Course info
Past examination paper 1
025_ZA_2016_d0
This paper is not to be removed from the Examination Halls
UNIVERSITY OF LONDON AC1025
BSc Degrees and Diplomas for Graduates in Economics, Management,
Finance and the Social Sciences, the Diplomas in Economics and Social
Sciences
Principles of Accounting
Specimen paper using the revised structure - December 2016
Section A of this examination consists of 20 multiple choice questions. You
should attempt to answer ALL the questions. Each question has four possible
answers (a-d). There is only one correct answer to each of the questions.
Please mark the correct answer on the special sheet provided. The maximum
mark for this part is 30.
Sections B and C: Please answer QUESTION 1 (30 marks) of Section B; ONE
question from Section C and ONE further question from either section B or C
(except for Question 1 all questions are worth 20 marks).
Workings should be submitted for all questions requiring calculations. Any
necessary assumptions introduced in answering a question are to be stated.
Extracts from compound interest tables are given after the final question on this
paper.
8-column accounting paper is provided at the end of this question paper. If
used, it must be detached and fastened securely inside the answer book.
A calculator may be used when answering questions on this paper and it must
comply in all respects with the specification given with your Admission Notice.
The make and type of machine must be clearly stated on the front cover of the
answer book.
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SECTION A - Answer ALL questions in this section which is worth 30 marks in
total. All questions carry equal marks.
Q.1 According to the IASB the principal objective of financial reporting is to:
A Meet the requirements of tax authorities
B Provide information useful to investors and lenders
C Produce a list of account balances to check accuracy of the records
D Record every transaction individually
Q.2 Inventory is valued using First In First Out (FIFO). Opening inventory was 12
units costing £8 each. Purchases were 60 units at £10 each, then sales of 18
units were made, followed by sales of 23 units. Closing inventory is valued (to
the nearest £) at:
A £286
B £300
C £280
D £310
Q.3 A company has sales of £450,000 for the year. The return on capital employed
is 8% and asset (capital) turnover is 2.4. What was the operating profit for the
year?
A £12,000
B £12,960
C £15,000
D £22,500
___________________________________________________________________
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Information for questions 4 and 5
On September 1st Jim started a business, called J Enterprises, by transferring
£12,000 into a business bank account.
During the first month of operation other relevant information is as follows:
• On 1st acquired a second hand vehicle paying £5,000 in cash and agreed to
pay the balance of the purchase price at the end of December.
• On 1st September paid £600 for a year’s insurance on the vehicle and £240 for
a year’s vehicle tax.
• Purchased goods for cash of £5,000.
• Sold goods for cash of £8,200.
• Incurred vehicle running costs of £1,100 of which £1,000 was paid in cash.
• There are no stocks of goods at the end of September.
• Ignore depreciation on the vehicle.
Q.4 J Enterprises net profit for the month of September was
A £2,100
B £2,120
C £3,200
D £2,030
Q.5 J Enterprises cash and bank balances at the end of September totalled
A £8,840
B £3,650
C £8,360
D £3,150
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Q.6 The simplified statement of Financial Position of a company contains only the
following items:
Trade payables £3,300
Trade receivables ?
Inventory £4,500
Long term debt £4,000
Non-Current assets £6,200
Cash £1,300
Equity ?
If the debt:equity ratio is 0.4:1 then trade receivables are?
A £1,300
B £2,000
C £5,300
D £8,000
Q.7 A company sells £4,000 of inventory for £6,000 on credit. Taking only this
transaction into account, which of the following statements is untrue?
A The equity will be changed
B The current assets will be changed
C The cash will be unchanged
D The total assets will be unchanged
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Q.8 The following ratios have been calculated for Theo plc for the year ended 31
December.
• Average trade receivables period was 38 days
• Average trade payables period was 45 days
• Average inventory holding period was 18 days
The average cash- to cash cycle of Theo for year ended 31 December was
A 11 days
B 65 days
C 25 days
D Minus 1 day
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Information for questions 9 and 10
The following are extracts from the financial statements of a company for the two
years ended 31 December 2014.
Statement of Financial position as at 31 December:
2013 2014
£000 £000
Inventory 925 1,583
Trade receivables 488 396
Current asset investments 120 100
Cash and bank balances 312 26
Bank overdraft - 180
Trade payables 910 1,418
Non-Current assets 1,536 2,728
Non- Current liabilities - 300
The current asset investments are highly liquid and are payable on demand.
The income statement for the year ended 31 December 2014 shows an operating
profit of £1,512,000 after charging deprecation of £625,000.
Q.9 The cash flow from operations of the company for the year ended 31
December 2014 were
A £ 829,000
B £ 1,454,000
C £ 2,079,000
D £ 2,195,000
___________________________________________________________________
Q.10 The change in the company’s cash and cash equivalents for the year ended
31 December 2014 were a net outflow of
A £158,000
B £378,000
C £466,000
D £486,000
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Q.11 A company has a payback period of 2.5 years. The net cash inflows for years
1, 2, 3, and 4 are budgeted to be £5,000; £5,500; £6,000 and £7,000
respectively.
The cash outflow at the start of year 1 is expected to be:
A £13,500
B £16,500
C £20,000
D £23,500
Q.12 A company has fixed costs of £1,200,000 per annum. It manufactures a
single product, which it sells for £40 per unit. Its contribution to sales ratio is
40 percent.
The company’s break-even point in units is:
A 18,000
B 30,000
C 50,000
D 75,000
Q.13 Internal rate of return is:
A The method used to calculate cost of capital
B The mean of positive and negative NPVs
C A form of ARR
D The discount rate which results in an NPV of zero
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The following information relates to questions 14 and 15
A company has the following data for a month
Budgeted machine hours 17,000
Budgeted overheads £297,500
Actual machine hours 15,856
Actual overheads £292,400
Q.14 What is the budgeted machine hour overhead absorption rate for the
month?
A £17.50 per hour
B £17.20 per hour
C £18.44 per hour
D £18.76 per hour
Q.15 Based on the above data what is the total amount of overhead under/over
absorbed?
A £5,100 under absorbed
B £5,058 over absorbed
C £5,100 over absorbed
D £14,920 under absorbed
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Q.16 Which of the following statements is true?
A Margin of safety is the difference between expected sales and actual sales
B Margin of safety is the difference between budgeted costs and actual
costs
C Margin of safety is the difference between sales at break even and
expected sales
D Margin of safety is the difference between budgeted profit and actual profit
Q.17 A company has the following standard material cost for a month:
One unit requires 6 hours of labour at £8 per hour
Budgeted production is 850 units
Actual output was 870 units for the month and a total 5000 hours were
worked, at a cost of £8.50 per hour.
What was the total labour variance for the month (to the nearest £)?
A £1,700 favourable
B £1,700 adverse
C £740 favourable
D £740 adverse
Q.18 If a manufacturing company is operating with scarce material resources it
should choose to make products which:
A Have the highest contribution per unit of output
B Have the lowest material usage
C Have the highest contribution per unit of material
D Have the highest selling price
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Q.19 A project requires purchase of plant for £1,000,000 at the start of year 1.
The project will last 3 years after which the plant will be sold for £400,000.
The plant is assumed to be consumed evenly over the period. The
expected profits from the project before deprecation are as follows:
Year 1 £400,000;
Year 2 £700,000;
Year 3 £600,000;
Year 4 £0 (break even profit/loss)
What is the accounting rate of return (ARR) for the project (to one decimal
place)?
A 27.5%
B 39.3%
C 60.7%
D 91.7%
Q.20 A company operates a standard costing system. The following information
relates to a month:
Budgeted sales volume 10,000 units
Budgeted selling price per unit £10.00
If the actual sales were 9,000 units at a selling price of £12.00, the sales
price variance would be:
A £18,000 favourable
B £18,000 adverse
C £20,000 favourable
D £20,000 adverse
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SECTION B
Answer question 1 and not more than one further question from this section.
1. Ophelia Ltd’s trial balance as at 31 October 2015 is shown below.
£’000 £’000
Share capital – Ordinary shares of £1 20,000
Share premium 5,000
Trade payables 2,798
Land and buildings – cost 35,152
Land and buildings – accumulated depreciation at 1
November 2014
7,000
Plant and equipment – cost 12,500
Plant and equipment – accumulated depreciation at 1
November 2014
7,400
Trade receivables 5,436
Accruals,at 31 October 2015 436
8% bank loan repayable in 10 years 15,000
Cash at bank 9,774
Retained earnings 9,801
Interest paid 600
Sales 58,411
Purchases 41,620
Distribution costs 5,443
Administrative expenses 4,789
Inventories at 1 November 2014 9,032
Dividends paid 1,500 ______
125,846 125,846
Further information
1. The inventories at the close of business on 31 October 2015 were valued at
£7,878,000.
2. Depreciation is to be provided for the year as follows:
Buildings 2% per annum - straight line basis
Plant and equipment 20% per annum - reducing balance basis
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Depreciation is apportioned as follows:
%
Cost of sales 40
Distribution costs 40
Administrative expenses 20
Land, which is non-depreciable, is included in the trial balance at a cost of
£15,152,000.
3. The company began a series of television adverts for the company’s range
of products on 1 October 2015 at a cost of £45,000. The adverts were to run
for three months and were to be paid for in full at the end of December 2015.
Advertising expenses are to be included in distribution costs.
4. Interest on the bank loan for the last six months of the year has not been
included in the accounts in the trial balance.
5. Tax on profits for the year has been calculated as £970,000.
6. Management has decided that a provision for bad debts of 5% of trade
receivables should be set up and charged to administrative expenses.
7. Ophelia Ltd paid an insurance premium for annual cover up to 30 June 2016.
The cheque for £45,000 was incorrectly treated as a supplier payment.
Insurance is an administrative expense.
8. Ophelia Ltd proposed an ordinary dividend of 10p per ordinary share on 31
October 2015.
Required:
(a) Prepare the following financial statements for Ophelia Ltd.
(i) Income statement for the year ended 31 October 2015. (10 marks)
(ii) Statement of changes in equity for the year ended 31 October 2015.
(3 marks)
(iii) Statement of financial position as at 31 October
(12 marks)
(b) Explain the objective of published financial statements and identify the two
principal characteristics of financial statements, which contribute to achieving
this objective. (5 marks)
Total 30 marks
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2. The following are the draft financial statements for Yorick Ltd for the year
ended 31 December 2015.
Income Statement for the year ended 31 December 2015
£
Revenue 7,350,500
Cost of sales (4,560,600)
Gross profit 2,789,900
Administrative expenses (1,060,800)
Distribution costs (768,000)
Profit from operations 961,100
Finance charge (75,000)
Profit before tax 886,100
Income tax expense (350,000)
Profit for the period 536,100
Statements of Financial Position as at 31 December
2015 2014
£ £ £ £
ASSETS
Non-current assets
Property, plant and equipment
Intangible assets
6,985,400
350,700
6,713,500
300,500
7,336,100 7,014,000
Current assets
Inventories
Trade receivables
Investments
Cash and cash equivalents
560,500
169,000
25,000
10,700
765,10
0
144,50
0
12,400
20,200
765,200 942,200
Total assets 8,101,300 7,956,200
EQUITY AND LIABILITIES
Capital and reserves
Ordinary share capital
Share premium account
Retained earnings
5,000,000
1,200,000
1,342,800
4,300,000
950,000
2,206,700
7,542,800 7,456,700
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Current liabilities
Trade payables
Taxation
148,500
410,000
139,50
0
360,00
0
558,500 499,500
Total equity and liabilities 8,101,300 7,956,200
Statement of changes in equity for the year ended 31 December 2015 (extract)
Retained earnings
£
Profit for the period 536,100
Dividends on ordinary shares (1,400,000)
Balance brought forward 2,206,700
Balance carried forward 1,342,800
The following additional information is relevant.
1. During the year Yorick Ltd issued redeemable preference shares at par.
2. The current asset investments are government bonds and management
has decided to class them as cash equivalents.
3. During the year Yorick Ltd sold plant and equipment with a carrying
amount of £560,500 for £600,000. Total depreciation charged for the year
was £750,600.
4. Yorick Ltd acquired new intangible assets at a cost of £77,500 during the
year.
5. An impairment review at 31 December 2015 identified a fall in the
recoverable amount of intangible assets. As a result, an impairment loss
of £15,000 was identified and written off to administrative expenses.
Amortisation on intangible assets is included in expenses.
6. During the year Yorick Ltd made a 1 for 100 bonus issue of its ordinary
shares. There was an issue of shares for cash after the bonus issue.
Required:
Prepare a statement of cash flows for Yorick Ltd for the year ended 31 December
2015. (20 marks)
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3. Claudius plc is a manufactruring company. In recent years, the company has
faced severe competition from overseas businesses and its sales volume has
hardly changed. The company has recently applied for an increase in its bank
overdraft limit from £750,000 to £1,500,000. The bank manager has asked
you, as the bank’s credit analyst, to look at the company’s application.
You have the following information:
Statements of financial position as at 31 December 2014 and 2015
2014 2015
£’000 £’000
Tangible non-current assets
Freehold land and buildings, at cost
Plant and equipment, at net book value
1,800
3,150
1,800
3,300
4,950 5,100
Current assets
Inventory
Trade receivables
Short-term investments
1,125
825
300
1,500
1,125
-
2,250 2,625
Total assets 7,200 7,725
Current liabilities
Bank overdraft
Trade payables
Taxation payable
Provisions
225
300
375
225
675
375
300
225
1,125 1,575
Non-current liability
8% debentures, 2017 1,500 1,500
Total liabilities 2,625 3,075
Equity
Ordinary shares of £1 each
Share premium account
Retained earnings
2,250
750
1,575
2,250
750
1,650
4,575 4,650
Total equity and liabilities 7,200 7,725
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Statements of comprehensive income for the years ended 31 December 2014
and 2015
2014 2015
£’000 £’000 £’000 £’000
Turnover 6,300 6,600
Cost of sales : materials
: labour
: production overheads
1,500
2,160
750
1,575
2,280
825
4,410 4,680
Gross profit 1,890 1,920
Administrative expenses 1,020 1,125
Operating profit 870 795
Investment income 15 -
885 795
Interest payable : debentures
: bank overdraft
120
15
120
75
135 195
Profit before taxation 750 600
Taxation 375 300
Profit attributable to shareholders 375 300
You are also provided with the following information:
i. The general price level rose on average by 8% between 2014 and 2015.
Average wages rose by 10% during this period.
ii. The debenture stock is secured by a fixed charge over the freehold land and
buildings, which have recently been valued at £3,000,000. The bank overdraft
is unsecured.
Required:
(a) Calculate for the years ended 31st December 2014 and 2015 the return on
capital employed and two other ratios which provide insight into the
profitability and efficiency of Claudius plc. (Answer to 2 places of
decimals.) (6 marks)
(b) Calculate for the years ended 31st December 2014 and 2015 the gearing
ratio and two ratios which provide insight into the liquidity and working
capital control of Claudius plc. (Answer to 2 places of decimals.) (6 marks)
(c) Based on the above calculations and the other information provided, draft
a set of notes for a discussion with the bank manager which highlight the
key areas she should consider when deciding upon the proposed
increased overdraft limit. (8 marks)
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SECTION C
Answer one question and no more than one further question from this section.
4. Osric Ltd manufactures components for the motor industry. A specialist luxury
car company has offered Osric a contract to supply a component identified as
“RSport”. The contract is for 400 “RSport”s over the next 12 months. The
initial price suggested by the car company is £145 for each “RSport”.
The data relating to the production of each “RSport” is:
1. Material requirements:
3 kg material M1 – see note (i) below.
2 kg material M2 – see note (ii) below.
1 part P2 – see note (iii) below.
Note (i) Material M1 is in continuous use by the company. 1,000 kg are
currently held in stock at a book value of £4.70 per kg but it is known that future
purchases will cost £5.50 per kg.
Note (ii) 1,200 kg of material M2 are held in stock. The original cost of this
material was £4.30 per kg but, as the material has not been required for the last two
years, it has been written down to £1.50 per kg scrap value. The only foreseeable
alternative use is as a substitute for material M4 (in current use) but this would
involve further processing costs of £1.60 per kg. The current cost of material M4 is
£3.60 per kg.
Note (iii) It is estimated that Part P2 could be bought for £50 each.
2. Labour requirements: Each “RSport” would require five hours of skilled
labour and five hours of semi-skilled. An employee possessing the
necessary skills is available and is currently paid £5 per hour. A
replacement would, however, have to be obtained at a rate of £4 per hour
for the work which would otherwise be done by the skilled employee. The
current rate for semi-skilled work is £3 per hour and an additional
employee could be appointed for this work.
3. Osric Ltd absorbs overhead by a machine hour rate, currently £20 per
hour of which £7 is for variable overhead and £13 for fixed overhead. If
this contract is undertaken it is estimated that fixed costs will increase for
the duration of the contract by £3,200. Spare machine capacity is
available and each component would require four machine hours.
Required:
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(a) Prepare a statement showing the contribution from the contract to produce
“RSport” at the suggested price. (12 marks)
(b) Explain each figure of cost included in the statement in (a) above. (8 marks)
5. Fortinbras Ltd manufactures a single product. The following information relates
to the actual selling price and actual cost of the product for March 2016.
£’000
Sales (50,000) units 2,250
Direct materials (240,000 litres) 528
Direct labour (250,000 hours) 1,375
Variable production overhead 245
Total variable costs 2,148
Fixed production overhead 650
Total costs 2,798
Loss (548)
The budgeted selling price and standard cost of each unit were as follows.
£ £
Selling price 55
Direct materials (5 litres) 10
Direct labour (4 hours) 20
Variable production overhead (recovered on direct
labour hours)
5
Total variable standard cost 35
Standard contribution 20
The total budgeted sales for March were 40,000 units and the budgeted fixed
overheads for the month were £600,000.
Required:
Prepare an operating statement for Fortinbras Ltd which reconciles
budgeted profit with the actual loss showing two variances for each cost
including fixed overheads. (20 marks)
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6. Polonius Manufacturing makes components for the telecoms industry. The
development department has designed a new product and incurred
development costs of £30,000.
The following information is available.
1. The new product is expected to have an initial life span of four years and
demand has been estimated at 10,200 units in year 1 with sales increases
of 10% in each of years 2 and 3 and sales of 9,000 units in year 4. The
unit selling price will be £34. There will be no stocks of finished goods.
2. Since the production cycle is very short, both production and sales could
start immediately, should the production go ahead. Each unit of the new
product will require 2 hours of labour which will need to be hired. There
will be no problem hiring at £8.00 per hour.
3. Each unit of the new product will require one component, a capacitor. The
company has a stock of 15,000 capacitors which were purchased two
years ago for £4.00 each. These have no resale value or alternative use.
Any capacitors to be purchased from now on will cost £5.00 each.
4. Each unit produced will also require £8.00 of sundry raw materials such
as wire and a circuit board. The company holds no stock of the sundry
raw materials.
5. The company already owns the machinery that could be used in the
manufacture of this product. If it is not used for this product it will be sold
immediately for £200,000. If it is used for this production, after four years it
is likely to have a residual value of £40,000.
6. Fixed production overheads allocated to this project will cost £40,000 per
annum. The cost of capital is 15% per annum. Assume all cash flows
occur on the last day of each year except for the immediate disposal of
the existing machinery.
Required:
(a) Calculate the Net Present Value (NPV) of this project (14 marks)
(b) Calculate the payback period of this project using nominal cash flow.
(3 marks)
(c) Advise Polonius Company on the acceptability of the project. (3 marks)
025_ZA_2016_d0
This paper is not to be removed from the Examination Halls
UNIVERSITY OF LONDON AC1025
BSc Degrees and Diplomas for Graduates in Economics, Management,
Finance and the Social Sciences, the Diplomas in Economics and Social
Sciences
Principles of Accounting
Specimen paper using the revised structure - December 2016
Section A of this examination consists of 20 multiple choice questions. You
should attempt to answer ALL the questions. Each question has four possible
answers (a-d). There is only one correct answer to each of the questions.
Please mark the correct answer on the special sheet provided. The maximum
mark for this part is 30.
Sections B and C: Please answer QUESTION 1 (30 marks) of Section B; ONE
question from Section C and ONE further question from either section B or C
(except for Question 1 all questions are worth 20 marks).
Workings should be submitted for all questions requiring calculations. Any
necessary assumptions introduced in answering a question are to be stated.
Extracts from compound interest tables are given after the final question on this
paper.
8-column accounting paper is provided at the end of this question paper. If
used, it must be detached and fastened securely inside the answer book.
A calculator may be used when answering questions on this paper and it must
comply in all respects with the specification given with your Admission Notice.
The make and type of machine must be clearly stated on the front cover of the
answer book.
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SECTION A - Answer ALL questions in this section which is worth 30 marks in
total. All questions carry equal marks.
Q.1 According to the IASB the principal objective of financial reporting is to:
A Meet the requirements of tax authorities
B Provide information useful to investors and lenders
C Produce a list of account balances to check accuracy of the records
D Record every transaction individually
Q.2 Inventory is valued using First In First Out (FIFO). Opening inventory was 12
units costing £8 each. Purchases were 60 units at £10 each, then sales of 18
units were made, followed by sales of 23 units. Closing inventory is valued (to
the nearest £) at:
A £286
B £300
C £280
D £310
Q.3 A company has sales of £450,000 for the year. The return on capital employed
is 8% and asset (capital) turnover is 2.4. What was the operating profit for the
year?
A £12,000
B £12,960
C £15,000
D £22,500
___________________________________________________________________
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Information for questions 4 and 5
On September 1st Jim started a business, called J Enterprises, by transferring
£12,000 into a business bank account.
During the first month of operation other relevant information is as follows:
• On 1st acquired a second hand vehicle paying £5,000 in cash and agreed to
pay the balance of the purchase price at the end of December.
• On 1st September paid £600 for a year’s insurance on the vehicle and £240 for
a year’s vehicle tax.
• Purchased goods for cash of £5,000.
• Sold goods for cash of £8,200.
• Incurred vehicle running costs of £1,100 of which £1,000 was paid in cash.
• There are no stocks of goods at the end of September.
• Ignore depreciation on the vehicle.
Q.4 J Enterprises net profit for the month of September was
A £2,100
B £2,120
C £3,200
D £2,030
Q.5 J Enterprises cash and bank balances at the end of September totalled
A £8,840
B £3,650
C £8,360
D £3,150
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Q.6 The simplified statement of Financial Position of a company contains only the
following items:
Trade payables £3,300
Trade receivables ?
Inventory £4,500
Long term debt £4,000
Non-Current assets £6,200
Cash £1,300
Equity ?
If the debt:equity ratio is 0.4:1 then trade receivables are?
A £1,300
B £2,000
C £5,300
D £8,000
Q.7 A company sells £4,000 of inventory for £6,000 on credit. Taking only this
transaction into account, which of the following statements is untrue?
A The equity will be changed
B The current assets will be changed
C The cash will be unchanged
D The total assets will be unchanged
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Q.8 The following ratios have been calculated for Theo plc for the year ended 31
December.
• Average trade receivables period was 38 days
• Average trade payables period was 45 days
• Average inventory holding period was 18 days
The average cash- to cash cycle of Theo for year ended 31 December was
A 11 days
B 65 days
C 25 days
D Minus 1 day
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Information for questions 9 and 10
The following are extracts from the financial statements of a company for the two
years ended 31 December 2014.
Statement of Financial position as at 31 December:
2013 2014
£000 £000
Inventory 925 1,583
Trade receivables 488 396
Current asset investments 120 100
Cash and bank balances 312 26
Bank overdraft - 180
Trade payables 910 1,418
Non-Current assets 1,536 2,728
Non- Current liabilities - 300
The current asset investments are highly liquid and are payable on demand.
The income statement for the year ended 31 December 2014 shows an operating
profit of £1,512,000 after charging deprecation of £625,000.
Q.9 The cash flow from operations of the company for the year ended 31
December 2014 were
A £ 829,000
B £ 1,454,000
C £ 2,079,000
D £ 2,195,000
___________________________________________________________________
Q.10 The change in the company’s cash and cash equivalents for the year ended
31 December 2014 were a net outflow of
A £158,000
B £378,000
C £466,000
D £486,000
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Q.11 A company has a payback period of 2.5 years. The net cash inflows for years
1, 2, 3, and 4 are budgeted to be £5,000; £5,500; £6,000 and £7,000
respectively.
The cash outflow at the start of year 1 is expected to be:
A £13,500
B £16,500
C £20,000
D £23,500
Q.12 A company has fixed costs of £1,200,000 per annum. It manufactures a
single product, which it sells for £40 per unit. Its contribution to sales ratio is
40 percent.
The company’s break-even point in units is:
A 18,000
B 30,000
C 50,000
D 75,000
Q.13 Internal rate of return is:
A The method used to calculate cost of capital
B The mean of positive and negative NPVs
C A form of ARR
D The discount rate which results in an NPV of zero
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The following information relates to questions 14 and 15
A company has the following data for a month
Budgeted machine hours 17,000
Budgeted overheads £297,500
Actual machine hours 15,856
Actual overheads £292,400
Q.14 What is the budgeted machine hour overhead absorption rate for the
month?
A £17.50 per hour
B £17.20 per hour
C £18.44 per hour
D £18.76 per hour
Q.15 Based on the above data what is the total amount of overhead under/over
absorbed?
A £5,100 under absorbed
B £5,058 over absorbed
C £5,100 over absorbed
D £14,920 under absorbed
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Q.16 Which of the following statements is true?
A Margin of safety is the difference between expected sales and actual sales
B Margin of safety is the difference between budgeted costs and actual
costs
C Margin of safety is the difference between sales at break even and
expected sales
D Margin of safety is the difference between budgeted profit and actual profit
Q.17 A company has the following standard material cost for a month:
One unit requires 6 hours of labour at £8 per hour
Budgeted production is 850 units
Actual output was 870 units for the month and a total 5000 hours were
worked, at a cost of £8.50 per hour.
What was the total labour variance for the month (to the nearest £)?
A £1,700 favourable
B £1,700 adverse
C £740 favourable
D £740 adverse
Q.18 If a manufacturing company is operating with scarce material resources it
should choose to make products which:
A Have the highest contribution per unit of output
B Have the lowest material usage
C Have the highest contribution per unit of material
D Have the highest selling price
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Q.19 A project requires purchase of plant for £1,000,000 at the start of year 1.
The project will last 3 years after which the plant will be sold for £400,000.
The plant is assumed to be consumed evenly over the period. The
expected profits from the project before deprecation are as follows:
Year 1 £400,000;
Year 2 £700,000;
Year 3 £600,000;
Year 4 £0 (break even profit/loss)
What is the accounting rate of return (ARR) for the project (to one decimal
place)?
A 27.5%
B 39.3%
C 60.7%
D 91.7%
Q.20 A company operates a standard costing system. The following information
relates to a month:
Budgeted sales volume 10,000 units
Budgeted selling price per unit £10.00
If the actual sales were 9,000 units at a selling price of £12.00, the sales
price variance would be:
A £18,000 favourable
B £18,000 adverse
C £20,000 favourable
D £20,000 adverse
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SECTION B
Answer question 1 and not more than one further question from this section.
1. Ophelia Ltd’s trial balance as at 31 October 2015 is shown below.
£’000 £’000
Share capital – Ordinary shares of £1 20,000
Share premium 5,000
Trade payables 2,798
Land and buildings – cost 35,152
Land and buildings – accumulated depreciation at 1
November 2014
7,000
Plant and equipment – cost 12,500
Plant and equipment – accumulated depreciation at 1
November 2014
7,400
Trade receivables 5,436
Accruals,at 31 October 2015 436
8% bank loan repayable in 10 years 15,000
Cash at bank 9,774
Retained earnings 9,801
Interest paid 600
Sales 58,411
Purchases 41,620
Distribution costs 5,443
Administrative expenses 4,789
Inventories at 1 November 2014 9,032
Dividends paid 1,500 ______
125,846 125,846
Further information
1. The inventories at the close of business on 31 October 2015 were valued at
£7,878,000.
2. Depreciation is to be provided for the year as follows:
Buildings 2% per annum - straight line basis
Plant and equipment 20% per annum - reducing balance basis
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Depreciation is apportioned as follows:
%
Cost of sales 40
Distribution costs 40
Administrative expenses 20
Land, which is non-depreciable, is included in the trial balance at a cost of
£15,152,000.
3. The company began a series of television adverts for the company’s range
of products on 1 October 2015 at a cost of £45,000. The adverts were to run
for three months and were to be paid for in full at the end of December 2015.
Advertising expenses are to be included in distribution costs.
4. Interest on the bank loan for the last six months of the year has not been
included in the accounts in the trial balance.
5. Tax on profits for the year has been calculated as £970,000.
6. Management has decided that a provision for bad debts of 5% of trade
receivables should be set up and charged to administrative expenses.
7. Ophelia Ltd paid an insurance premium for annual cover up to 30 June 2016.
The cheque for £45,000 was incorrectly treated as a supplier payment.
Insurance is an administrative expense.
8. Ophelia Ltd proposed an ordinary dividend of 10p per ordinary share on 31
October 2015.
Required:
(a) Prepare the following financial statements for Ophelia Ltd.
(i) Income statement for the year ended 31 October 2015. (10 marks)
(ii) Statement of changes in equity for the year ended 31 October 2015.
(3 marks)
(iii) Statement of financial position as at 31 October
(12 marks)
(b) Explain the objective of published financial statements and identify the two
principal characteristics of financial statements, which contribute to achieving
this objective. (5 marks)
Total 30 marks
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2. The following are the draft financial statements for Yorick Ltd for the year
ended 31 December 2015.
Income Statement for the year ended 31 December 2015
£
Revenue 7,350,500
Cost of sales (4,560,600)
Gross profit 2,789,900
Administrative expenses (1,060,800)
Distribution costs (768,000)
Profit from operations 961,100
Finance charge (75,000)
Profit before tax 886,100
Income tax expense (350,000)
Profit for the period 536,100
Statements of Financial Position as at 31 December
2015 2014
£ £ £ £
ASSETS
Non-current assets
Property, plant and equipment
Intangible assets
6,985,400
350,700
6,713,500
300,500
7,336,100 7,014,000
Current assets
Inventories
Trade receivables
Investments
Cash and cash equivalents
560,500
169,000
25,000
10,700
765,10
0
144,50
0
12,400
20,200
765,200 942,200
Total assets 8,101,300 7,956,200
EQUITY AND LIABILITIES
Capital and reserves
Ordinary share capital
Share premium account
Retained earnings
5,000,000
1,200,000
1,342,800
4,300,000
950,000
2,206,700
7,542,800 7,456,700
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Current liabilities
Trade payables
Taxation
148,500
410,000
139,50
0
360,00
0
558,500 499,500
Total equity and liabilities 8,101,300 7,956,200
Statement of changes in equity for the year ended 31 December 2015 (extract)
Retained earnings
£
Profit for the period 536,100
Dividends on ordinary shares (1,400,000)
Balance brought forward 2,206,700
Balance carried forward 1,342,800
The following additional information is relevant.
1. During the year Yorick Ltd issued redeemable preference shares at par.
2. The current asset investments are government bonds and management
has decided to class them as cash equivalents.
3. During the year Yorick Ltd sold plant and equipment with a carrying
amount of £560,500 for £600,000. Total depreciation charged for the year
was £750,600.
4. Yorick Ltd acquired new intangible assets at a cost of £77,500 during the
year.
5. An impairment review at 31 December 2015 identified a fall in the
recoverable amount of intangible assets. As a result, an impairment loss
of £15,000 was identified and written off to administrative expenses.
Amortisation on intangible assets is included in expenses.
6. During the year Yorick Ltd made a 1 for 100 bonus issue of its ordinary
shares. There was an issue of shares for cash after the bonus issue.
Required:
Prepare a statement of cash flows for Yorick Ltd for the year ended 31 December
2015. (20 marks)
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3. Claudius plc is a manufactruring company. In recent years, the company has
faced severe competition from overseas businesses and its sales volume has
hardly changed. The company has recently applied for an increase in its bank
overdraft limit from £750,000 to £1,500,000. The bank manager has asked
you, as the bank’s credit analyst, to look at the company’s application.
You have the following information:
Statements of financial position as at 31 December 2014 and 2015
2014 2015
£’000 £’000
Tangible non-current assets
Freehold land and buildings, at cost
Plant and equipment, at net book value
1,800
3,150
1,800
3,300
4,950 5,100
Current assets
Inventory
Trade receivables
Short-term investments
1,125
825
300
1,500
1,125
-
2,250 2,625
Total assets 7,200 7,725
Current liabilities
Bank overdraft
Trade payables
Taxation payable
Provisions
225
300
375
225
675
375
300
225
1,125 1,575
Non-current liability
8% debentures, 2017 1,500 1,500
Total liabilities 2,625 3,075
Equity
Ordinary shares of £1 each
Share premium account
Retained earnings
2,250
750
1,575
2,250
750
1,650
4,575 4,650
Total equity and liabilities 7,200 7,725
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Statements of comprehensive income for the years ended 31 December 2014
and 2015
2014 2015
£’000 £’000 £’000 £’000
Turnover 6,300 6,600
Cost of sales : materials
: labour
: production overheads
1,500
2,160
750
1,575
2,280
825
4,410 4,680
Gross profit 1,890 1,920
Administrative expenses 1,020 1,125
Operating profit 870 795
Investment income 15 -
885 795
Interest payable : debentures
: bank overdraft
120
15
120
75
135 195
Profit before taxation 750 600
Taxation 375 300
Profit attributable to shareholders 375 300
You are also provided with the following information:
i. The general price level rose on average by 8% between 2014 and 2015.
Average wages rose by 10% during this period.
ii. The debenture stock is secured by a fixed charge over the freehold land and
buildings, which have recently been valued at £3,000,000. The bank overdraft
is unsecured.
Required:
(a) Calculate for the years ended 31st December 2014 and 2015 the return on
capital employed and two other ratios which provide insight into the
profitability and efficiency of Claudius plc. (Answer to 2 places of
decimals.) (6 marks)
(b) Calculate for the years ended 31st December 2014 and 2015 the gearing
ratio and two ratios which provide insight into the liquidity and working
capital control of Claudius plc. (Answer to 2 places of decimals.) (6 marks)
(c) Based on the above calculations and the other information provided, draft
a set of notes for a discussion with the bank manager which highlight the
key areas she should consider when deciding upon the proposed
increased overdraft limit. (8 marks)
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SECTION C
Answer one question and no more than one further question from this section.
4. Osric Ltd manufactures components for the motor industry. A specialist luxury
car company has offered Osric a contract to supply a component identified as
“RSport”. The contract is for 400 “RSport”s over the next 12 months. The
initial price suggested by the car company is £145 for each “RSport”.
The data relating to the production of each “RSport” is:
1. Material requirements:
3 kg material M1 – see note (i) below.
2 kg material M2 – see note (ii) below.
1 part P2 – see note (iii) below.
Note (i) Material M1 is in continuous use by the company. 1,000 kg are
currently held in stock at a book value of £4.70 per kg but it is known that future
purchases will cost £5.50 per kg.
Note (ii) 1,200 kg of material M2 are held in stock. The original cost of this
material was £4.30 per kg but, as the material has not been required for the last two
years, it has been written down to £1.50 per kg scrap value. The only foreseeable
alternative use is as a substitute for material M4 (in current use) but this would
involve further processing costs of £1.60 per kg. The current cost of material M4 is
£3.60 per kg.
Note (iii) It is estimated that Part P2 could be bought for £50 each.
2. Labour requirements: Each “RSport” would require five hours of skilled
labour and five hours of semi-skilled. An employee possessing the
necessary skills is available and is currently paid £5 per hour. A
replacement would, however, have to be obtained at a rate of £4 per hour
for the work which would otherwise be done by the skilled employee. The
current rate for semi-skilled work is £3 per hour and an additional
employee could be appointed for this work.
3. Osric Ltd absorbs overhead by a machine hour rate, currently £20 per
hour of which £7 is for variable overhead and £13 for fixed overhead. If
this contract is undertaken it is estimated that fixed costs will increase for
the duration of the contract by £3,200. Spare machine capacity is
available and each component would require four machine hours.
Required:
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(a) Prepare a statement showing the contribution from the contract to produce
“RSport” at the suggested price. (12 marks)
(b) Explain each figure of cost included in the statement in (a) above. (8 marks)
5. Fortinbras Ltd manufactures a single product. The following information relates
to the actual selling price and actual cost of the product for March 2016.
£’000
Sales (50,000) units 2,250
Direct materials (240,000 litres) 528
Direct labour (250,000 hours) 1,375
Variable production overhead 245
Total variable costs 2,148
Fixed production overhead 650
Total costs 2,798
Loss (548)
The budgeted selling price and standard cost of each unit were as follows.
£ £
Selling price 55
Direct materials (5 litres) 10
Direct labour (4 hours) 20
Variable production overhead (recovered on direct
labour hours)
5
Total variable standard cost 35
Standard contribution 20
The total budgeted sales for March were 40,000 units and the budgeted fixed
overheads for the month were £600,000.
Required:
Prepare an operating statement for Fortinbras Ltd which reconciles
budgeted profit with the actual loss showing two variances for each cost
including fixed overheads. (20 marks)
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6. Polonius Manufacturing makes components for the telecoms industry. The
development department has designed a new product and incurred
development costs of £30,000.
The following information is available.
1. The new product is expected to have an initial life span of four years and
demand has been estimated at 10,200 units in year 1 with sales increases
of 10% in each of years 2 and 3 and sales of 9,000 units in year 4. The
unit selling price will be £34. There will be no stocks of finished goods.
2. Since the production cycle is very short, both production and sales could
start immediately, should the production go ahead. Each unit of the new
product will require 2 hours of labour which will need to be hired. There
will be no problem hiring at £8.00 per hour.
3. Each unit of the new product will require one component, a capacitor. The
company has a stock of 15,000 capacitors which were purchased two
years ago for £4.00 each. These have no resale value or alternative use.
Any capacitors to be purchased from now on will cost £5.00 each.
4. Each unit produced will also require £8.00 of sundry raw materials such
as wire and a circuit board. The company holds no stock of the sundry
raw materials.
5. The company already owns the machinery that could be used in the
manufacture of this product. If it is not used for this product it will be sold
immediately for £200,000. If it is used for this production, after four years it
is likely to have a residual value of £40,000.
6. Fixed production overheads allocated to this project will cost £40,000 per
annum. The cost of capital is 15% per annum. Assume all cash flows
occur on the last day of each year except for the immediate disposal of
the existing machinery.
Required:
(a) Calculate the Net Present Value (NPV) of this project (14 marks)
(b) Calculate the payback period of this project using nominal cash flow.
(3 marks)
(c) Advise Polonius Company on the acceptability of the project. (3 marks)
- Teacher: Ahmed Metwally
- Teacher: Mohamed Salem