Questions in addition to your weekly workshop questionsMCQ EXAMPLES Question . Which of the following equations is correct? a. Assets = Liabilities + Owners Equity (Revenues Expenses) b. Assets + (Revenues + Expenses) = Liabilities + Owners Equity c. Assets + Liabilities + Owners Equity = Revenues Expenses D* Assets Liabilities = Owners Equity + (Revenues Expenses) . Question . An entitys owners equity is one-third of its total assets. Its liabilities total $100,000. What is the amount of its total assets? a. $100,000 B* $150,000 . c. $200,000 d. $300,000 .33x +100,000= X .6666X=100,000 X=150,000 Question . The purchase of an asset for cash will: A* not affect total assets, liabilities, and owners equity. b. increase total assets and increase total liabilities. c. increase total assets and increase total owners equity. d. increase total assets. Question . What is the value of total assets if current assets equal $2200, current liabilities equal $1500, non-current liabilities equal $800 and owners equity equals $2500? a. $2600 b. $3200 C* $4800 . d. $1100

Question . Accounting information: a. is helpful for financing decisions but not for marketing decisions. b. is useful for profit-making entities but is not needed for not-for-profit entities. c. must follow generally accepted accounting principles if provided to management. D* is useful for all economic organisations. .

Question . In a firm that offers a bonus scheme based on accounting profit, managers can, in most cases, be expected to adopt a: a. profit-decreasing accounting policy. B* profit-increasing accounting policy. . c. dividend-increasing accounting policy. d. liability-increasing accounting policy.

Question . In a utilitarian ethical framework, moral correctness is based on the premise that: a. the underlying nature of an action determines its correctness. B* the consequences of an action determine its correctness. . c. the nature of an action and its consequences determines its correctness. d. All of the above are correct. Question . Which of the following statements is true of the straight-line and/or reducing-balance methods of depreciation? a. The two methods yield different amounts of total depreciation expense over the useful life of the asset. B* The two methods yield the same amount of total depreciation expense over the useful life . of the asset. c. The straight-line method is applied to assets that wear and tear faster in the earlier years. d. The reducing-balance method is applied to assets that generate more revenue in later years.

Question . Slow Trucking owned a truck that cost $30,000 when it was purchased on 1 January 20X1. It had accumulated depreciation of $18,000 at 31 December 20X2. Slow originally estimated that the truck would have a residual value after using it for 4 years of $3,000. It sold the truck for $22,500 cash on 1 January 20X3. The amount of gain (loss) on the sale of the truck was: a. $4500 gain b. $19,500 gain c. $1500 loss D* $10,500 gain . Question . The So-Big Company sells hot-dogs. Inventory information for a recent week is shown below: Beginning inventory Purchase Purchase Units 2 4 6 Unit Cost $6 8 10 Total Cost $12 32 60

If 5 units were sold during the week, what is the cost of goods sold if the LIFO periodic method is used? a. $68 b. $54 C* $50 . d. $36 Question. Which of the following would not explain the difference between current and non-current assets? a. The future benefit of current assets will generally be used up within the entitys operating cycle. B* An expenditure is classified as a non-current asset if it is considered to be material. . c. An asset is classified as non-current if it is intended to be used within the business for a considerable period of time. d. The nature and intention of the business can help determine whether an expenditure should be classified as a non-current asset. Question 10. The following costs were incurred in the purchase of new office equipment.

Cash price Sales tax Insurance during transit Installation

$22,000 3,300 200 500

What amount should be recorded as the cost of the office equipment? a. $22,000 b. $25,300 c. $25,500 D* $26,000 .

Question . The major accounting difference between a finance lease and an operating lease is that: a. finance leases involve larger amounts of funds. b. finance leases are for longer periods of time. C* finance leases involve the recognition of assets and liabilities. . d. finance leases are cancellable.

Question . When calculating cost of goods sold, an error was made which understated closing inventory. What effect will this have on assets in the statement of financial position and on profits in the statement of financial performance? A* Assets will be understated and profit for the period will be understated. b. Assets will be overstated and profit for the period will be overstated. c. Assets will be understated and profit for the period will be overstated. d. Assets will be overstated and profit for the period will be understated.

Question even point?

Able Company sells a product for $50 per unit, its variable costs are $35 per unit and its total fixed costs are $45,000. What is Ables break-

A*. b. c. d.

3000 units. 150,000 units. 1286 units. 64,286 units.

Question Which of the following shows a combination of fixed and variable cost for a production plant? a. Costs of building and costs of equipment b. Land purchase costs and costs of equipment C*. Cost of building and costs of materials d. Land purchase costs and general managers salary Question Arches Manufacturing Company provides the following information: Direct labour Direct materials Direct labour hours Manufacturing overhead Variable selling expenses Number of units produced Costs $16,000 20,000 4,000 36,000 12,000 800

What is the total unit cost of one unit of finished product? a. $90.00 b. $95.00 C*. $105.00 d. $87.00 Question . Jany Ltd produces 20,000 golf balls. Each golf ball sells for $8, and it costs $2000 to produce the golf balls. The cost of the fixed plant and equipment needed to produce the golf balls is $1500 per period. The break-even point for Jany Ltd is (to the nearest integer): A*. 190 golf balls. b. 200 golf balls. c. 210 golf balls. d. 220 golf balls.

Question. A company has net profit of $10,000, sales price per unit of $25 and fixed costs of $40,000. The company would like to increase profits by 50%. What percentage increase in sales volume would be needed to achieve this goal? a. 20% b. 10% c. 12.5% D*. Answer cannot be determined from the information given. Question . Winter Sales, Inc. sells many kinds of winter sports equipment, primarily through telemarketing. Its sales staff is paid 15% of all sales dollars generated. In order to decrease the uncertainty of this arrangement for its staff and increase loyalty, the company is considering a change in the method of payment. The company would like to pay its 100 employees $1000 per month plus 10% of sales. Using cost-volume-profit analysis, what volume of sales dollars does the company need to exceed per month to make this new method more profitable for the company than the old method? a. $360,000 B*. $2,000,000 c. $1,000,000 d. Answer cannot be determined from the information given.

Question . Bowden Company forecasts sales for the third quarter at 10,000 units. The desired ending inventory for the second quarter is 2000 units and for the third quarter 3000 units. How many units must be produced in the third quarter? a. 9000 units B*. 11,000 units c. 12,000 units d. 13,000 units Question . Hamilton has budgeted total manufacturing overhead costs for the year as $125,000, based on 20,000 direct labour hours. The ratio of variable manufacturing overhead costs to fixed manufacturing overhead costs is 2:1. In a given month, 2000 direct labour hours are budgeted for production. How much overhead is budgeted? A*. $12,500.00 b. $11,805.55 c. $11,110.42 d. $10,416.67

Theory question: Best Guide: Weekly WS Review Questions from your Text Book Numerical Questions Chapter 19 WS questions Chapter 20 WS questions Chapter 14 Text Book: Question: 13 (Chapter 14)

Profitability:20X6 ROR on ordinary shareholders funds6 3 9 2 = 14% 9 0 49 0 2 2 7 0

20X54 3 1 0 = 8.8% 3 5 49 8 1 0 0 5

20X44 3 2 0 8.6% 2 5= 49 0 0 0 0 0

Indicates an increasing profitability almost on a par with the industry.20X6 Net profit margin Gross profit margin 13.2% 38% 20X5 15% 41% 20X4 17% 39%

A fairly constant gross profit margin with a falling net profit margin indicates a rising level of expenses such as depreciation, wages, interest, etc.. These should be analysed further. In this case a large part of the trend is due to increased interest charges on long-term debt.20X6 Times interest covered 5 20X5 10 20X4 11

This is a potentially dangerous situation since profitability is not quite good enough to offset the higher charges incurred to obtain funds. Short-term solvency:

20X6 Current ratio Quick ratio 1.49 0.65

20X5 1.84 0.75

20X4 2.25 0.90

Short-term solvency is contracting. This may be serious depending on how efficiently funds can be generated.20X6 Accounts receivable turnover Inventory turnover Operating cycle 75 days 152 days 227 days 20X5 72 days 268 days 340 days 20X4 68 days 304 days 372 days

Cash generation has improved greatly but still lags behind the norm for the industry (150 day operating cycle). Increases here can make allowances for the lower levels of liquid funds held. Receivables turnover has deteriorated particularly given that credit terms are net 45 days. A review of credit procedures may be warranted and perhaps action on long-outstanding receivables. Leverage:Debt/Tangible net assets 20X6 1.42 20X5 0.76 20X4 0.64

Increases in long-term debt have gone into long-term investment this is an essentially health situation. However, the returns from this investment are not yet great enough to offset the interest burden.20X6 Debt / Total assets 49% 20X5 32% 20X4 29%

The firm has increased debt levels beyond those for the industry. This is a cause for concern. Summary

While Jaycos profitability is still consistent with that of the industry, its increased debt levels and deteriorating liquidity are a cause for concern. Jayco needs to examine the collection of debtors. However, the increase in share price is evidence of market confidence in Jayco and its ability to service the higher levels of debt.IMPORTANT RATIOs Asset Turnover Sales Turnover Return on Sales Liquidity Ratios (CR and QR) Earning Per Share Efficiency Ratios (Debtor and Inventory Turnover ratios) Question 9 (Chapter 14)

a Declining profitability as measured by:Net profit margin 20X4 10% 20X5 8.3% 20X6 6.25%

Increase in sales is offset by increase in materials costs:Material costs/sales Return on shareholders funds Pre-tax return on total assets (assume 30% tax) 37.5% 38.9% 47.75%

10% 7050 90 000 = 7.8%

7.5% 5550 90 000 = 6.1%

6.25% 5737 105 000 = 5.5%

This trend may be levelling out. b Debt retired for equity in 20X6 has improved the ability to cover fixed charges in 20X6.

Times interest earned Debt/equity ratio

5 50 %

4 50 %

4.1 2 40 %

c

All the additional investment has gone into work in progress. This indicates that the equity increase was made to acquire working capital since short-term sources had been exhausted. Notice that there is no long-term finance. Perhaps attempt to retire short-term debt in favour of long-term debt which is generally less expensive and provides more flexibility Attempt to speed up work in progress to release funds for further investment Need to examine costs of materials: can these be reduced? If not, can the company increase its prices? Lower profit on increased sales is not a good sign. However, there may be problems in the economy (e.g., a recession) or competitive pressures which prevent price rises

Chapter 4 Question 14 & 15( chapter 4)

14 Mickey Ltd Balance sheet as at 30 June 20X1$ $ $

Current assets Bank Accounts receivable Inventory Loan receivable(1/7/20X1) Other current assets Total current assets Non-current assets Loan receivable(30/6/20X3) Fixtures and fittings Plant and equipment Land and buildings Total non-current assets Total assets Current liabilities Accounts payable Salaries payable Tax payable Other current liabilities Total current liabilities Non-current liabilities Debentures payable Loan payable(31/12/20X3) Total non-current liabilities Total liabilities Net assets Total owners equity

10 000 15 700 27 200 10 000 700 100 000 7200 3600 120 000

63 600

230 800

294 400

10 300 6200 12 300 1200 137 000 100 000

30 000 267 000 27 400 27 400

237 000

15

ABC Co. Ltd Balance sheetAssets Current assets Debtors Inventory Prepaid rent Non-current assets Motor vehicles Plant & equipment Land Buildings $ $ Liabilities and owners equity Current liabilities Bank overdraft Creditors $ $

10 000 20 000 2000 20 000 15 000 50 000 100 000

32 000 Owners equity Capital Retained earnings 185 000

12 000 90 000 80 000 35 000

102 000

115 000

Total assets

217 000

Total liabilities and owners equity

217 000

Chapter 6 Question 6 Chapter 6

6 aMandy Plover worksheet ASSETS = LIABILITIES + OWNERS EQUITY

Date

Bank

Prepaid Rent

Fixture s& Fittings

Comput er

Supplie s

Account s Receiva ble

Prepaid Lease Rent

Accounts = Payable

Capital

Profit & Loss

July 1

2 3 4 15 15 15 16 16 18 22 23 29 29 31 Balance Adjustmen t Rent Lease Supplies* Adjusted

30 000 3000 275 50 475 1000 1380 No entry 750 225 2000 17 500 300 750 300 340 3985

3000

30 000 275 50 475 1000 17 500 138 0 2750 2750 750 225 2000 17 500 780 3110 4855 300 780 750 300 3450 3720 1000 1000 115 = 0 30 1605 17 500

3000 1000

1000

17 500

138 0

2000

=

0

30 000

-115 3985 2000 1000 17 126 4855

1000 1000

Balance 500 5 *Assumed to last for one year, therefore 1380 x 1/12 = 11

000

b Mandy Plover Income statement for month ending 31 July$ Revenue Less Expenses Wages Rent Motor Vehicle Lease Telephone Electricity Fee Office Equipment Rent Bad Debts Supplies Net Profit $ 6800

1500 1000 1000 275 50 475 780 115

5195 1605

Mandy Plover Balance sheet as at 31 JulyAssets Current assets Bank Accounts receivable Supplies Prepaid rent Prepaid lease rent Non-current assets Fixtures and fittings Computer Total assets $ $ Liabilities and owners equity Owners equity Capital Retained earnings $

3985 4855 1265 2000 1000

30 000 1605

13 105

1 000 17 500

18 500

31 605

31 605

c

For the month of July, Mandy has made a profit of $1605. However, this figure is overstated for the following reasons: No expense recorded for electricity or telephone as no account has been received as at 31 July

No depreciation recorded for the computer or the signs No allowance made for any further bad debts Based on the investment of $30 000, Mandy is receiving the following return:1,6 5 x1 0 2 3 ,0 0 0 0 x 10 0

= 64.2 per cent per annum The other issue Mandy must consider is whether her wages of $750 per fortnight represent what she could earn elsewhere. If in fact her wages are understated at $750 per fortnight or $20 000 per annum, then her return on investment is overstated. Finally the effect of the lease of the BMW must be considered. For July the impact on profit has only been $1000 but in future months the impact will be $2000 per month. If Mandy continues to earn the same profit each month then the following figures show the impact of the BMW:

Net profit for July Add back BMW lease cost x 12 for full year Less full year cost of BMW

$1605 1000 $2605 x 12 31 260 24 000 7260

Return on investment:7 6 ,2 0 3 ,0 0 0 0 x1 0 0

= 24.2 per centIn summary then, Mandys business looks very promising. However, further analysis is required after a few more months of business to enable a more accurate assessment of the financials. Perhaps Mandy could earn a higher return by investing her money in shares and working for someone else but then she loses her independence and perhaps the BMW car. Even if she continues in her own business she could improve the return on her investment by choosing to lease a less expensive motor vehicle. Chapter 7 Question 20 (Chapter 7)

20 a

i

FIFO:

20X0

Cost of goods sold 2300 750 475 3525 Inventory 525 500 250 1275

@ @ @

$ 24. 06 24. 38 25. 00 25. 00 25. 31 25. 62

55 18 11 85

$ 338 285 875 498

@ @ @

13 125 12 655 6405 32 185

20X1

Cost of goods sold 1275 875 875 825 3850 Inventory 50 1250 1300

@ @ @

25. 62 25. 62 26. 26 26. 26 26. 56

32 22 22 21 98

185 418 418 665 686

@ @

1313 33 200 34 513

20X2

Cost of goods sold 1300 1250 875 263 3688 Inventory 612 875 1487

@ @ @

26. 56 26. 88 26. 88 26. 88 26. 88

34 513 33 200 23 520 7069 98 302

@ @

16 451 23 520 39 971

ii

LIFO:

20X0

Cost of goods sold 250 500 1000 750 1025 3525

@ @ @ @ @

25. 62 25. 31 25. 00 24. 38 24. 06 24. 06 26. 56 26. 26 25. 62 25. 62 24. 06 25. 62 26. 88 26. 88 26. 88 26. 56 24. 06 25. 62 26. 56

6405 12 655 25 000 18 285 24 662 87 007

Inventory 1275 20X1 Cost of goods sold 1250 875 875 850 3850

@

30 676

@ @ @ @

33 22 22 21 100

200 978 418 777 373

Inventory 1275 25 1300 20X2 Cost of goods sold 875 875 875 1063 3688

@ @

30 676 641 31 317

@ @ @ @

23 23 23 28 98

520 520 520 233 793

Inventory 1275 25 187 1487

@ @ @

30 676 641 4967 36 284

iii

Average:20X 0 20X 1 20X 2

Cost of goods sold Inventory Cost of goods sold Inventory Cost of goods sold Inventory

352 5 127 5 385 0 130 0 368 8 148 7

@ @ @ @ @ @

24.5 17 24.5 17 25.6 84 25.6 84 26.5 02 26.5 02

86 422 31 259 98 883 33 389 97 739 39 408

Note: It should be pointed out to students that a lot of effort can be saved by simply applying the equation beginning inventory + purchases = COGS + closing inventory.

b FIFO:

20X 2

Cost of goods sold

148 7 188 8 337 5 500

@ @

26. 88 27. 19

@ 27. 19

39 971 51 335 91 306 _____ 13 595

Inventory

LIFO:20X 2 Cost of goods sold 238 8 187 25 775 @ 27. @ 19 @ 26. @ 56 25. 62 24. @ 06 64 930 4967 641 18 647 _____ 89 185 12 030

Inventory

500 24. 06

Tutors should discuss the lowering of cost of goods sold and hence the increase in profit in 20X2 for LIFO compared to FIFO. This is contrary to the other three years and is despite the fact that costs still increased in 20X2. This is due to the lowering of the ending stock levels and as a result the lower unit cost flowing through cost of goods sold under LIFO. Chapter 17 5 a The predetermined overhead rate: Cost Centre X based on direct labour cost basis: $140 000/$100 000 = $1.40 per $ of direct labour cost Cost Centre Y based on machine hour basis: $150 000/20 000 hrs = $7.50 per machine hour b The total production cost for BNH:X $ Y $

Direct material Direct labour Overheads X $1.40 x $32 000 Y $7.50 x 13 000 hrs

20 000 32 000 44 800 96 800

40 000 21 000 97 500 158 500

Total cost of production X Y

$ 96 800 158 500 255 300

c

Unit cost of product BNH: Total cost of production/No. of units $255 300/20 000 units = $12.77 per unit

d The over-absorbed or under-absorbed overhead for 20X1:X Actual cost Absorbed overheads: X $144 200 x $1.40 Over-absorbed overhead $ 160 000 201 880 41 880 $ 138 000 135 000 3000 41 880 (3000 ) 38 880

Y Actual cost Absorbed overheads: Y 18 000 hrs x $7.50 Under-absorbed overhead X over-absorbed Y under-absorbed Total over-absorbed

9 a

Cost drivers: Construction 3 000 000 100 000 Inspection 1 000 000 20 000 Testing 500 000 8 000

= $30 per DLH = $50 per TTI = $62.50 per TTT

Mustang Direct materials Constructio n Inspection Testing Total cost $ 160 000 (4000 x $30) (800 x $50) (200 x $62.50) 120 000 40 000 12 500 332 500

Jaguar $ 120 000 (6 000 x $30) (1 200 x $50) (300 x $62.50) 180 000 60 000 18 750 378 750

b Overhead applied was 120 000 + 180 000 + 40 000 + 60 000 + 12 500 + 18 750 or $431 250. Actual overhead was $440 000. Overhead under-applied by $8750.Chapter 18

11 a

The amount of trousers Cords sell each month. Using the break-even equation where x is the number of pairs of trousers to earn a profit of $22 080 each month: S(x) = VC(x) + FC + P 36(x) = 20(x) + 52 800 + 22 080 16(x) = 74 880 x = 4680 pairs of trousers b Fixed costs have now increased to ($52 800 + $6 000) $58 800. The break-even point, using the break-even equation: 34(x) = 20(x) + 58 800 14(x) = 58 800 x = 4200 pairs of trousers The break-even point before the changes in price and advertising expenditure was: 36(x) = 20(x) + 52 800 x = 3300 pairs Profit on sales of 5800 pairs of trousers: 34(5,800) = 20(5 800) + 58 800 + P P = $22 400 Comments regarding the sales directors proposals: small increase in profits of $320 (1.4 per cent) much higher break-even point and therefore the proposal is riskier than previous operating level what is the likelihood that sales will, indeed, increase to 5800 units (24 per cent increase) Assumptions: all variable costs remain unchanged and are proportional to volume within this range of activity

c

fixed costs do not change capacity is available efficiency does not change, e.g., no economies of scale business environment not changing (e.g., government policy, competitors) i Required profit 15 per cent increase on $22 080 x 1.15 = $25 392 34(x) = 20(x) + 58 800 + 25 392 14(x) = 84 192 x = 6014 pairs of trousers (to the nearest whole number) ii Assuming that the Sales Directors policies were not adopted: 36(x) = 20(x) + 52 800 + 25 392 x = 4887 pairs of trousers