SURNAME OF CANDIDATE:
FIRST NAME OF CANDIDATE:
STUDENT ID:
SIGNATURE:
Official Use Only
Q
Mark
1
2
3
SCHOOL OF ACCOUNTING
4
ACCT 1511:
5
Accounting and
Financial Management 1B
6
7
FINAL EXAMINATION
Semester 1, 2008
8
Total
(/75)
Time Allowed:
Reading Time:
Total Number of Questions:
Total Number of Pages
3 Hours
10 minutes
9
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.
Page 1 of 27
QUESTION 1 (6 MARKS): ACCRUAL ACCOUNTING
Redrum Ltd. purchased a desktop computer for business use. The purchase price was
$3,000. The company has a policy of depreciating all computers over their useful life
of 3 years using the straight-line method with no residual value.
Required:
(a) Construct a three year-end schedule of the historical cost, depreciation expense,
accumulated depreciation and carrying value of the desktop computer. (3 marks)
Year
Historical cost
Depreciation
expense
Accumulated
depreciation
Carrying
value
1
2
3
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(b) How do the concepts of “cost”, “asset” and “expense” relate to the desktop
computer? (3 marks).
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Page 2 of 27
QUESTION 2 (24 MARKS): STATEMENT OF CASH FLOWS
The following information relates to Tonny Ltd.:
Income Statement for the year-ended 30 June 2007 ($'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
Bad debts expense
Insurance expense
Interest expense
Other expenses
2200
30
20
40
1400
Profit before income tax
less Income tax expense
Profit after tax
3690
1410
490
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 $290,000.
4. An interim dividend was paid during the year.
5. Ignore the effect of revaluation activity on the accumulated depreciation account.
Page 3 of 27
QUESTION 2 (CONT.): STATEMENT OF CASH FLOWS
Comparative Balance Sheets
30 June 2007
($’000)
30 June 2006
($’000)
Current Assets
Cash
Accounts receivable
Allowance for doubtful debts
Inventory
Prepaid insurance
193
400
(50)
420
30
240
470
(47)
380
40
Non-Current Assets
Land
Buildings
Accum. depn. – buildings
Trucks
Accum. depn. – trucks
Office equipment
Accum. depn. – office equipment
Net goodwill
Total Assets
605
1205
(390)
215
(80)
610
(220)
170
3108
620
840
(310)
215
(40)
400
(210)
190
2788
Current Liabilities
Accounts payable
Accrued expenses
Interest payable
Income tax payable
Final dividend payable
210
120
40
510
270
290
140
40
480
200
Non-Current Liabilities
Borrowings
Total Liabilities
770
1920
1100
2250
Shareholders' Equity
Share capital
Asset revaluation reserve
General reserve
Retained earnings
Total Shareholders' Equity
400
60
110
618
1188
300
10
50
178
538
Page 4 of 27
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
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Page 5 of 27
Amount
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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Page 6 of 27
WORKING SPACE FOR CASHFLOW QUESTION IF REQUIRED
Page 7 of 27
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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Page 8 of 27
WORKING SPACE FOR CASHFLOW QUESTION IF REQUIRED
Page 9 of 27
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.
Page 10 of 27
QUESTION 3 (CONT.): FINANCIAL STATEMENT ANALYSIS
Summary data:
US$
Fiscal Year Ends
Price as at 17 April 2008
Market Cap
Trailing P/E
Forward P/E (fye 31-Dec-09)
PEG Ratio (5 yr expected)
Price/Sales
Price/Book
Profit Margin
Return on Assets
Return on Equity
Income Statement
Revenue:
Net Income Available to shareholders:
Diluted EPS:
Balance Sheet
Total Asset
Total Liability
Shareholders Equity
Cash Flow Statement
Operating Cash Flow
Investing Cash Flow
Financing Cash Flow
JP Morgan (JPM)
31 Dec 2007
45.12
153.25B
10.3
10.62
1.77
2.37
1.23
23.82%
1.06%
12.86%
159.23B
3.58B
0.72
116.35B
15.37B
4.38
2,187.63B
2,074.03B
113.6B
1,562.15B
1,438.93B
123.22B
-71.43B
-62.38B
144.49B
-110.56B
-73.12B
182.99B
QUESTION 3 (CONT.): FINANCIAL STATEMENT ANALYSIS
Page 11 of 27
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:
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(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.
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)
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(b) Assuming that the analysis of Citigroup in part (a) is correct and using the
information on Citigroup from Question 3, calculate Citigroup’s 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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Page 14 of 27
QUESTION 4 (CONT.) ACCOUNTING POLICY CHOICE
(c) Discuss your concerns, if any, regarding the following extract on Citigroup’s
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)
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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
Page 15 of 27
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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Page 16 of 27
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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Page 17 of 27
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:
Direct materials
Direct labour
Applied manufacturing overhead
Mixing
$17,000
$5,000
$10,000
Bottling
$5,000
$1,000
$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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Page 18 of 27
QUESTION 6 (CONT.): COSTING SYSTEMS
(b) At the end of the financial year Maxy’s 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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Page 19 of 27
QUESTION 7 (6 MARKS): BUDGETING FOR PLANNING AND CONTROL
The following information relates to Tomsen Ltd., a retail company specialising in
adult toys:
1.
2.
3.
4.
5.
6.
7.
Sales are expected to be $54,000 for November 2007, and $40,000 for December
2007.
Collections are expected to be 70% in the month of sale and 30% in the month
following the sale.
The gross margin is budgeted at 30% of sales (i.e. cost of goods sold amounts to
70% of sales revenue).
Merchandise is purchased on credit and is payable in the following month.
70% of merchandise is purchased in the month prior to the month of sale, and
30% is purchased in the month of sale.
Depreciation on shop fixtures and fittings is budgeted at $3,000 per month.
Other monthly expenses are budgeted at $4,500.
The budgeted balance sheet at 31 October 2007 is as follows:
Assets:
Cash
Accounts receivable
Inventory
Fixtures and fittings
Total assets
$4,400
15,200
26,400
174,000
$220,000
Liabilities and owners’ equity
Accounts payable
Owners’ equity
Total liabilities and owners’ equity
$20,000
200,000
$220,000
Page 20 of 27
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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Page 21 of 27
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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Page 22 of 27
QUESTION 8 (CONT.): CORPORATE GOVERNANCE
4.
5.
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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. …
Page 23 of 27
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. …
Page 24 of 27
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. ..
Page 25 of 27
SOLUTION GUIDELINES
QUESTION 1 (6 MARKS)
(a)
Year
Historical cost
1
2
3
$3,000
$3,000
$3,000
Depreciation
expense
$1,000
$1,000
$1,000
Accumulated
depreciation
$1,000
$2,000
$3,000
Carrying value
$2,000
$1,000
$0
(b)
•
•
•
Cost is the price of $3000 paid for the desktop computer.
The desktop computer is initially defined and recognised as an asset.
As the desktop computer is used, this is reflected in depreciation expense.
QUESTION 2
(a)
+
+
+
+
-
Depreciation - Office equipment
- Buildings
- Trucks
Amortisation - Goodwill
Gain from sale of land
Gain from sale of office equipment
150
80
40
20
(180)
(120)
(b)
Cash flows from investing activities:*
Purchase buildings
Proceeds from sale of land
Purchase land
Proceeds from sale of office equipment
Purchase office equipment
Net cash outflows
(c)
Dr
Dr
Dr
Borrowings
Cr
330
Cash
330
Final dividends payable
Cr
Cash
200
Cash
100
Cr
Dr
(365)
380
(135)
280
(510)
(350)
200
Share capital
100
Interim dividends payable
Cr
Cash
150
150
Page 26 of 27
QUESTION 5 (5 MARKS)
(a)
ProfitBT
0.20R
0.20R
0.50R
R
= R – VC – FC
= R – VC – FC
= R – 0.30R – 32,000
= $32,000
= $64,000