OFFICE USE ONLY
AC
Question 1 (Students must express answers in own words, not provide memorised
answers. Students should be given credit for other relevant points)
(a) Accrual accounting – transactions and events are recorded in the periods in which they
occur, which is not necessarily in the same period as they are received or paid. Income is
recorded when earned and expenses when incurred.
Using the fundamental timing of the transaction rather than the receipt or payment of cash
gives a better measure of an entity’s profit performance as it better aligns measured profit
with the effort expended in earning that profit and results in a profit measure which is
more consistent and comparable from period to period.
b) Goodwill –
Fair value of assets - $4,100,000
Fair value of liabilities - $500,000
Fair value of net assets acquired - $3,600,000
Acquisition cost $3,900,000
Less value of net assets $3,600,000
Goodwill $300,000
Goodwill is classified as an intangible asset, under the non-current assets, in the balance
sheet
c) Discussion of 4 worthwhile points required such as
Working capital is the difference between the amounts of current assets and current
liabilities
Businesses need to have cash available to meet their commitments on time. If they are
unable to do this they face the prospect of failing. Working capital must be sufficient to
maintain liquidity at all times as the consequences of not doing can be very serious.
However holding assets such as cash, inventory and debtors or maintaining a bank
overdraft also involves costs. For example, storage costs for inventory.
There is also the opportunity cost of having resources tied up in unproductive assets when
they could be employed in increasing profits.
The benefits of holding working capital must be weighed up against its cost and a suitable
balance needs to be struck. If the level of working capital maintained is above what is
needed to maintain liquidity then the firm is using resources inefficiently and cutting
profits.
d) (i) Definition and recognition criteria of assets
Definition – future economic benefit, controlled by the entity and as a result of a past
transaction
Recognition – probable and reliable measurement
Illustrative example required
(ii) Equity is the residual value after deducting liabilities from assets
Alternative form A – L = E. This tells us that net assets, (A-L) is always equal to owner’s
equity.
e) All transactions are initially recorded at historical cost.
Items on the balance sheet can then be valued in a number of ways – measurement issues
– eg fair value, as either market value or replacement cost;
OFFICE USE ONLY
AC
Property, plant and equipment – cost (carrying amount cannot be > recoverable amount)
or revalued. Students could also discuss depreciation
f) Definition of fixed costs (costs remain same in total within a given range of activity and
timeframe) and variable costs (costs that change as the level of activity changes).
Some costs may appear to possess fixed and variable characteristics, that is, they cannot
be neatly classified as fixed or variable – mixed costs.
Assumes that cost behavior is linear.
Fixed costs may not remain constant over time or over a range.
Given the above issues, then the CVP technique can result in incorrect break even points.
g) The advantages are that it does provide a form of immediate finance to the borrowing
entity. The factoring company can either buy the invoices outright from the borrowing
entity or it can give a loan to the borrowing entity, collect the outstanding amounts,
subtract its fees, the amount outstanding and return the balance to the borrower. The
disadvantages are that it is a rather expensive form of finance. The factoring fees or the
discounting of the invoices can be quite high and can substantially reduce the amounts
outstanding. This can have implications for the working capital of the business,
particularly if the total debtors were a large proportion of the working capital.
h) The balanced scorecard provides a set of performance measures that reflect the entity’s
goals and strategies. The framework includes measures from four perspectives, financial,
customer, internal operation and innovation and improvement.
Any three of the following
Possible performance measures relevant to the innovation and improvement perspective
could be:
- Employee satisfaction
- Number of employee suggestions
- Number of employees receiving bonuses
- Number of employees attending training
- Time taken to develop new technology
- Time taken to introduce new product introduction vs competition
- Product focus
OFFICE USE ONLY
AC
Question 2
a) Cash flows from operating
activities
Receipts from customers* $171,000
Payments to suppliers and
$135,000
employees#
Net cash provided from
operating activities $36,000
*Cash from customers = opening accounts receivable + sales – closing
=34000 + 183,000 – 46,000
accounts receivable
$171,000
#Cash paid to suppliers = opening accounts payable + purchases –
=33,000 + (132,000-5,000) – 28,000
closing accounts payable
$132,000
Cash paid to other suppliers = other expenses +/- increase (decrease) in prepayments +/- decrease (increase) in accruals
= 0 + 8,000 - 5,000 + 0
$3,000
Cash paid to suppliers = $132,000 + $3,000 = $135,000
b) students’ answers must demonstrate understanding:
operating:
relates to provision of goods and services and other activities in course of trading
relates to income statement and CA and CL accounts
investing
relating to acquisition and disposal of non‐current assets
relate to NCA accounts
financing
activities that change size or composition of financial structure
relate to NCL and equity accounts
c) Students to identify, and explain significance of three items, e.g.
payments to suppliers > receipts from customers
Proceeds of sale relative to payments for PPE
Size of distributions paid relative to other Financial inflows and the low level of OCF
Or any other reasonable observation
OFFICE USE ONLY
AC
Question 3
a) D = (H‐RV)/N, therefore N = 180,000/3600 = 50 years.
Given the business is in provision of services, 50 years seems a very long time. On the
other hand, give marks if student’s alternative view is plausible. Key to getting marks is the
answer is thoughtful/critical.
b) New D = 180,000/10 = $18,000
New profit = 15,200 ‐ $18,000 = $2,800 loss
c) Example illustrates how accounting information is subject to estimations and policy
choices of managers, and these can significantly affect the reported numbers and hence
decisions of users.
Any well‐explained example (other than depreciation), such as accrual estimates of
incurred expense and unrecognised revenue.
d) The adjustment changes the story from one of profit to one of loss.
EBITDA, which is a good proxy for OCF, remains unchanged.
OFFICE USE ONLY
AC
Question 4
a)
November December
September $140,000 8% $11,200
October $160,000 30% $48,000 8% $12,800
November $200,000 60% $120,000 30% $60,000
December $230,000 60% $138,000
Total receipts $179,200 $210,800
b) 1 mark for each of four worthwhile points, e.g.
it itemises budgeted receipts and payments by month
so that periods of small or negative inflows can be identified
and the balance of cash monitored
so that decisions about timing or payments can be made
c) 1 mark for each of 4 worthwhile points such as
timing is bad given negative inflow expected for August
insufficient funds means overdraft or similar may be required
therefore consider delaying purchase to September when (barely) sufficient funds
are forecast to be available or delay even later
else investigate possibility of purchasing on credit with no fees
OFFICE USE ONLY
AC
Question 5
a) CM/unit = $2.5M/250K units = $10 per unit
BE = $2M/$10 = 200,000 units
b) 10% higher means $10 more contribution from extra 25K units, therefore profit
increases from $500K to $750K.
Revenue 11,550,000
Variable costs 8,800,000
Fixed costs 2,000,000
Net profit 750,000
c) Vol = ($2M + 0.6M)/$10 = 260,000
d) Relevant costs are those that differ between two options being chosen between.
Up to 2 marks for each of the two examples depending on how clearly and accurately they
are expressed.
OFFICE USE ONLY
AC
Question 6
a) Board requires hurdle rates with which to assess the estimated returns.
b) 1 mark for each worthwhile point, e.g.
choose Machine B.
although A has higher ARR, IRR takes account of time value of money better
this is important since the projects span a lengthy time, ie ten years
given higher IRR, it may have superior early net cash inflows and possibly lower risk
c) 1 mark for each worthwhile point, e.g.
no
neither ARR nor IRR measure the absolute value of the benefit
therefore require NPV
because it calculates for a given RRR the value of the benefit in present day dollars
