Sample/practice exam 2016, questions and answers PDF

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EXAMINATION PAPER FACULTY OF BUSINESS AND LAW Department of Accounting Suggested Solutions to Sample (practice) examination Unit Code: MAA103 Unit Name: Accounting for Decision Making Writing Time: 2 hours Reading Time: 15 Minutes Instructions for Candidates: 1. Closed book examination This paper co...

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EXAMINATION PAPER FACULTY OF BUSINESS AND LAW Department of Accounting Suggested Solutions to Sample (practice) examination Unit Code:

MAA103

Unit Name:

Accounting for Decision Making

Writing Time:

2 hours

Reading Time:

15 Minutes

Instructions for Candidates: 1.

Closed book examination This paper consists of one section. This paper carries 60 marks. (This is converted to equal 60 % of your total assessment in this unit). Calculators are allowed. Memory must be cleared in case of programmable calculators. ALL QUESTIONS MUST BE ANSWERED. ALL questions must be answered on this exam paper itself. Spare pages are provided at the end of the exam paper should you require them. A formula sheet is on page 17.

2. 3. 4. 5. 6. 7.

THIS PAPER MUST REMAIN IN THE EXAMINATION ROOM. Materials authorised for this examination must be in accordance with Deakin University policy. Failure to comply will be considered Academic Misconduct. Question 1

Possible Mark 15

2

15

3 4 5

7 10 7

6

6

Total

Actual

60

All candidates MUST complete this section:

ID Number: …………………

Seat Allocation Number: ……….

MAA103.2 Sample/Practice

Page 1 of 18

MAA103 Accounting for Decision Making Sample Examination

QUESTION 1 (5 + 2 + 3 + 5) = 15 marks Joel Lynch commenced business as an architect on 1st March under the name of Lynch Designs. The following transactions occurred during March: March 1 2

5 10 12 14 18 28 31

Joel deposited $160,000 into a business bank account. Purchased a small office building for $660,000 (including GST), paying a deposit of 10% in cash and obtaining a loan from Waco Bank for the balance. Paid $3,300 (including GST) for 3 months hire of computer equipment. Bought office supplies on credit costing $660 (including GST). Withdrew $750 for a holiday to Queensland. Performed design services for customers on credit totalling $6,600 (including GST). Received cash from credit customers, $2,400. Contributed a personally owned vehicle to the business valued at $18,000. Paid $10,000 off an amount owing to Waco Bank. At the end of the month $300 of office supplies had been used up.

Required: a) Analyse and record each transaction in the transaction analysis table provided below. List the account names, indicate the movement (increase/decrease or positive/negative or debit/credit) and the amount in the table provided. b) Determine the cash position and GST paid at the end of March. c) Prepare an income statement for Lynch Designs for the first month of trading. d) Prepare a fully classified Statement of Financial Position as at 31 March 2016.

MAA103.2 Sample/Practice

Page 2 of 18

MAA103 Accounting for Decision Making Sample Examination

QUESTION 1 continued… (a) Transaction Analysis Table for Lynch Designs DATE ASSETS LIABILITIES Mar1 + Cash $160,000 Mar 2 + Building $600,000 + Loan $594,000 + GST paid $60,000 - Cash $66,000 *Mar 5

Mar 10 Mar 12 Mar 14 Mar 18 Mar 28 Mar 31 Mar 31

- Cash $3,300 +Prepaid Hire $2,000 + GST paid $300 + Office Supplies $600 + GST paid $60 - Cash $750 + Accounts Rec. $6,600 + Cash $2,400 - Accounts Rec. $2,400 + Vehicle $18,000 - Cash $10,000 - Office Supplies $300

OWNERS’ EQUITY + Capital $160,000

- Hire Expense $1,000 + Accounts Payable $660

+ GST collected $600

- Drawings $750 + Fees Revenue $6,000

+ Capital $18,000 - Loan $10,000 - Office Supp. Exp $300

Alternative for March 5 entry: *Mar 5 - Cash $3,300 +Prepaid Hire $3,000 + GST paid $300 *Mar 31 - Prepaid Hire $1,000

MAA103.2 Sample/Practice

- Hire expense $1,000

Page 3 of 18

MAA103 Accounting for Decision Making Sample Examination

QUESTION 1 continued… Answer if using DR and CR (a) Transaction Analysis Table for Lynch Designs DATE ASSETS LIABILITIES Mar1 DR Cash $160,000 Mar 2 DR Building $600,000 CR Loan $594,000 DR GST paid $60,000 CR Cash $66,000 Mar 5 CR Cash $3,300 DR Prepaid Hire $2,000 DR GST paid $300 CR Accounts Payable Mar 10 DR Office Supplies $600 DR GST paid $60 $660 Mar 12 CR Cash $750 Mar 14 DR Accounts Rec. $6,600 CR GST Collected $600 Mar 18 DR Cash $2,400 CR Accounts Rec. $2,400 Mar 28 DR Vehicle $18,000 Mar 31 CR Cash $10,000 DR Loan $10,000 Mar 31 CR Office Supplies $300

OWNERS’ EQUITY CR Capital $160,000

DR Hire Expense $1,000

DR Drawings $750 CR Fees Revenue $6,000

CR Capital $18,000 DR Office Supp. Exp $300

Alternative for March 5 entry: *Mar 5 CR Cash $3,300 DR Prepaid Hire $3,000 DR GST paid $300 *Mar 31 CR Prepaid Hire $1,000

MAA103.2 Sample/Practice

DR Hire expense $1,000

Page 4 of 18

MAA103 Accounting for Decision Making Sample Examination

(b)

Cash position at the end of March Date

Amount ($)

Mar 1 Mar 2 Mar 5 Mar 12 Mar 18 Mar 31

+160,000 -66,000 -3,300 -750 + 2,400 -10,000 82,350

GST paid at the end of March GST paid = $ (60,000 + 300 + 60) = $60,360 (c)

Lynch Designs Income statement for the period ended 31 March, 2016 $

$

Fees Revenue Less Expenses Hire Expense Office Supplies expense

6,000

1,000 300 1,300

Net Profit

MAA103.2 Sample/Practice

4,700

Page 5 of 18

MAA103 Accounting for Decision Making Sample Examination (d)

Lynch Designs Statement of financial position as at 31March, 2016 $

ASSETS CURRENT Cash Prepaid Hire Office Supplies GST paid Accounts Rec NON-CURRENT Building Vehicle

82,350 2,000 300 60,360 4,200

600,000 18,000

$

$ LIABILITIES CURRENT Accounts Payable GST collected

660 600 1,260

NON-CURRENT Loan 149,210 OWNERS EQUITY Capital Add: Profit 618,000 Less: Drawings 767,210

MAA103.2 Sample/Practice

$

584,000 178,000 4,700 182,700 750 181,950 767,210

Page 6 of 18

MAA103 Accounting for Decision Making Sample Examination

QUESTION 2 (2 + 4 + 4 +5) = 15 marks (a) Explain the meaning of the term budgetary slack and how this is relevant to the budgeting process. Budgetary slack is the deliberate under-estimation of budgeted revenue or overestimation of budgeted expenses. This allows managers a much better chance of "making their numbers," which is particularly important for them if performance appraisals and bonuses are tied to the achievement of budgeted numbers. Budgetary slack may also occur when there is considerable uncertainty about the results to be expected in a future period as managers tend to be more conservative when creating budgets under such circumstances. b) LaBelle Ltd. budgeted sales for the quarter ended September 2016 are as follows:Units July 2016 20,000 August 2016 35,000 September 2016 45,000 The company wants to maintain inventory on hand at the end of each month to be 20% of the sales for the next month and this was the situation at the end of June. The cost price per unit is $8.

Required: Prepare a Purchases Budget for July and August 2016 for LaBelle Ltd.

Purchases Budget July Sales + Ending Inventory - Starting Inventory

Purchases @ $8 each MAA103.2 Sample/Practice

August

20,000 7,000 27,000 4,000 23,000

35,000 9,000 44,000 7,000 37,000

$184,000

$296,000 Page 7 of 18

MAA103 Accounting for Decision Making Sample Examination

QUESTION 2 continued… (c)

The following information is provided to assist in the preparation of the Cash Budget for Wyoming Ltd. for May and June 2016. 

The cash balance at 1st May, 2016 is $30,000



Of Wyoming Ltd.’s sales, 80% of sales are expected to be credit sales and 20% cash sales.

March April May June

Actual/Budgete d Sales $

Budgeted Purchases $

140,000 120,000 130,000 155,000

72,000 64,000 68,000 82,000

Cash collections from credit customers are:  70% in the month of sale  20% in the month following the sale  10% in the second month following the sale All purchases are made on credit and payments are made as follows:  

60% of purchases are paid for in the month of purchase 40% of purchases are paid for in the month following the purchase.



Selling and administrative expenses each month are $24,000 plus 15% of sales for that month. This includes $6,000 per month for depreciation.



Equipment costing $35,000 is expected to be bought in May and paid for in June.

Required: (i) Prepare a schedule of cash collections for the months of May and June, 2016. (ii) Prepare a cash budget for the months of May and June, 2016. MAA103.2 Sample/Practice

Page 8 of 18

MAA103 Accounting for Decision Making Sample Examination

QUESTION 2 continued… (i) Prepare a schedule of cash collections for the months of May and June, 2016.

Schedule of Cash Collections May and June, 2016 May

June

Cash Sales Credit Sales:-

26,000

31,000

March $112,000

11,200

April $96,000

19,200

9,600

May $104,000

72,800

20,800

June $124,000 Total

86,800 129,200

148,200

(ii) Prepare a cash budget for the months of May and June, 2016.

Cash Budget May and June, 2016 May

June

$30,000

$55,300

Cash Collections

129,200

148,200

Available Cash Balance

159,200

203,500

Opening Cash Balance Add: Receipts

Less: Payments Purchases – April $64,000

25,600

Purchases – May $68,000

40,800

Purchases – June $82,000 Selling & Admin Expenses Equipment

Closing Cash Balance

27,200 49,200

37,500

41,250

0

35,000

103,900

152,650

$55,300

$50,850

Calculations: Selling & Admin Expenses May = $24,000 + 15% of Sales – Depreciation = 24,000+19,500-6,000= $37,500 June =$24,000 + 15% of Sales – Depreciation = 24,000+23,250–6,000 =$41,250

QUESTION 3 MAA103.2 Sample/Practice

Page 9 of 18

MAA103 Accounting for Decision Making Sample Examination

(2+2+3) = 7 marks (a) List and explain two advantages and two disadvantages of sustainability reporting Advantages of sustainability reporting:  May attract ethical investors  Allows entity to assess its operations in terms of its impact on society and the environment  Ability to manage risk and create value  May lead to increased loyalty from employees, customers and investors through brand and reputation Disadvantages of sustainability reporting:  Difficult to measure and quantify in dollar terms  Compiling a report requires a huge organisational commitment and effort so some may not see the value in the process. i.e. costs outweigh the benefits.

(b) Describe the following accounting assumptions:  going concern  time period The going concern principle is the assumption that an entity will remain in business for the foreseeable future. Conversely, this means the entity will not be forced to halt operations and liquidate its assets in the near term at what may be very low fire-sale prices. By making this assumption, the accountant is justified in deferring the recognition of certain expenses until a later period, when the entity will presumably still be in business and using its assets in the most effective manner possible. Under the time period assumption, an accountant is required to determine the relevance of each business transaction to specific accounting periods. The division of the life of a business into time periods facilitates comparison of financial performance from one period to the next, or from one entity to another for the same period.

MAA103.2 Sample/Practice

Page 10 of 18

MAA103 Accounting for Decision Making Sample Examination QUESTION 3 continued… (c) You have just joined your local gymnasium and paid a once-off joining fee of $100 (non-refundable) and an annual membership of $600. How do you think the owner of the gymnasium should recognise the joining fee? How do you think the owner of the gymnasium should recognise the membership revenue? The revenue recognition principle, which states that revenue should be recognised in the accounting period in which the economic benefits have been received. That is to say, the revenue should be brought to account when earned regardless of when the associated cash flow occurs. In this situation, the joining fee should be brought to account as revenue when received. Once the payment is received, the gymnasium is under no obligation to provide any further services and so the joining fee has been earned. The annual membership fee implies that benefits will be provided to the member over the course of the year and so the appropriate method would be to bring to account the revenue periodically in accordance with the benefits provided. In this case, we would expect the gymnasium owner to declare revenue of $50 per month for the membership fees over the course of the year.

MAA103.2 Sample/Practice

Page 11 of 18

MAA103 Accounting for Decision Making Sample Examination

QUESTION 4 (4 + 2 + 2 + 2) = 10 marks The following financial ratios have been calculated from the financial statements of Spakfillers Ltd.

Return on Equity Gross Profit margin Net Profit margin Asset Turnover (times) Return on Assets Days Inventory Days Debtors Current Ratio Quick Ratio Debt (to assets) Ratio Debt to equity Ratio Interest coverage ratio (Times Interest Earned) (times)

2012 2013 2014 13% 19% 24% 35% 40% 42% 12% 10% 9% 0.9 1.25 1.5 11% 12.5% 13.5% 90 days 85 days 80 days 40 days 45 days 50 days 1.20 1.1 0.95 0.9 0.7 0.5 30% 40% 45% 43% 67% 82% 2.8 3.5 4.0

Required By identifying and using the appropriate ratio calculations above, comment on the company’s profitability, efficiency, liquidity and financial stability (short and long term) for the three year period 2012-2014. Profitability: Gross Profit margin has increased suggesting an increase in sales price or decrease in the cost of goods sold (cost of sales) price. At the same time the Net Profit Margin (NPM) has decreased which shows that operating costs have increased, suggesting that the control of operating expenses has deteriorated.

The increase in the Return on Assets (ROA) over the three years suggests that the entity has improved in its ability to covert sales into profit and to generate profit from its investment in assets. The Return on Equity (ROE) has also improved and indeed improved a larger rate than ROA. This improvement over the three years reflects Spakfillers’ ability to improve their MAA103.2 Sample/Practice

Page 12 of 18

MAA103 Accounting for Decision Making Sample Examination QUESTION 4 – Continued profitability, asset efficiency and capital structure, meaning that the entity has generated more profits for its owners. An improvement in ROE also tends to attract new investors.

Efficiency Days Inventory Turnover has decreased showing that the company is now selling its inventory quicker. This is particularly positive given the increase in the GPM. Days Debtors Turnover has increased meaning that it is taking slightly longer to collect the cash from sales. Note that this increase is less that the decrease in inventory days so overall it is taking less time from the date of purchasing inventory to the date of collecting the cash from selling it. The Asset Turnover has increased meaning that the company is generating more sales per dollar of asset invested. Spakfillers ability to improve its asset turnover indicates that it is also improving its efficiency in managing current and non-current assets. Since the management of current assets includes debtors and inventory, it is useful to compare the asset turnover result with the Inventory and Debtors ratio results. Interestingly, the days debtors result has shown a slight reduction in efficiency whilst the days inventory result indicates an improvement in inventory efficiency. These results will need to be closely monitored in future years. Liquidity As a general rule, the current ratio should be 1.5 and the quick ratio should be 0.80. Spakfillers is below the benchmark for both ratios. Both the current ratio and quick asset ratio have decreased over the three years indicating some difficulties in terms of liquidity (conversion into cash) which may be resulting in difficulties to meet short-term obligations.

Capital Structure MAA103.2 Sample/Practice

Page 13 of 18

MAA103 Accounting for Decision Making Sample Examination The debt ratios have both increased indicating more reliance on debt finance and as a consequence this implies higher risk. Despite the higher debt levels, the company is generating more profit on that debt than the interest requirements as evidenced by the Interest Coverage Ratio – successful use of leverage. Overall conclusion Over the three year period from 2012 to 2014, Spakfillers have demonstrated improvement in most of the profitability, efficiency and capital structure ratios but have shown a deterioration in liquidity ratios; although the NPM and days debtors showed a decline in performance. The ratio results indicate that they require better control of their current assets, current liabilities and expenses to ensure that their future obligations can be discharged as they fall due.

MAA103.2 Sample/Practice

Page 14 of 18

MAA103 Accounting for Decision Making Sample Examination

QUESTION 5 (1+1+1+1+2+1) = 7 marks New York Trading provides you with the following information in relation to budget predictions for the coming year: Estimated sales units for the year Selling price per unit Variable cost per unit Total fixed costs for the year

40,000 $30 $14 $384,000

Required: (i) Calculate the contribution margin per unit. Calculation area: CMU = Sales Price – Variable Cost = 30 – 14 = $16

Contribution margin per unit

$16

(ii) Calculate the break-even point in units. Calculation area: BEP (U) = (Fixed Costs + Profit)/CMU = (384,000 + 0)/16 = 24,000

Breakeven unit

24,000

(iii) Calculate the profit from the estimated level of sales. Calculation area: Total Sales = 40,000 Break-Even Sales = 24,000 Therefore selling 16,000 units above break-even @ $16 each

Profit MAA103.2 Sample/Practice

$256,000 Page 15 of 18

MAA103 Accounting for Decision Making Sample Examination

QUESTION 5 continued… (iv) Calculate the expected sales dollars needed to make a profit of $300,000. Calculation area: BEP (U) = (384,000 + 300,000)/16 = 42,750 units BEP ($) = BEP (U) x $30 per unit = $1,282,500 Alternative Solution:BEP ($) = (Fixed Costs + Target Profit)/Contribution Margin Ratio NB: Contribution Ratio = Contribution Margin Per Unit/Sales Price = 16/30 = 0.5333 BEP ($) = (384,000 + 300,000)/0.533333 = $1,282,500 Sales dollars $1,282,500

(v) Variable cost is to increase by $2 per unit. Ma...