.62%
-21.82%
0.98
2.54
8.60
(b) (e)
See tutors during consultation times
(f)
Share price in 2008
=
=
$0.90 x 23.12
$20.81
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SOLUTIONS TO QUESTION 3
Part A
(a)
Sales revenue
678.2
Expenses
(458.6)
EBITDA
219.6
(185.3)
3.3
37.6
(11.3)
26.3
(b)
See tutors during consultation times
(c)
2007
Accounting policy choices have no cash flow implications.
2008
There is an net profit before tax of $37.6 million in 2007 so there is a tax cash outflow
impact of $11.3 million.
Part B
See tutors during consultation times.
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SOLUTIONS TO QUESTION 4
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
Dr
Dr
Dr
Dr
Dr
Dr
Dr
Dr
Dr
Raw Materials
Cr
Accounts Payable
28,400
WIP
Cr
48,000
28,400
Wages Payable
WIP
Cr
Raw Materials
WIP
Cr
Overhead Control
48,000
12,000
12,000
36,000
36,000
Overhead Control
34,000
Cr
Wages Payable
Cr
Accumulated Depreciation
22,000
12,000
Overhead Control
Cr
COGS
2,000
2,000
Finished Goods
Cr
WIP
72,000
COGS
Cr
Finished Goods
88,000
Accounts Receivable
Cr
Sales Revenue
105,600
72,000
88,000
105,600
SOLUTIONS TO QUESTION 5
Part A
See tutors during consultation times.
Part B
(a) Cash collection in December
Month of sale
November
December
Sales
$400,000
$440,000
December
$152,000
$264,000
$347,200
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$330,000
$264,000
$17,600
$25,200
$306,800
Sales revenue
Less: Cost of goods sold (75% of sales)
Gross margin (25% of sales)
Less: Operating expenses:
Variable operating expenses 4% of sales)
Bad debts expense (2% of sales)
Depreciation ($432,000/12)
Other expenses
Total operating expenses
Income before taxes
Tax expense
Net profit after tax
December
$440,000
$330,000
$110,000
$17,600
$8,800
$36,000
$25,200
$87,600
$22,400
$6,720
$15,680
o/b 152,000
Sales 440,000
Accounts Receivable
Cash (sales November) 152,000
Cash (sales December) 264,000
Bad debts written off 8,800
c/b 167,200
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