acct1511 final version

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SURNAME OF CANDIDATE:

FIRST NAME OF CANDIDATE:

STUDENT ID:

SIGNATURE:

SCHOOL OF ACCOUNTING

ACCT 1511: Accounting and

Financial Management 1B

FINAL EXAMINATION Semester 1, 2008

Time Allowed: 3 Hours Reading Time: 10 minutes Total Number of Questions: 9 Total Number of Pages 33

Answer ALL questions. The questions are NOT of equal value. Answers to Questions 1 to 8 must be written in ink on the lines or in spaces provided in this Booklet. Question 9 (multiple choice questions) must be answered on the separate Generalised Answer Sheet provided using a 2B pencil. This is a Closed Book examination. Candidates may NOT bring their own calculators.

Print your student number and name on top right hand corner and sign. This paper is NOT to be retained by the candidate.

Official Use Only

Q Mark

1

2

3

4

5

6

7

8

Total (/75)

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QUESTION 1 (6 MARKS): ACCRUAL ACCOUNTING Redrum Ltd. purchased a desktop computer for business use. The purchase price was $3,000. The company has a policy of depreciating all computers over their useful life of 3 years using the straight-line method with no residual value. Required: (a) Construct a three year-end schedule of the historical cost, depreciation expense, accumulated depreciation and carrying value of the desktop computer. (3 marks) Year Historical cost Depreciation

expense Accumulated depreciation

Carrying value

1

2

3

DO NOT WRITE OUTSIDE THE BOX PROVIDED (b) How do the concepts of cost, asset and expense relate to the desktop computer? (3 marks).

DO NOT WRITE OUTSIDE THE BOX PROVIDED

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QUESTION 2 (24 MARKS): STATEMENT OF CASH FLOWS The following information relates to Tonny Ltd.:

Income Statement for the year-ended 30 June 2007 ($'000) Sales revenue 4800 Gain from sale of land 180 Gain from sale of office equipment 120 Total revenue 5100 less Expenses: Cost of goods sold 2200 Bad debts expense 30 Insurance expense 20 Interest expense 40 Other expenses 1400 3690 Profit before income tax 1410 less Income tax expense 490 Profit after tax 920

Additional information (dollar amounts expressed in full units): 1. The office equipment sold had been originally purchased by Tonny Ltd. three

years ago at a cost of $300,000. Carrying amount of equipment sold was $160,000. 2. Land that was sold had a carrying amount of $200,000. 3. Land with an original value of $240,000 was revalued to $290,000. 4. An interim dividend was paid during the year. 5. Ignore the effect of revaluation activity on the accumulated depreciation account.

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QUESTION 2 (CONT.): STATEMENT OF CASH FLOWS

Comparative Balance Sheets 30 June 2007

($000) 30 June 2006

($000) Current Assets Cash 193 240 Accounts receivable 400 470 Allowance for doubtful debts (50) (47) Inventory 420 380 Prepaid insurance 30 40 Non-Current Assets Land 605 620 Buildings 1205 840 Accum. depn. buildings (390) (310) Trucks 215 215 Accum. depn. trucks (80) (40) Office equipment 610 400 Accum. depn. office equipment (220) (210) Net goodwill 170 190 Total Assets 3108 2788 Current Liabilities Accounts payable 210 290 Accrued expenses 120 140 Interest payable 40 40 Income tax payable 510 480 Final dividend payable 270 200 Non-Current Liabilities Borrowings 770 1100 Total Liabilities 1920 2250 Shareholders' Equity Share capital 400 300 Asset revaluation reserve 60 10 General reserve 110 50 Retained earnings 618 178 Total Shareholders' Equity 1188 538

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QUESTION 2 (CONT.): STATEMENT OF CASH FLOWS Required: For Tonny Ltd.'s year-ended 30 June 2007:

(a) List all items and their amounts relating to permanent differences only in the indirect method. Also list whether each item is subtracted (-) from or added (+) to the net profit after tax. (6 marks)

Subtracted (-) from or added (+) to the net

profit after tax?

Item Amount


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QUESTION 2 (CONT.): STATEMENT OF CASH FLOWS (b) Calculate net cash flows from investing using the direct method. Show all cash inflows and outflows. (10 marks)

Cash flows from investing activities:

Net cash flows from investing:


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WORKING SPACE FOR CASHFLOW QUESTION IF REQUIRED

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QUESTION 2 (CONT.): STATEMENT OF CASH FLOWS (c) Provide all journal entries related to cash inflows or outflows from financing only. (8 marks)


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WORKING SPACE FOR CASHFLOW QUESTION IF REQUIRED

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QUESTION 3 (12 MARKS): FINANCIAL STATEMENT ANALYSIS NOT RELEVANT IN S2 2009 The following data and chart relate to two companies: Citygroup Inc (C) and JP Morgan Chase & Co (JPM). The third chart shows a stock price performance comparison between the two companies.

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QUESTION 3 (CONT.): FINANCIAL STATEMENT ANALYSIS

Summary data: US$ Citigroup (C) JP Morgan (JPM) Fiscal Year Ends 31 Dec 2007 31 Dec 2007 Price as at 17 April 2008 24.03 45.12 Market Cap 125.11B 153.25B Trailing P/E 33.51 10.3 Forward P/E (fye 31-Dec-09) 7.35 10.62 PEG Ratio (5 yr expected) 2.07 1.77 Price/Sales 1.9 2.37 Price/Book 1.03 1.23 Profit Margin 5.63% 23.82% Return on Assets 0.18% 1.06% Return on Equity 3.10% 12.86% Income Statement Revenue: 159.23B 116.35B Net Income Available to shareholders: 3.58B 15.37B Diluted EPS: 0.72 4.38 Balance Sheet Total Asset 2,187.63B 1,562.15B Total Liability 2,074.03B 1,438.93B Shareholders Equity 113.6B 123.22B Cash Flow Statement Operating Cash Flow -71.43B -110.56B Investing Cash Flow -62.38B -73.12B Financing Cash Flow 144.49B 182.99B QUESTION 3 (CONT.): FINANCIAL STATEMENT ANALYSIS

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You are an equity investment analyst reviewing the information provided in the charts and the summary data provided in the previous pages. Required: (a) Choose one of the above two companies, Citigroup (C) or JP Morgan (JPM). What would be your stock recommendation with respect to your choice relative to the other, and what would be your price target? (2 marks) Stock recommendation: Price target:

DO NOT WRITE OUTSIDE THE BOX PROVIDED (b) Using financial statement analysis, valuation analysis and a visual inspection of the price charts, give FIVE (5) reasons in support of the above stock recommendation. You may calculate other ratios to support your recommendation. (2 marks for each reason): 1. 2.


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QUESTION 3 (CONT.): FINANCIAL STATEMENT ANALYSIS 3. 4. 5.


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QUESTION 4 (7 MARKS) ACCOUNTING POLICY CHOICE Required: For this question please use the information on Citigroup from Question 3 and the quotations for each section below: (a) Based on the extract below, what is a major limitation of financial statement analysis? (2 marks)

..Citigroup, which has incurred $22.1 billion in losses from the subprime crisis, has $320 billion in ``significant unconsolidated VIEs (variable interest entities),'' according to a Feb. 22 filing by the New York-based bank. The securities in the VIEs may be worth as little as 27 cents on the dollar once they're put back on balance sheets, according to David Hendler, an analyst at New York-based CreditSights. Hendler based his estimate on the recent sale of $800 million of bonds by E*Trade Financial Corp. (Source: Bloomberg, February 26, 2008)

DO NOT WRITE OUTSIDE THE BOX PROVIDED (b) Assuming that the analysis of Citigroup in part (a) is correct and using the information on Citigroup from Question 3, calculate Citigroups leverage before and after the impact of possible VIE losses. (2 marks) Leverage before

the impact of possible VIE losses:

Leverage after

the impact of possible VIE losses:


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QUESTION 4 (CONT.) ACCOUNTING POLICY CHOICE (c) Discuss your concerns, if any, regarding the following extract on Citigroups Level 3 assets and its potential impact on shareholders equity. (3 marks) Citigroup Inc. in a quarterly regulatory filing Monday said its so-called level 3 assets as of Sept. 30 were $134.84 billion. Level 3 assets are holdings that are so illiquid, or trade so infrequently, that they have no reliable price, so their valuations are based on management's best guess. Citigroup said it often hedges its level 3 positions. (Source: MarketWatch Nov. 5, 2007)

DO NOT WRITE OUTSIDE THE BOX PROVIDED Note: If required, please use the following formulae to calculate ratios for Questions 3 and 4. Performance Ratios Return on Equity (ROE) = Net Profit After Tax / Shareholders Equity Return on Assets (ROA) = Earnings before Interest & Tax (EBIT) / Total Assets Profit Margin = Net Profit After Tax / Sales Revenue Gross Margin = Gross Profit / Sales Revenue Activity Ratios Asset Turnover = Sales Revenue / Total Assets Inventory Turnover = COGS / Average Inventory Days Inventory on Hand = 365 / Inventory Turnover Debtors (receivables) Turnover = Credit Sales / Average Trade Debtors Days in Debtors = 365 / Debtors turnover Creditors Turnover = Purchases (or COGS) / Average Accounts Payable Days in Creditors = 365 / Creditors Turnover Cash Flow Cycle = Days in Inventory + Days in Receivables Days in Creditors Liquidity and Financial Structure Ratios Current Ratio = Current Assets / Current Liabilities Quick Ratio = (Current Assets Inventories) / Current Liabilities Interest Coverage = EBIT / Interest Expense (net) Debt to Equity Ratio = Total Liabilities / Total Equity Debt to Assets = Total Liabilities / Total Assets Leverage = Total Assets / Shareholders Equity

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QUESTION 5 (5 MARKS): COST-VOLUME-PROFIT ANALYSIS Samuel Jones plans to open a new Do-It-Yourself (DIY) gardening venture in Melbourne. He was able to get $900,000 conditional loan provided he can convince the bank that profits will be at least 20 percent of future sales revenues. Samuel estimated that total fixed expenses would be $32,000 per year and that variable expenses would be approximately 30 percent of sales revenues. Required: (a) How much total sales revenue must be generated to earn a profit equal to 20 percent of sales? Please round up your figures to two decimal points in every step of the calculations. (2 marks)


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QUESTION 5 (CONT.): COST-VOLUME-PROFIT ANALYSIS (b) The bank decides that after-tax-profit had to be 20 percent of sales revenue before Samuel can borrow $900,000. Under this assumption, how many DIY kits have to be sold if Samuel plans to sell each kit for $10? Assume the tax rate is 35 percent. Please round up your figures to two decimal points in every step of the calculations. (3 marks)


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QUESTION 6 (5 MARKS): COSTING SYSTEMS Maxy Ltd. makes syrup for people with iodine deficiencies. The syrup comes in 250ml bottles. Production takes place in two departments: Mixing and Bottling. Production starts in the Mixing department, and all output from the Mixing department is transferred to the Bottling department. After the syrup has been bottled, it is sold. The company uses a predetermined overhead rate (i.e., normal costing). The manufacturing costs for each department for October were:

Mixing Bottling Direct materials $17,000 $5,000 Direct labour $5,000 $1,000 Applied manufacturing overhead $10,000 $2,000

In October the output of the Mixing Department was 1,250 litres, and the output for the Bottling Department was 5000 bottles. At the end of the month there were no inventories, i.e., everything produced was sold. Required: (a) What is the cost per bottle of syrup for October? (3 marks)


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QUESTION 6 (CONT.): COSTING SYSTEMS (b) At the end of the financial year Maxys accountant discovered that while $130,000 in overhead had been applied to inventory over the year, actual overheads were $127,000. Prepare a journal entry to record the disposal of the overhead variance. Assume that the variance is immaterial. (2 marks)


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QUESTION 7 (6 MARKS): BUDGETING FOR PLANNING AND CONTROL The following information relates to Tomsen Ltd., a retail company specialising in adult toys: 1. Sales are expected to be $54,000 for November 2007, and $40,000 for December

2007. 2. Collections are expected to be 70% in the month of sale and 30% in the month

following the sale. 3. The gross margin is budgeted at 30% of sales (i.e. cost of goods sold amounts to

70% of sales revenue). 4. Merchandise is purchased on credit and is payable in the following month. 5. 70% of merchandise is purchased in the month prior to the month of sale, and

30% is purchased in the month of sale. 6. Depreciation on shop fixtures and fittings is budgeted at $3,000 per month. 7. Other monthly expenses are budgeted at $4,500. The budgeted balance sheet at 31 October 2007 is as follows:

Assets: Cash $4,400 Accounts receivable 15,200 Inventory 26,400 Fixtures and fittings 174,000 Total assets $220,000 Liabilities and owners equity Accounts payable $20,000 Owners equity 200,000 Total liabilities and owners equity $220,000

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QUESTION 7 (CONT.): BUDGETING FOR PLANNING AND CONTROL Required: What is the budgeted accounts payable balance at 30 November 2007? Show all

workings.


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QUESTION 8 (10 MARKS): CORPORATE GOVERNANCE The following pages present information on the Board of Directors for Qantas Ltd. This information is an abridged version of the information presented in the Qantas 2007Annual Report. Based on the information provided, list and discuss ANY FIVE (5) issues on whether Qantas complies with the ASX Principles of Good Governance and Best Practice Recommendations. 1. 2. 3.


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QUESTION 8 (CONT.): CORPORATE GOVERNANCE 4. 5.


Qantas Board Committee Members

Nominations

Committee: Leigh Clifford (Chairman), John Schubert and Garry Hounsell. Remuneration

Committee: James Strong (Chairman), Paul Anderson and Patricia Cross. Audit

Committee: Garry Hounsell (Chairman), Mike Codd and Patricia Cross.

The Qantas Board

Leigh Clifford, AO Chairman Independent Non-Executive Director

Leigh Clifford was appointed to the Qantas Board on 9 August 2007 and as Chairman on 14 November 2007. Mr Clifford is a Director of Barclays Bank plc and the Murdoch Children's Research Institute. Mr Clifford was most recently Chief Executive of Rio Tinto plc from April 2000 to April 2007. His executive and board career with Rio Tinto has spanned some 37 years, including a wide variety of operational and marketing roles in the coal and metalliferous operations of the Rio Tinto Group in Australia and overseas.

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QUESTION 8 (CONT.): CORPORATE GOVERNANCE

Geoff Dixon Chief Executive Officer

Geoff Dixon was appointed Chief Executive Officer and Managing Director of Qantas in March 2001. He was Chief Executive Designate from November 2000, after serving as Deputy Chief Executive Officer since November 1998. He was appointed to the Qantas Board in August 2000.

Peter Gregg Chief Financial Officer and Executive General Manager Strategy

Peter Gregg was appointed Chief Financial Officer and to the Qantas Board in September 2000. Previously Mr Gregg was Deputy Chief Financial Officer and Group Treasurer at Qantas. He was also Treasurer Australian Airlines and has worked for the Queensland Government in various risk management roles. He is a Fellow of the Finance and Treasury Association, a Member of the Australian Institute of Company Directors and holds a Bachelor of Economics.

Paul Anderson Independent Non-Executive Director He is a Member of the Qantas Remuneration Committee.

Paul Anderson was appointed to the Qantas Board in September 2002. Mr Anderson is a Director of BHP Billiton Limited He was the Chief Executive Officer of BHP Billiton Limited and its predecessor, The Broken Hill Proprietary Company Limited from 1998 to 2002.

Mike Codd, AC Independent Non-Executive Director He is a Member of the Qantas Audit Committee.

Mike Codd was appointed to the Qantas Board in January 1992. Mr Codd is Chancellor of the University of Wollongong. He is a Director of the Wealth Management Companies of the National Australia Bank and Chairman of INGEUS Ltd. From 1981 to 1986, Mr Codd held senior positions in the Commonwealth Government From 1986 to 1991, Mr Codd held the position of Head of Department of the Prime Minister and Cabinet, and Secretary to Cabinet.

General Peter Cosgrove, AC, MC Independent Non-Executive Director

Peter Cosgrove was appointed to the Qantas Board in July 2005. General Cosgrove served in the Australian Army from 1965 and was the Chief of the Australian Defence Force from July 2002 until his retirement in July 2005.

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QUESTION 8 (CONT.): CORPORATE GOVERNANCE

Patricia Cross Independent Non-Executive Director She is a Member of the Qantas Audit Committee and Qantas Remuneration

Committee. Patricia Cross was appointed to the Qantas Board in January 2004. Mrs Cross is a Director of Wesfarmers Limited, National Australia Bank Limited and the Murdoch Children's Research Institute. Prior to becoming a professional company director in 1996, Mrs Cross held various senior executive positions with Chase Manhattan Bank, Banque Nationale de Paris and National Australia Bank in New York, Europe and Australia. ...

Garry Hounsell Independent Non-Executive Director

Garry Hounsell was appointed to the Qantas Board in January 2005. He is the Chairman of the Qantas Audit Committee and was appointed as a Member of the Qantas Nominations Committee on 18 July 2007. Mr Hounsell is a former Senior Partner of Ernst & Young and Chief Executive Officer and Country Managing Partner of Arthur Andersen. He holds a Bachelor of Business (Accounting).

Dr John Schubert Independent Non-Executive Director He is a Member of the Qantas Nominations Committee.

John Schubert, BE, PhD, FIEAust, CPEng, FTS, FIChemE, was appointed to the Qantas Board in October 2000. Dr Schubert is Chairman of the Commonwealth Bank of Australia and a Director of BHP Billiton Limited. ... Dr Schubert commenced his career with Esso Australia Ltd as a professional engineer and held various positions with Esso in Australia and overseas In 1985, Dr Schubert became Esso's Deputy Managing Director and in 1988 he became Esso's Chairman and Managing Director.

James Strong, AO Independent Non-Executive Director He is Chairman of the Qantas Remuneration Committee.

James Strong was appointed to the Qantas Board on 1 July 2006. Mr Strong was previously the Chief Executive Officer and Managing Director of Qantas between 1993 and March 2001, following an appointment to the Board in 1991. He is Chairman of Woolworths Limited, Insurance Australia Group Limited (IAG), IAG Finance (New Zealand) Limited, Rip Curl Group Pty Ltd and the Australian Council for the Arts. ..

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SOLUTION GUIDELINES QUESTION 1 (6 MARKS) (a) Year Historical cost Depreciation

expense Accumulated depreciation

Carrying value

1 $3,000 $1,000 $1,000 $2,000 2 $3,000 $1,000 $2,000 $1,000 3 $3,000 $1,000 $3,000 $0 (b)

Cost The desktop computer is initially defined and recognised as an

is the price of $3000 paid for the desktop computer. asset

As the desktop computer is used, this is reflected in depreciation .

expense

.

QUESTION 2 (a)

+ Depreciation - Office equipment 150 + - Buildings 80 + - Trucks 40 + Amortisation - Goodwill 20 - Gain from sale of land (180) - Gain from sale of office equipment (120)

(b)

Cash flows from investing activities:*

Purchase buildings (365) Proceeds from sale of land 380 Purchase land (135) Proceeds from sale of office equipment 280 Purchase office equipment Net cash outflows

(510) (350)

(c) Dr Borrowings 330 Cr Cash 330 Dr Final dividends payable 200 Cr Cash 200 Dr Cash 100 Cr Share capital 100 Dr Interim dividends payable 150 Cr Cash 150

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QUESTION 5 (5 MARKS) (a) ProfitBT = R VC FC 0.20R = R VC FC 0.20R = R 0.30R 32,000 0.50R = $32,000

R = $64,000

(b) ProfitAT = ProfitBT tax rate (ProfitBT) 0.20 (10x) = ProfitBT 0.35ProfitBT 0.20 (10x) = 0.65ProfitBT ProfitBT = 3.08x

ProfitBT = R VC FC 3.08x = 10x 3x 32,000 3.92x = 32,000

x = 8,163.27 x = 8,164 units

QUESTION 6 Mixing Dept. Bottling Dept. Total Cost Direct materials 17000 5000 22000 Direct labour 5000 1000 6000 Manufacturing OH 10000 2000 12000 Total production cost 32000 8000 40000 Units produced 1250 litres 5000 bottles Cost per bottle $8 (40000/5000) (b) Dr Overhead control 3000 Cr COGS 3000 QUESTION 7 Opening balance $20,000 Credit purchases: Nov (30% x 37800) $11,340 Dec (70% x 28000) $ $50,940

19,600

Payments from a/c Pay Oct $ $30,940

20,000

SCHOOL OF ACCOUNTINGQUESTION 5 (5 MARKS): COST-VOLUME-PROFIT ANALYSISQUESTION 5 (CONT.): COST-VOLUME-PROFIT ANALYSIS

acct1511 final version

Documents

income tax expense

insurance expense

total assets

total liabilities

income tax payable

total revenue

sale of office equipment

income statement