ACC10007

Sample Exam 2 – suggested solution

Question 1

Hawthorn Industries

Cash Flow Satement for year ended 3o June 2015

$000
Cash Flow from Operating Activities
Cash Receipts from Customers $ 431,200
Cash Payments to Suppliers (229,000)
Cash Payments of Wages (47,600)
Cash Payments of Rent (50,000)
Cash Payment of Other Expenses (44,600)
= Net Cash Flow from Operating activities 60,000

Cash Flow from Investing Activities

Purchases of Non Current Assets $
- Vehicle (10,000)
Proceeds from Sale of Non Current Assets 0
= Net Cash Flow from Investing Activities (10,000)

Cash Flow from Financing Activities

Proceeds from Loan $ 15,000
Loan Repayment 0
Drawings (46,000)

= Net Cash Flow from Financing Activities (31,000)

= Net Cash Flow for the year $ 19,000

+ Bank @ beginning (16,600)
= Bank @ end $ 2,400

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Hawthorn Industries
Cash Flow Statement - Workings

Operating Activities

Cash Receipts from Customers

Accounts Receivable @ beginning $ 56600

+ Sales 456000
= Potential Receipts from Customers 512600
- Accounts Receivable @ end 81400
= Cash Receipts from Customers $ 431200

Cash Payments to Suppliers Purchases

Accounts Payable @ beginning $ 37200 Cost of Sales $ 251000
+ Purchases 257000 + Inventory @ end 30400
= Potential Payments to Suppliers 294200 = Goods Available for Sale 281400
- Accounts Payable @ end 65200 - Inventory @ beginning 24400
= Cash Payments to Suppliers $ 229000 = Purchases $ 257000

Cash Payments of Wages Cash Payments of Rent

Wage Expense as per Income Statement $ 49320 Rent Expense as per Income Statement $ 40000
+ Accrued Wages @ beginning 0 - Prepaid Rent @ beginning 0
- Accrued Other Expenses @ end 1720 + Prepaid Rent @ end 10000
= Cash Payments of Wages $ 47600 = Cash Payments of Rent $ 50000

All Other Expenses Paid

Van Running $ 38000

Electricity 5400
Interest 1200
= Cash Payments of All Other Expenses $ 44600

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Question 2 solution
Part A
i)
$900,000 / 90,000 = $10 SP 10.00
$585,000 / 90,000 = $6.50 - VC 6.50
= CM 3.50 FC = $270,000
B/E = FC / CM$pu = $270,000/$3.50
= 77142.8 77,143 units required to break even

ii) Margin of Safety

90,000 – 77,143 = 12,857 units

iii) refer to text, lecture and tutorial material

iv) CM ratio
CM$pu = $ 3.50 = 35%
SP$pu $10.00

v) refer to text, lecture and tutorial material

Part B
The manufacturing director is correct. A price increase results in a higher unit contribution
margin. An increase in the unit contribution margin causes the break-even point to
decline.
The financial director’s reasoning is flawed. Even though the break-even point will be lower,
the price increase will not necessarily reduce the likelihood of a loss. Customers will
probably be less likely to buy the product at a higher price. Thus, the firm may be less
likely to meet the lower break-even point (at a high price) than the higher break-even
point (at a low price).

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Question 3 Solution:
Part A
a) X= Production overhead ÷ Direct labour cost

= $70,000 ÷ $200,000

= 0.35 (35%)

Y = Production overhead ÷ Machine hours

= $150,000 ÷ 10,000 hrs

= $15/machine hour

b) X = Production overhead ÷ Machine hours

= $70,000 ÷ 1,000

= $70/machine hour

Y = Production overhead ÷ Direct labour hours

= $150,000 ÷ 3,500

= $42.86/labour hour

Part B
Refer text, lecture and tutorial notes.

Part C
In manufacturing, product costs comprise raw materials, direct labour and manufacturing
overhead. Raw materials and direct labour, as direct costs, can be traced to the cost
object. Manufacturing overhead, as an indirect cost, is allocated. In some service
organisations, these cost categories exist in much the same manner. However, many
service organisations have little or no raw materials, as their main cost element is direct
labour. All other costs are treated as indirect or overhead costs, including minor
materials and consumables used in delivering the service. In service organisations,
upstream and downstream costs may also be included in overhead costs as costing of
services is not influenced by accounting standards.

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Question 4 Part A Solution:
a) Production capacity: 40,000
Idle capacity: 4,000 Special order for 6,000 knives
Variable manufacturing costs: $1,600,000/40,000 = $40/knife

Normal sales Special order

Contribution Margin
Sales Price $200 $180
Less variable costs 40 40
Contribution margin $160 $140
Benefits of Special order
6,000 units x $140 $ 840,000
Less incremental fixed cost (40,000)
$ 800,000
Less opportunity cost
2,000 units x $160 $ 320,000
Net benefit of special order $ 480,000

b) Refer text, lecture and tutorial notes

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 Question 4 Solution Part B

Cost type Business Variable Semi- Fixed

variable
Flour Baker x
Equipment depreciation Farmer x
Electricity Restaurant x
Flowers Florist x
Vehicle registration Bus x
company
Equipment repairs Builder x
Telephone charges Accountant x
Landing fees Airline X*
Logs Sawmill x
Insurance Electrical x
repairs
Sales commission Retailer x
• Depends on the activity level and airport charge out rate (per traveller or per landing)

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Question 5 Solution
1. Which of the following is NOT an issue to be taken into account when deciding between
long-and short-term borrowing?
a) Flexibility
b) Balance Sheet Disclosure
c) Re-funding
d) Interest rates

2. Which of the following is an advantage of using retained profits as an internal source of

finance?
a) There are no issue costs
b) It is a ‘cost free’ source of funds
c) The amount raised is certain
d) Options a) and c)

3. Which of the following statements is incorrect?

a) A rights issue is an example of a share issue
b) A bonus issue is an example of a share issue
c) A non-renounceable rights issue is an example of a share issue
d) A private placement is an example of a Debt issue

4. Liquidity refers to the ability of a company to

a) pay off long-term debt
b) raise equity capital
c) acquire the necessary assets to operate the business
d) meet short-term obligations as they mature

5. The category of financial ratios that helps users to assess the ability of the business to
generate returns for its owners is:
a) Profitability
b) Efficiency
c) Liquidity
e) Gearing
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Jessie Ltd Total Assets = Liabilities + Owners' Equity
Non
Worksheet Current Assets Non Current Assets Current Liabilities Current Owners' Equity
Acc Prepaid Acc Bank Accrued Accounts Liability Retained
Bank Receiv Inv Exp Equip Depn O/draft Wages Payable Loan Capital Earnings Notes

Balance @ beginning $ 7000 5000 500 40000 -4500 4000 500 2000 16500 20000 5000

Transactions / Adjustments
Credit Purchases of stock 18000 18000
Cash sales 30000 30000 cash sales
- cost of sales -9400 -9400 cost of sales
Credit sales 17000 17000 credit sales
- cost of sales -7400 -7400 cost of sales
Paid Acc Pay -13000 -13000
Paid wages -9000 -500 -8500 wages
wages owing 1000 -1000 wages
Collection from Acc Rec 16000 -16000
Interest -500 -500 interest
Rent (last year's prepaid used this year) -500 -500 rent
Rent paid $8250 incl prepaid $250 -8250 250 -8000 rent
Depn 15% of cost -6000 -6000 depn
Bad debts -200 -200 bad debts

Adj - offset Bank o/draft to bank -4000 -4000

Balance @ end 11250 7800 6200 250 40000 -10500 0 1000 7000 16500 20000 10500

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 Jessie Ltd
Profit or Loss Statement for year ended 30 June 2014

Sales
Cash Sales $ 30000
Credit Sales 17000 $ 47000

less Cost of Sales $ 16800

= Gross Profit $ 30200

Less Other Expenses

Wages $ 9500
Interest 500
Rent 8500
Depreciation 6000
Bad Debts 200

Total Other Expenses 24700

= Net Profit before Tax $ 5500

Jessie Ltd
Balance Sheet as at 30 June 2014

Current Assets Current Liabilities

Bank $ 11250 Accrued Wages $ 1000
Accounts Receivable 7800 Accounts Payable 7000
Inventory 6200 Total Current Liabilities $ 8000
Prepaid Rent 250 Non Current Liabilities
Total Current Assets $ 25500 Loan 16500
Total Liabilities $ 24500
Non Current Assets
Equipment $ 40000 Owners' Equity
- Acc. Depn -10500 Capital @ beg $ 20000
- Drawings 0
Total Non Current Assets $ 29500 Retained earnings @ beg 5000
+ Profit/ (Loss) 5500
Total Owners' Equity 30500

Total Assets $ 55000 Total Liabilities & Owners' Equity $ 55000

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