4QQMN101/6SSMI303 Accounting and Financial Reporting Sample Paper 1

Question 1

The following is the statement of financial position of May Day Company as at 31 December 2020:

Statement of financial position as at 31 December 2020

During 2021, the following transactions took place:

(i)             The owners withdrew equity in the form of cash of £46,000.

(ii)             Premises were rented  at  an annual rental of £40,000.   During the year, rent  of

£50,000 was paid to the owner of the premises.

(iii)             Rates on the premises were paid during the year for the period 1 April 2020 to 31 March 2021 and amounted to £4,000.

(iv)            Some machinery (a non-current asset), which was bought on  1 January 2020 for £26,000,  has  proved  to  be  unsatisfactory.    It  was  part-exchanged  for  some  new machinery on 1 January 2021 and May Day Company paid a cash amount of £12,000. The new machinery would have cost £30,000 had the business bought it without the trade-in.

(v)            Wages totalling £47,600 were paid during the year.   At the  end of the year, the

business owed £1,720 of wages.

(vi)            Electricity bills for the four quarter of the year were paid, totalling £5,400. (vii)            Inventories totalling £286,000 were bought on credit.

(viii)            Inventories totalling £24,000 were bought on cash.

(ix)            Sales revenue on credit totalled £422,000 (cost £254,000).

(x)            Cash sales revenue totalled £84,000 (cost £50,000)

(xi)            Receipts from trade receivables totalled £396,000

(xii)            Payments to trade payables totalled £312,000

(xiii)            Van running expenses paid totalled £35,000.

The business uses the reducing-balance method of depreciation for non-current assets at the rate of 30 per cent each year.

(a) Prepare an income statement for the year ended 31 December 2021 and a statement of financial position as at that date. (15 marks)

(b) Explain and discuss the matching and duality (Dual aspect) conventions. (4 marks)

(c)  Discuss  one  option  for  long  term  financing  available  to  Limited  companies  and  the advantage                  and                  disadvantage                  of                 this                  option   (6 marks)

TOTAL 25

Question 2

You are provided below with the financial statements of Catalona Ltd, a wholesaler, for their financial year end 31st  of December 2020 and 2021.

Income Statement Extracts

2020 2021

$ $

Operating expenses (110) (140)

Profit from operations    140    160

Statements of Financial Position

2020 2021

Non-current assets $ $                   $       $

Property plant and equipment          500                         570

Inventories (stock)                     60                           70

Trade receivables                       90                         160

Cash and bank 0 0

150                         230

Current liabilities

Trade and other payables          57                           60

Current tax payable 42 52

144                         220

Non-current liabilities

Loan (100) (100)

Net assets 406 480

Equity and reserves

Share capital                                     200                         200

Share premium                                  100                         100

Retained earnings 106 180

406 480

Additional Information:

There were no disposals of non-current assets in either year.  Additions of non-current assets in 2021 amounted to £90,000.

Required:

(a) Using the information above, calculate the following ratios for both years (Ratio formulas included at the end of the booklet):

. Gross Profit margin

. Operating Profit margin

. Return on Capital Employed (ROCE)

. Current Ratio

. Quick or Acid-Test Ratio

. Average inventories turnover period

. Average settlement period for receivables

. Average settlement period for payables (8 marks)

(b) Using the information provided in the financial statements and the ratios that you have calculated,  write  a  management  report  to  the  board   of  directors  commenting  on  the company’s  operations  for  the  financial  year  end  31st    December  2021  compared  to  the previous year. ( 17 marks)

TOTAL 25 MARKS

Question 3

BPX Limited manufactures rig tools for the Oil industry. It has three production

departments Machining, Turning and Assembly.  Expected production overheads for the forthcoming year are:

£

Rent and Rates

Depreciation of machinery

Machining department’s supervisors’ salary

Insurance of machinery

Total Production overheads

The following information is available:

86,520

64,800

76,500

4,520

======

232,340

Machining      Turning

Assembly

Floor area (square metres)                                                 1,800

900                   1,500

Value of machinery                                                  150,000          90,000

60,000

Direct labour hours                                                  87,200          32,780

29,844

Required:

(a) Allocate or apportion each of the production overheads to the three departments showing clearly the basis used for each production overhead.  Show also the total allocation/apportionment for each department.                                                             (8 marks)

(b) Calculate an overhead absorption rate based on direct labour hours for each of the three production departments. Show your answer to two decimal places.   (2 marks)

(c) Calculate the selling price of product TXC which had direct labour costs of £3,290, direct material costs of £2,308 and used the following labour hours in each of the 3

departments. The profit mark up is to be 25%. (3 marks)

Direct Labour Hours

Turning                                      15

Assembly                                    22

(d)  Discuss the reasons why managers would want to know the full cost of their products ( 12 marks)

Question 4

Milton Plc make a product for which the standard costs are:

£

Sales Price                                                 31

Direct labour (2hrs at £5.5/hr)             11

Direct materials (1Kg at £10/kg)             10

Standard Profit 7

The budgeted output for September was 1,000 units the actual output was 1,100 units which sold for £34,950. No stocks were left at the end of the month.

The actual production costs were:

Direct Labour (2,150 hours)

Direct Materials (1,170 kg)

Fixed Overheads

Required

£

12,210

11,630

3,200

a) Prepare the original budget and a budget flexed to the actual volume. Use these and other   calculated relevant variances to prepare a statement that reconciles the budgeted to the actual profit for September in as much detail as the information will allow (you should state clearly whether the variances are adverse or favourable). (13 marks)

b) Comment on the performance of Milton plc for the month of September referring to the

variances calculated above, and include suggestions for possible reasons for the variances you have calculated ( 12 marks)

TOTAL 25

RATIO FORMULAS:

Profitability Ratios

Return on Capital Employed (ROCE) (%) = Operating profit divided by Capital employed x100

*capital employed = share capital + reserves + non-current liabilities

*operating profit = profit before interest and tax

Gross profit margin (%) = Gross profit divided by sales revenue x 100.

Operating profit margin (%) = Operating profit divided by sales revenue x 100.

Efficiency Ratios

Sales revenue to capital employed (£) = sales revenue divided by share capital + reserves + non-current liabilities

Average inventories turnover period = inventory divided by cost of sales x 365

Average settlement period for receivables = trade receivables divided by sales revenue* x 365

*or credit sales if known

Average settlement period for payables = trade payables divided by cost of sales* x 365 *or credit purchases if known

Liquidity Ratios

Current ratio (:1)= current assets divided by current liabilities

Quick or acid test ratio (:1) = current assets less inventory divided by current liabilities

Gearing Ratios

Gearing ratio (%) = Non-current liabilities divided by share capital + reserves + non- current liabilities x 100.

Interest cover ratio (times) = Operating profit divided by interest payable

Investment Ratios

Earnings per share = Earnings available to ordinary shareholders divided by number of ordinary shares in issue

Price / earnings ratio (times) = market value per share divided by earnings per share

Dividend yield ratio (%) = Dividends per share divided by market value

per share x 100

Dividend cover (times) = Earnings for the year divided by dividend for the year