Accounting 101 Exam-style question

Solutions to Mock Exam I

Section A

Imperial Tech Ltd
Income statement
	£	£
Revenues		266,000
Cost of sales
Opening inventories	15,000
Purchases	150,000
Ending inventories	25,000
Cost of sales		140,000
Gross Profit		126,000
Distribution Cost		43,000
Administrative cost		48,000
Profit before interest		35,000
Interest expense		2,000
Profit after interest		33,000
Income tax expense		19,000
Profit for the year		14,000

Imperial Tech Ltd
Balance Sheet
ASSETS
Non-Current assets		162,000
Current Assets
Inventories		25,000
Trade receivables		75,000
Prepayments		5,000
Cash and cash equivalents		55,000
Total current assets		160,000
Total assets		322,000
LIABILITIES
Noncurrent liabilities
Loans		20,000
Current Liabilities
Trade payables		54,000
Accruals		3,000
Tax payable		19,000
Interest payable		2,000
Dividend payable		7,000
Total current liabilities		85,000
Total liabilities		105,000
EQUITY
Share capital		80,000
Retained earnings		137,000
Total equity		217,000
Total Equity and Liabilities		322,000

Notes:

1. Inventories at 31 December were £25,000

Closing Inv = 25,000

Also, use this for COGS calculaton

2. Dividend proposed for 2015 was £7,000 and not yet paid

Dr. RE 7,000

Cr. Dividend Payable 7,000

3. An accrual for distribution cost of £3,000 was required at 31 December 2015

Dr. Distribution cost 3,000

Cr. Accrual 3,000

4. A prepayment of £5,000 was wrongfully booked on administrative expenses

Dr. Prepayment 5,000

Cr. Admin Expenses 5,000

5. Tax was estimated at £19,000 to be payable on the profit of 2015

Dr. Tax Expenses 19,000

Cr. Tax Payable 19,000

6. Annual depreciation charges on land & Buildings and Motor Vehicles are included in the administrative expenses and distribution costs, and in the accumulated depreciation used to calculate the net book values of £95,000 and £40,000 respectively, shown in the trial balance.

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7. The furniture and fixtures balance of £30,000 relates to the purchases of assets during 2015. The depreciation cost are not included in the trial balance yet. They are require to be calculated on a straight line basis for the full year of 2015, based on a useful life of eight years and an estimated residual value of £6,000

Dr. Admin Expenses 3,000 : (30,000 – 6,000)/8

Cr. Accumulated Dep, FF 3,000

8. Interest is 10% on the loan and not paid yet

Dr. Interest Expense 10%*20,000

Cr. Interest Payable 2,000

b) Adjusting entries are related to accrual accounting. There are five main groups of adjusting entries: inventory adjustments, depreciation and amortization, accruals, prepayments and bad and doubtful accounts. These recordings relate to the recognition of expenses in specific period. These entries ensure that the expenses that were incurred are matched with the revenue they helped to generate.

Section B

1. The Balance sheet at 31/12/2015 of Orange Ltd contained the following information

· Retained Earnings: 1/1/2015: £123 million

· Retained Earnings at 31/12/2015: £197 million

· Revaluation reserve 1/1/2015: £69 million

· Revaluation reserve 31/12/2015: £69 million

Net income in 2015 was £134 million. How much dividend was paid?

a. £63 million

b. £60 million

c. £73 million

d. £134 million

e. £257 million

Opening RE = £123 & Closing RE = £197

Closing RE = Opening RE + Net Profit – Dividends

197 = 123 + 134 – Dividends => Dividends = 60

2. The furniture and fixtures balance of £30,000 relates to the purchases of assets during 2015. The depreciation costs are not included in the trial balance yet. They are required to be calculated on a straight line basis for the full year of 2015, based on a useful life of 8 years and an estimated residual value of £6,000 and to be included in the administrative expenses and accumulated depreciation. Depreciation expenses are:

a. £6,000

b. £5,000

c. £4,000

d. £3,750

e. £3,000

(30,000 – 6,000)/8 = 3,000

3. An entrepreneur purchases a machine to the amount of £40,000 on January 2006. The machine has an expected life span of four years. Each year the machine is depreciated by £8,000. What is the residual value of this machine?

a. £6,000

b. £4,000

c. £8,000

d. £2,000

e. £0

Annual depreciation = (Historical Cost – Salvage Value)/Useful life

8,000 = (40,000 – Salvage value)/4

32,000 = 40,000 – Salvage value

4. Flight Inc. is considering the purchase of a machine that would cost $200,000 and would last for 4 years. At the end of 4 years, the machine would have a salvage value of $18,000. By reducing labour and other operating costs, the machine would provide annual cost savings of $78,000. The company requires a minimum return of 6% on all investment projects. The net present value of the proposed project is closest to:  

a.  $69,420 b.  $65,490

c. $70,278

d. $84,526 e.  $112,000

CF are 78,000 for 4 years and at the end of year 4, we also get 18,000.

Initial investment is 200,000 and discount rate 6%

5. Sarah’s accountant recorded cash flows for several transactions:

Payment of dividend £185,000 F Payment for the purchase of equipment £180,000 I

Payment to repay loans £175,000 F

Payments from issuing new debentures £550,000 F

Payment of salary and wages £350,000 O

Based on these recordings, what are the cash flows from financing activities?

a. £10,000

b. £20,000

c. £100,000

d. £190,000

e. £350,000

550,000 – 175,000 – 185,000 = 190,000

6. Astra recorded the following cash flow transactions:

Purchases of patents £50,000 I

Purchases of inventory £75,000 O

Purchases of machinery £45,000 I

Taxes paid £25,000 O

Based on these recordings, what are the cash flows from investing activities?

a. -£20,000

b. -£30,000

c. -£95,000

d. -£150,000

e. +£75,000

7. Ebony Ltd has fixed assets worth £100,000, Current Assets worth £ 180,000 and Current Liabilities worth £ 80,000. The current ratio is?

a. 1.0

b. 1.8

c. 2.25

d. 3.5

e. 4.15

8. Imperial Surf manufactures and sells one type of surfboards. The following information is available: The fixed selling price per board is £625, the fixed costs are £450,000 and the variable cost per unit are £250. What is the break volume?

a. 800 units

b. 1,000 units

c. 1,200 units

d. 1,600 units

e. 1,800 units

BE (Q) = Fixed Cost/CM per unit = 450,000/(625-250) = 1,200 units

9. For 2017 Imperial Surf has budgeted a turnover of 2,000 boards at £625 each ( = £1,250,000 turnover in total). The fixed costs are £450,000 a year and the variable costs are £250 per unit. What is the safety margin?

a. 20%

b. 40%

c. 45%

d. 50%

e. 55%

Break-even = 450,000/(625-250) = 1,200

Margin safety = (2,000 – 1,200)/2,000 = 40%

Margin of safety = (Budgeted Sales – BE )/Budgeted Sales

10. French Connection Company has a cash balance of $10,000 on 1 December. The company must maintain a minimum cash balance of $5,000. During December expected cash receipts are $37,000. Expected cash disbursements during the month total $52,000. During December the company will need to borrow

borrow: 

a. £5,000

b. £10,000

c. £15,000

d. £35,000

e. £0

Opening balance = 10,000

Closing Balance = 5,000

Receipts – Disbursements = 37,000 – 52,000 = -15,000

10,000 – 15,000 + Loan = 5,000

Loan = 5,000 +15,000 – 10,000 = 20,000 – 10,000 = 10,000

Section C

Question C1

a) Production Budget
		Lewington	Neville
		units	units
Sales		7,200	9,500
Closing stock		880	840
		8,080	10,340
Less Opening stock		(500)	(600)
Production		7,580	9,740
b) Material Usage Budget
		X	Y
		kgs	kgs
Used in Lewington		60,640	37,900
Used in Neville		68,180	165,580
		128,820	203,480
Closing stock		11,800	20,200
Less Opening stock		(10,300)	(22,300)
Purchases		130,320	201,380
		x	x
Unit price		£ 7	£ 4
Cost of materials purchased		912,240	805,520

c)

students could point to the fact that these budgets will give an early indication of the amount of resources needed for example, materials and the same principle applies to Labour budget if produced.

If the organisation finds that it is unable to obtain the required amount of materials or labour, this gives an early indication that there is a limiting factor. Either the budgets will need to be redrafted or special attention could be made to find extra resources.

Following on from this, once the production budgets have been finalised, the cash budget can be completed to give an indication of the funds required to finance activity during the forthcoming period.

In addition to cash, we can get an indication of budgeted profit for the forthcoming period.

At the end of the period, all the budgets can then be compared to the actual results using variance analysis to see whether the business is over or under performed and which departments are responsible.

Section D

Question D1

	Crash	Bang	Total	Avg.
Percentage of total sales	25%	75%	100%
Sales volume (units)	50,000	150,000	200,000
	£	£	£
Sales	1,000,000	1,800,000	2,800,000	14.00
Less variable expenses	(600,000)	(1,200,000)	(1,800,000)	(9.00)
Contribution	400,000	600,000	1,000,000	5.00
Less fixed expenses			(640,000)
Profit			360,000

a)

Cont/unit = 1,000,000/200,000 = 5

Fixed costs	=	640,000
Cont/unit		5.00
Break even (units)	128,000
Break even (£s)	1,792,000

Margin of safety (units)	= 200,000 - 128,000		=	72,000	units
Margin of safety (£s)	1,008,000
Margin of safety (%)	36%

b)

Target Sales (units)	=	£1,140,000
		5.00/unit

=

228,000

units