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Past exam 2

Examination Period

Faculty ofBusiness and Economics

ACF5903

PAPER 1

Question 1

Briefly answer any six (6) of the following eight (8) parts to Question 1.

(a)        Explain the meaning of accrual accounting and discuss why accountants use this

approach to measure profit.

(b)       Predator Ltd acquired Prey Ltd at a cost of $3,900,000. The fair value of Prey Ltd’s

assets is assessed at $4,100,000 and the fair value of its liabilities at $500,000. Calculate the amount of goodwill to be recorded in the balance sheet of Predator Ltd. Describe how goodwill is classified in the balance sheet.

(c) It is always best to maintain a level of working capital that is as high as possible” . Evaluate this statement and explain your answer.

(d)       The balance sheet is a financial report that details the entity’s assets, liabilities and equity at reporting date.

(i)      Outline the definition and recognition criteria for assets.  Provide an example to illustrate your answer.

(ii)     The Conceptual Frameworkfor the Preparation and Presentation of Financial

Statements (Framework) defines equity as a residual’ .  Explain how this amount is a residual.

(e)        “Numerous measurement systems can be used to measure elements on the balance

sheet”.  Discuss this statement making reference to how property, plant and equipment is measured.

(f)         Discuss the problems involved in classifying costs as either fixed or variable in cost ‐

volume profit analysis.  Discuss the assumptions used in this technique.

(g)        Explain the advantages and disadvantages of using factoring as a source of short‐

term finance.

(h)       Explain what the balanced scorecard is and suggest three (3) performance measures

that are relevant from an innovation and improvement perspective.

(6 x 4 = 24 marks)

Question 2

a) Sam and Sandra Partnership provide property management services to its clients. The following information relates to the year just ended.

Balance Sheet (extract)

As at 30 June 2014

2014

2013

Cash

$59,000

$37,000

Accounts Receivable

$46,000

$34,000

Prepaid Expenses

$8,000

$5,000

Accounts Payable

$28,000

$33,000

Income Statement

For year ending 30 June 2014

Sales Revenues

$183,000

Operating Expenses

132,000

Profit

51,000

Operating expenses include depreciation of $5,000

Required:

For the period ending 30 June, 2014, calculate receipts from customers and payments to

suppliers and prepare the operating activities section of the Statement of Cash Flows.

7 marks

Questions 2 b) and c) refer to the following Statement of Cash Flows for Tabourine

Ltd:

Cash flows from operating activities

Receipts from customers

Payments to suppliers and employees

Interest received

Interest paid

Income taxes paid

Net cash provided from operating activities

Cash from Investing Activities

Payments for property, plant and equipment

Proceeds from sale of property, plant and equipment Net cash from Investing Activities

Cash from financing activities

Proceeds from equity

Proceeds from borrowings

Repayment of borrowings

Distributions Paid

Net cash flow from financing

activities

Net increase/decrease in cash for

the year

Cash at beginning of the financial

year

Cash at the end of the financial year

$199,000 ($201,000)  $14,000  ($8,000) ($3,000) $1,000

($30,000) $80,000 $50,000

$20,000  $20,000  $0 ($50,000)

($10,000)

$41,000

$100,000 $141,000

Required:

b) Explain the meaning of the three different types of activity reported in the Statement of Cash Flows. 6 marks

c) As a user of this report, identify three issues that are significant in your assessment of this company’s performance. Justify your choices by explaining why they are significant. 9 marks (7 + 6 + 9 = 22 marks)

Question 3

Farmers Ltd is a manufacturer which manufactures equipment for agricultural purpose. The following information is provided by Farmers Ltd.

FARMERS LTD

Income Statement

for the year ended 30 Dec 2014

180 000

Rent Revenue

15 000

Total Income

195 000

Expenses

Salaries Expense

120 000

Supplies Expense

22 000

Rent Expense

34 000

Insurance Expense

3 800

179 800

EBITDA

15 200

Depreciation Expense

3 600

Profit

$11,600

FARMERS LTD

Balance Sheet (extract)

As at 30 Dec 2014

Non current Assets

Plant & Equipment

Accumulated depreciation

Carrying value

$180,000

$3,600

$176,400

Required:

a) The Plant & Equipment was purchased on 1st January 2014. The Notes to the Accounts show the method of depreciation of Plant & Equipment is straight‐line and the residual    value is estimated to be $0. What is the estimated useful life of these assets? Comment on the reasonableness of the estimate you calculate. 4 marks

b) Auditors were engaged to review the financial statements prior to their release and they requested the assets be depreciated over a ten year period. Calculate the profit that would  result in the period ended 30 Dec 2014 from this adjustment. 3 marks

c) Interpret the significance of this adjustment for users who rely on financial statements     generally for the purpose of their decision making. Explain another situation (not related to depreciation) where critical interpretation of financial statements may be required. 4 marks

d) In the specific case of Farmers Ltd, interpret the significance of the adjustment in (b) for both cash flow from operations, and reported profit. (Note: this question does not require

calculation of cash flow from operations). 4 marks (4+3+4+4=15 marks)


Question 4

The accountant for Fast Freight Services is preparing its cash budget for November and   December 2015. The accountant, Fred, has collected the following information regarding expected credit sales:

September      October             November       December

Credit sales                     $140 000          $160 000         $200 000        $230 000

Fred has analysed the accounts receivable records for the past few years and has                      determined that customers normally pay 60 per cent in the month of sale, 30 per cent in the month following the sale, and 8 per cent in the second month following sale. The remaining 2 per cent is considered a bad debt and uncollectable.

Required

a) Prepare a Schedule of Expected Receipts from Accounts Receivable for November and December 6 marks

Questions (b) and (c) refer to the Cash Budget below.

Toorak Travel Services

Cash budget for quarter ended September 30 2015.

July

$

Aug

$

Sept

$

TOTAL

$

ANTICIPATED RECEIPTS

Initial capital

Fees received

Total receipts

ANTICIPATED PAYMENTS

advertising and marketing

cash withdrawals

computer equipment

administration

Rent

Total Payments

Excess (Deficit) receipts over payments

Bank balance at beginning of month

Bank Balance at End of Month

10000

8200

6900

15200

10000

30300

$18,20 0

$6,900

$15,200

$40,300

3000

1500

8000

1300

1800

2400

1500

1300

1800

2000

1500

1300

1800

7400

4500

8000

3900

5400

0

$15,60 0

$7,000

$6,600

$29,200

$2,600

($100)