4QQMN101/6SSMI303 Accounting and Financial Reporting Sample Paper 2

Question 1

Finmart Limited’s Income Statement for the year ended 31 December 2021 and the Statements of Financial Position as at 31 December 2020 and 2021 are as follows:

Income statement for the year ended 31 December 2021:

£000

Sales revenue            602

Cost of sales            (423)

Gross profit             179

Operating expenses            ( 148)

Operating profit            31

Interest payable            (22)

Profit before taxation            9

Taxation            (4)

Profit for the year              5

Statement of Financial Position as at 31 December:

2020            2021

£000            £000            £000            £000

Non-current assets                         110                         125

Current assets

Inventories            68                         83

Trade receivables            80                         96

Cash                          6              154                          2              181

Total assets                          264                          306

Equity

Ordinary shares of £0.50 each             13                         13

Capital reserves            33                         33

Retained profit             84                         130             84                         130

Non-current liabilities

Borrowings - Loan notes                         55                         60

Current liabilities

Trade payables            75                         114

Taxation                          4              79                          2              116

Total equity and liabilities                                      264                         306

Included in operating expenses are the following depreciation charges:

2020            £32,000

2021            £36,000

There were no disposals of non-current assets in either year.

Dividends were paid of £6,000 and £5,000 during last year and this year respectively.

Required:

(a) Prepare a cash flow statement for this year. Show all workings. (13 marks)

(b) Make any relevant comments about Finmart Limited’s cash flow statement which you feel should  be  drawn  to  the  attention  of its  management?                       ( 12 marks)

TOTAL 25 MARKS

Question 2

Ripley Limited manufactures and sells a single product which has the following cost and selling structure:

£/unit

Direct labour                                                  5

Direct materials                                    4

Variable overheads                                     1

The direct costs are considered to be variable.

The fixed overheads are £300,000

The forecast sales are 30,000 units and the maximum output of product is 40,000 units.

Required

(a)            Calculate the contribution margin ratio (2 marks)

(b)            Calculate  the  break-even  point  in  both  units  and  sales  revenue  at  the

forecast output (2 marks)

(c)            At  the  forecast  output  calculate  the  margin  of  safety  in  units  and  as  a percentage. (2 marks)

(d)             Calculate the number of units to generate a profit of £100,000 (show your answer to the nearest whole number). (2 marks)

(e)            Calculate the profit at the forecast output (2 marks)

(f)             One of the managers has suggested that if the selling price were reduced to £19 per unit, then the sales would increase to the maximum amount and a cheaper material could be used costing 25% less than the original material. For this new strategy you are to calculate both:

(i)The new break-even point in units only

(ii)The new margin of safety in units only

(iii)The new forecast profit (4 marks)

(g)              Explain briefly  if you  would  recommend  the  manager’s  suggestion  be implemented? (1 mark)

(h)            As  an  alternative  to  the   strategy  discussed  in  (f)  above  an  overseas customer operating in a different market has approached Ripley and offered to purchase the extra  10,000 units available above the forecast sales of 30,000 units  for  £150,000.  The  overseas  customer  intends to  sell these units  onto customers in their home market. Discuss whether Ripley should accept this offer on a purely financial basis and what other factors Ripley should consider before                                making                                a                                final decision. (4 marks)

(i)                Discuss the weaknesses of break-even analysis (6 marks)

Question 3

(a) Maxi Company manufactures 2 products, the Alpha and the Beta. The management  accountant for Maxi has asked for your assistance in producing the budgets for the year ending 31st  December 2023. She has provided you with the following information:

Material and direct labour costs:

£

Material X                                                               7  per kg

Material Y                                                               11  per kg

Labour                                                              10  per hour

The material and direct labour usage for each product is as follows:

Material X

Material Y

Labour

Alpha

4kg

7kg

5 hours

Beta

5kg

9kg

8 hours

Related inventories (stocks) are as follows:

Finished Product

st

1  January 2023

31st December 2023

Alpha

Units

200

300

Beta

Units

500

700

st

1  January 2023

31st December 2023

Material X

Kg

9,000

11,000

Material Y

Kg

12,000

8,000

Budgeted sales for 2023 are: 4,300 units of Alpha and 6,400 units of Beta

Question 4

Cameron Mining plc is investigating the possibility of purchasing an open-cast coal mine in Yorkshire at a cost of £1.25m which is being sold by Brown plc. The company's surveyors have spent the last three months examining the potential of the mine and have incurred costs to date of £0.1m. The surveyors have prepared a report which states that the company will require equipment and vehicles costing £6.25m in order to operate the mine and that these assets can be sold for £1.25m in four years’ time when the coal reserves of the mine are exhausted.

The assistant to the CEO of the company has prepared the following projected figures for each year of the life of the mine:

Year

The following additional information is available:

i. The project will require an investment of £0.25m of working capital from the beginning of the project until the end of the useful life of the mine.

ii.           After the mine has been exhausted, the company will be required to clean up the site and to make good the damage to the environment resulting from its mining operations.  The company will incur costs of £0.2m in Year 5, in order to do this.

The company has a cost of capital of 12%.

Ignore taxation.

Required:

(a)  Calculate the Net Present Value (NPV) and Internal Rate of Return (IRR) for the above project   stating  if  the   project   should  be  undertaken   or  not  giving  reasons   for  your choice. (15 marks)

(b) Explain why net present value is so useful for capital investment appraisal.         (6 marks)

(c) Discuss the use of investment appraisal techniques in practice.                           (4 marks)

TOTAL 25 MARKS

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