Jan 2009

1. As part of their business plan, the directors of Standard Bicycles plc intend to reorganise and restructure its workforce in the next financial year, ending 31 December 2009. The reorganising and restructuring of the workforce will be treated in the accounts for the year ending 31 December 2009 as an Exceptional Item.

(b) Evaluate the usefulness of this treatment to the users of the published accounts of Standard Bicycles plc.

Benefits

This will benefit users of accounts because they can see that the expense of the Exceptional Item will not be expected to be repeated regularly in the future. √√

Although in the normal line of business √ the Exceptional Item should be disclosed because of its size. √

This allows reader to predict more accurately future expected performance. √√ This may help future potential investors √ / shareholders √ / creditors √ etc with

decision making. √ Should be beneficial if required to be shown √ by FRS3. √ Could be said to give a True

and Fair View √

Disadvantages

Adds more figures and details to the accounts √ so makes them more difficult to understand. √

Extra cost √ in spending extra time preparing accounts.

2. When the Cash Flow Statement is presented to the Board Meeting, the Marketing Director comments “We should not be worried. Liquidity, not profitability, is important for the short term survival of the business”.

(d) Evaluate this comment, with reference to Sunset plc.

Not worried - Liquidity most important for short term survival

Liquidity problems result in unable to pay daily bills √ eg wages, electricity (need two) √

Unable to pay some bills may result in closure of business √ eg tax bill √ Unable to pay some bills may mean business unable to operate √ eg electricity cut

off √ Can survive short term losses √ if previous profits have been built up √ If depreciation (a non-cash expense√) is not included, Sunset plc makes a “profit”√ The Net Cash figure shows an inflow/increase √ ( But this has been due to a loan √

and new share issue √)

Worried - Profitability important.

If not profitable, business would close down √ in the long run √ If short term liquidity problem, √ many sources are available as source of finance √

eg banks, shareholders, debt factoring etc (need two sources) √ No/low profitability may result in firm unable to attract finance √ or

investors/shareholders √ No/low profitability may see share price fall, √ as investors lose confidence √ Sunset only has no liquidity problem at present √ because it has increased the bank

loan √ and asked shareholders for more funds √ The extra loan now means interest payments of £127 500 √ to be made a year which

will reduce profit √

3. (f) Evaluate whether it would be useful for Mrs Yeungs Cakes Ltd also to prepare a cash budget for the first four weeks of trading.

For a Cash Budget o Allows firm to see inflows and outflows of cash in the period, √ and to see

whether overall there is an inflow or outflow of cash for the period. √ o This will help the firm with planning and decision making √ e.g. arrange an

overdraft √ or arrange a loan, √ or chase up debtors, √ or negotiate with suppliers, √ or adjust prices √ prevent overtrading √

o Can compare Budget to Actual √and variance analysis can take place. √ Against a Cash Budget

o Takes staff time to draw up budget √ and this means money. √ o Budget is only an estimate √ so could be inaccurate √ and this could lead to

inaccurate decision-making √ Conclusion (does not have to be at end)

o Should conclude that drawing up a cash budget is worthwhile for the firm.

4. The Production Manager of CoolShades Ltd has said, “If you decide to pay a low wage rate, the business does not always benefit”.

(c) Evaluate this statement.

o For statement ie. Against Paying Low Wage Rate: o Labour Rate variance is favourable, so probably less skilled workers than

expected employed. √ This could result in the adverse Labour Efficiency variance, √ as they will take more time to complete the job than higher skilled workers. √

o This also explains the adverse Total Labour Cost Variance. √ Also, the lower skilled workers (favourable Labour Rate variance) √ would waste more material, √ explaining the Material Usage variance, √ and the Total Material Cost Variance. √

o Workers are less motivated √ so productivity may suffer √

o Against Statement ie. For Paying Low Wage Rate : o Labour Rate variance is favourable √ which may reduce labour costs √

o Conclusion must relate to points made above.

5. (c) Evaluate on behalf of the management of Himalaya Ltd which method of stock valuation, marginal costing or absorption costing, should be used.

o Case for Marginal Costing o Could be said to help decision making √ when deciding whether to accept an

offer price √ or make or buy √ or discontinue a product/profit centre. √ o Sees costs allocated to a time period, √ so it may be argued that profit for

that time period is more accurate. √ External accounts √ are drawn up on the basis of a time period. √

o May be argued it is prudent √ to write off costs in time period incurred. √ o Case for Absorption Costing

o Sees costs allocated to products. √ o Could be useful for management √ when fixing prices √ or reviewing if a

product/project has been profitable √ o Recommended √ by SSAP 9. √ o Could be said to give a True and Fair view √.

o Other Points o If figures in the future are similar, choice of stock valuation will not have

very much effect on the profit. √√ o Conclusion Max 2 marks available. Should relate to points made above.

6. KC Jones bought three hundred (300) £2 shares in Whistle Stopz plc in the stock market for £2.50 each, one year ago. The shares are now trading on the stock market at £2.03.

(d) Evaluate the merger on behalf of KC Jones.

o Case for takeover: o KC has received some goodwill, √ as purchase price is greater than net value of

assets sold. √ Goodwill is actually 589 000 / 5 000 000 √ = 11.78p per share. √ #o Whistle Stopz plc appear to having problems. √ o Liquidity / working capital is very low. √ Profit and loss reserve balance is very

low. √ May be good to sell shares at decent price √ before it gets worse. √ o Selling share for £2.10 which is above market value √ of £2.03 by £0.07 per

share √ o Case Against takeover:

o KC bought the shares for £2.50 but is only receiving £2.10 per share now. √ He is making a loss of £0.40 per share. √

o Goodwill paid is low √ – only about 5% above asset values. √ o Whistle Stopz plc may improve in the future √ and the share price could rise

above £2.10. √ o Conclusion 2 marks available Should relate to points made above.

7. (c) Evaluate the financial success of the route to the new destination by comparing the actual and budget figures.

Better than budget o Passenger figures of 130 000 are better √ than budget figures by 10 000 √ o Sales price per passenger of £55 is better √ than the budget figure of £50 √ o Actual sales of £7 150 000 √ is better than the budget sales of £6 000 000 √

Worse than budget o Profit of £550 000 is worse than the budget profit √ of £600 000 √ (by £50 000). o Variable costs of £40 per passenger are higher √ than budget figures of £35 √ o Fixed costs of £1 400 000 are higher √ than budget figure of £1 200 000 √ o Actual Total Costs of £6 600 000 √ is worse than Budget Total Costs of £5 400 000 √

although this is partly due to more passengers. √ o Break even figure for passengers of 93 334 is higher √ than budget figure of 80 000.

√ Conclusion (Should relate to above points. Profit is higher so actual figures are better than

budget. √√

June 2009

1. (b) “A company’s balance sheet is more important than its profit and loss account”. Evaluate this statement.

o FOR Importance of Balance Sheet: o shows items of value firm possesses and may use for running firm over long

term √ (fixed assets), ie shows financial strength of firm. √ o shows liquidity position of firm √ by Net Current Assets (Current Assets –

Current Liabilities) √ o shows financial weaknesses of firm √ (long term liabilities – debt that must be

serviced) √ o shows a book value of the firm, ie Capital and Reserves √ o Shareholders can see the book value of their investment √ o some figures in the Profit & Loss account may be estimates √ for example

depreciation and stock values. √ o FOR importance of Profit & Loss Account:

o shows how well the firm has performed over the last trading period. √ This is very important as for example balance sheet may look healthy, but trading at a loss √

o enables firm to see the relationship between sales and purchasing/production √ ie Gross Profit √

o enables the firm to see the relationship between Gross Profit and Expenses √ ie Net profit √

o some figures in the Balance Sheet may be estimates √ for example depreciation and stock values. √

o CONCLUSION For example balance Sheet is more important. √√ 2 √’s for conclusion

2. (d) Study the budget and actual figures, and the information given for April 2009. Evaluate the most appropriate actions to achieve the £40 000 net profit target required by the directors

Answers may include:

o selling price below budget √ competitive market? √ Difficult to raise price √ promotions? √ o Investigate why 0.52 kg of material used per loaf. Wastage? √ Could reduce this figure. √ o World price of wheat rising. √ Difficult to reduce purchase price. √ o However, firm could try to find cheaper suppliers √ or receive discounts for buying in

greater bulk. √ o Labour just had a pay rise. √ Difficult to now reduce pay rate. √ o Hours used less than budget. √ Any scope possible for further reduction? √ o Variable overheads difficult to reduce rate, √ but could reduce usage. √ o Fixed overheads unlikely to reduce rent, or managers salaries. √ Lay off staff? √ o Conclusion o Probably best to try to control quantity of material used in production. √√

3. Angelina was a shareholder in Highway Connections Limited. (d) Evaluate the merger from the point of view of Angelina.

o For Merger o Shareholders in Highway Connections “receive a profit” on realisation of £341 000

o/f √ also Goodwill valuation of £274 000. √ o New company should enjoy benefits of vertical integration as in same line of

business. √ o New company could enjoy economies of scale √ for example bulk buying of

machinery √ o Or enjoy managerial economies of scale √ or marketing economies of scale √ o Larger company could enjoy financial benefits for example easier to get bank loans √

at a lower interest rate. √ o Against Merger

o Dilution of ownership √ and voting power. √ o Wessex Quarries do not appear to be in a healthy financial state √ for example

negative profit & loss reserve. √ o Original Wessex balance sheet appears to have many assets overvalued √ for

example machinery overvalued by £100 000. o Also liquidity position of Wessex is worrying √ as they appear to have low working

capital ratio/negative working capital √ . o Wessex may be a drain on the liquid resources of the new company, √ especially

with the large amount of creditors to pay. √ o We do not know the market price of the Highway Connections shares. √ o We do not know what the market price of Roadworks shares are likely to be. √

o Conclusiono Should conclude and relate to points made above. √√

4. Production is determined by the maximum production capacity of the factory, NOT by the number of beds ordered by customers.

(b) Evaluate the decision to produce a quantity determined by the maximum capacity of the factory instead of producing a quantity determined by customers’ orders.

o For Decision o Makes full use of factory √ ie capacity utilisation is 100%, √ no wastage √ o Sales may be more than 55 a week. √ Able to meet this demand from

production √ or stock. √ o In the event of production breakdown √ customers orders can be met √ this will

maintain customer loyalty. √ o Beds kept in stock do not deteriorate / perish √ so money is not lost. √

o Against Decision o Stock is building up continually, √ and this involves a number of costs for

example rent √ insurance √ and ties up working capital. √√ o Eventually will run out of storage space, √ so must find alternative premises √ or

reduce production. √ o It is possible that beds could deteriorate in stock √ for example due to

dampness. √ o Possible that tastes change √ and firm left with stock that they cannot sell. √

o Evaluation 2 marks available for overall conclusion, should relate to points made above.

6. (b) Evaluate the project for the company, considering both financial and non-financial factors

o FOR INVESTMENT o Payback method invest √ as project profitable overall √ and within 5 year payback

period. √ o AGAINST INVESTMENT

o ARR states do not invest √ as fails to meet % return figure of 10% √ o Other Relevant Points:

o Accuracy of predictions? √ o What happens after 5 years? √ o Other possible investment projects available? √ o Objectives/strategy of company? √ o If incomes fall√ consumers are likely to reduce expenditure on leisure activities

(income elastics). √

Jan 2010

1. (b) Evaluate the usefulness of limited companies preparing their final accounts in accordance with the Companies Act 1985.

a. FOR Usefulness i. Accounts are prepared in standard format which allows stakeholders √ to

compare the accounts of one company with another. √ Eg for investment potential.

ii. Having a standard format makes it harder for companies to “window dress” or manipulate accounts. √√

iii. The Companies Act must state a good way to prepare the accounts √ as it was prepared by highly qualified professionals √ eg accountants, lawyers. √

iv. Readers of accounts √ eg auditors √ only have to familiarise themselves with the one format. √

v. A standard format allows accounting aids to be developed and used √ eg software programmes. √

vi. A standard format makes it easier for Regulatory authorities √ to enforce procedures.√

b. AGAINST Usefulness i. Preparing the accounts in this format could be time consuming, √ and time

means money. √ ii. Staff have to train to learn the format. √√

iii. The format still has scope for different interpretation √ eg stock value, depreciation. √

iv. Original Act is now 25 years old, √ and we live in constantly changing times. √

c. CONCLUSION i. Should relate to points made above. Eg In accordance with Companies Act is

important and of value. √√ 2. (c) Evaluate the usefulness to West Anglian Farms of preparing a cash budget for the year.

a. FOR usefulness of Cash Budgets i. The Farm has a very seasonal cash flow √√, especially from sales. √

ii. The Cash Budget will show if the sales will be sufficient to cover all outgoings √, and when shortages may occur. √

iii. The budget may allow the Farm to see when alternative arrangements √eg overdraft √ may be required. Also for how long, √ and how much. √

iv. The budget may show where a cash surplus may be present, √ so allows the firm time to plan what to do with the surplus √ eg invest in shares, currencies etc. √

b. AGAINST the usefulness of Cash Budgets i. The budget takes time √ and money √ and expertise √ to draw up.

ii. The figures are only predictions √ and may be inaccurate or misleading. √ iii. Inaccurate production figures may be caused by weather √ or volatile

market prices. √ c. CONCLUSION

i. Should relate to points made above ie Cash Budgets are useful. √√ 3. (d) Evaluate the decisions of the directors in 2009 from the point of view of an ordinary

shareholder. a. Answers may include :

i. Positives :1. Ordinary dividend received of 5.2p √ per share which is quite good.

√ 2. Gearing ratio of 28% which is healthy √√ and lower than start of

year √√ 3. Redemption of Preference shares will improve the future figure for

ROCE √√ also reduce future preference dividends. √√ 4. Capital and Reserves have risen, √ which means book value of firm

has risen, √ which probably means share price has risen. √√ ii. Negatives :

1. Funds are leaving the company √ to pay preference share dividends √ and redeem preference shares. √

2. Possible that liquidity adversely affected √ to pay preference shareholders. √

b. Conclusion i. Should relate to above – 2009 been good for Ordinary shareholders

4. (b) As Yasmin Faraz’s accountant, evaluate the likely effects of a standard costing system on the production workers.

a. POSITIVE EFFECTS i. Helps to establish production targets (√) that may be comfortable for

workers to achieve(√) ii. Eg numerical example (√)

iii. May be basis of possible bonus for production targets met etc (√) which may see workers taking home more pay (√)

iv. Anything that benefits the firm will benefit the workers (√) eg for job security, pay, bonuses, competitive pricing of products etc (√)

v. Meeting production targets √ will motivate workers. √ b. NEGATIVE EFFECTS

i. Helps to establish production targets (√) that may be difficult for workers to achieve (√)

ii. Eg numerical example (√) iii. May be basis of possible bonus for production targets met etc (√) which

may see workers missing targets (√) and taking home less (√) iv. Missing production targets √ will demotivate workers. √

c. CONCLUSION i. should relate to points made above √√

5. (e) Evaluate the suggestions of the Managing Director.a. NOT a good suggestion

i. Increase in prices not recommended √ due to recession, and competition, √ and will probably reduce sales. √

ii. Rent decrease difficult √ if signed a long term lease or agreement. √ Manager’s salary reduction will demotivate managers √ and performance may suffer. √

iii. Director labour’s pay cut will demotivate √ and could result in industrial action. √

iv. May not be able to reduce other fixed costs √ eg Business Rates to council, interest on loan etc √

b. GOOD suggestion i. May be possible to negotiate a rent decrease √ due to recession √ It is

possible to impose a cut in the managers salary √ ii. It is possible to impose a cut in pay to direct labour force √ It may be

possible to reduce some fixed costs √ eg heating, insurance √ c. Conclusion

i. Should relate to above 2 marks6. Maria Manakopolous, the Marketing Director, has studied the figures and said “I am

concerned about the liquidity of the business”. (c) Evaluate this statement.a. AGREE with Statement

i. Current Ratio is very weak √ at 0.67 : 1 √ ii. Current Ratio worsened over the last year from 1:1 √ which was weak √

iii. Creditors are rising √ is this due to lack of liquidity? √ Positive bank balance at start year now an overdraft. √

b. DISAGREE with Statement i. Debtors are falling √ so are probably being chased up. √

ii. Bills such as tax and debenture interest appear to have been paid over the year. √√

iii. Positive Net Cash Flow from Operating Activities of £163 755 √√ c. CONCLUSION

i. Should relate to above points Liquidity of business gives cause for concern √√

7. b) Evaluate the project for MetroTransit plc, using the calculations made and considering any other relevant factors.

a. FOR investing in project i. Project has a NPV greater than 0 ie £356 m

ii. Figures may not be accurate and NPV may be even greater. iii. Other possible investment projects may be made available in the future

b. AGAINST investing in the project i. Figures may not be accurate and NPV may be smaller.

c. CONCLUSION Should relate to above ie Worth Investing in the project = 1 mark

June 2010

1. b) A director has made the following comment at a Board meeting: “In order to reduce expenditure, we should not have an Auditors’ Report with the final accounts this year, as the Auditors’ Report is not important.” Evaluate this statement.

a. FOR Importance i. Auditors are independent √ scrutineers of the accounts. √ who report that

the accounts have been prepared “correctly” √ in accordance with company law √ or Accounting Standards or Stock Exchange regulations (only needs one)√ rather, give a True and Fair view. √ or do not √ .

ii. Auditors are reporting on how Directors have used the funds √ invested by shareholders. √. The auditors duty is to the shareholders. √

iii. Auditors may give tax authorities √ more confidence that the tax computation is correct. √

iv. Professional supervisory bodies √ exist to give guidelines to auditors √ , eg Auditing Practices Board. √

v. Auditors should be professionally qualified √ eg Chartered Accountants.√ vi. Companies Act could require report √

b. AGAINST Importance i. Auditors may not be very independent, √ going along with the wishes of

clients, √ in order to keep their custom. √ which may include non-audit work. √

ii. Auditors could be misled √ by the directors √ and provide an inaccurate report. √

iii. Auditors do not guarantee √ that material fraud has not occurred. √ Report maybe costly to produce √

c. Conclusioni. Should relate to points made above. Eg Auditors’ Report is important and of

value. √√ 2. (c) Evaluate the importance to Lee Ping of drawing up a Cash Budget before starting his

businessa. FOR usefulness of Cash Budgets

i. Lee will need to show potential investors√ eg family and friends, banks √ business will be successful and is able to give a return/pay back √

ii. The Cash Budget will show if the sales receipts will be sufficient to cover all outgoings √, and when shortages may occur. √ The budget may allow Lee to see when alternative arrangements √ eg overdraft √ may be required. Also for how long, √ and how much.√

iii. The budget may show where a cash surplus may be present, √ so allows the firm time to plan what to do with the surplus √ eg invest in shares, currencies etc. √

iv. Budget can act as a method of control √ v. Budget can give variances which can be analysed and action taken √

vi. Answers could involve analysis of Lee Ping’s cash budgets

b. AGAINST the usefulness of Cash Budgets i. The budget takes time √ and money √ and expertise √ to draw up.

ii. The figures are only predictions √ and may be inaccurate or misleading√ iii. Eg Inaccurate sales figures may be caused by change in demand from

supermarkets√ iv. Budget maybe inaccurate √ and may demotivate workers not meeting

targets √ c. CONCLUSION Should relate to points made above ie Cash Budgets are useful. √√

3. Sandra was a shareholder in Highland Bank plc. (d) As Sandra’s accountant, evaluate the merger on her behalf.

a. For Merger i. New company should enjoy benefits of horizontal integration √ as in same

line of business. √ which leads to larger market share √ which results in increased profits and dividends √

ii. New company could enjoy economies of scale√ eg bulk buying √ iii. New company should be able to reduce costs √ eg reduce staff √or close

some branches √ iv. Highland Bank appears to be in poor financial position √ eg profit and loss

reserve negative √ and debtors contained many bad debts.√ They probably need a stronger company to take them over √ to improve position √ or guarantee survival. √

v. She gets no dividends at present √ because Profit & Loss account balance is negative √ and she may get dividends now √

vi. Reduces risk √ and reduces competition √ b. Against Merger

i. Shareholders in Highland Bank plc do not benefit from any Goodwill√ ii. The book value of the company before the merger was £47m √ but the value

at the time of the merger was only £28 m, √ a decrease of £19m. √ (loss on realisation √)

iii. Increased number of shareholders /Dilution of ownership (need one) √ and voting power √

iv. We do not know what the market price of St Andrew’s Bank plc shares is likely to be. √ It is quite possible it will not settle at £1.25 √

v. St Andrew’s Bank could be purchasing the assets of the Highland Bank at a value under the market price √

c. Own figure rules apply to calculations d. Conclusion Should conclude and relate to points made above. √√

4. (d) Evaluate the effectiveness of management by exception to Marcoa. FOR the use of Management By Exception

i. Management by exception sees management only investigating differences √ against preset tolerances √

ii. Saves management time √ as no need to take any action √ if no variance / unless adverse variance. √ Here, Marcos does not need to spend any time worrying about material cost √ and usage √ etc

iii. Costs may well be reduced if variances are adverse √

b. AGAINST the use of Management by Exception i. It is possible that costs could be reduced √ eg find a cheaper supplier, √ but

Marcos will not spend this time looking for another supplier √ as there is no adverse variance. √

ii. Standards set could be poor √ c. CONCLUSION Should conclude and relate to points made above √ 8730; √ 8730;

5. (b) Evaluate how Red Arrow plc has performed as a business compared to the industry average, for the financial year ended 31 March 2010.

a. BETTER than industry average i. Price/Earnings ratio is better √ by 3 times √ – reflecting the generous

dividends? √ ii. Dividend per share is better from the shareholders point of view √ by 0.5p

per share √ iii. Dividend yield is better from the shareholders point of view √ by 3.14% √ iv. Dividend cover could be said to be better from the shareholders point of

view as a higher percentage of profit is paid as a dividend. √ - by 1.34 times √

b. WORSE than industry average i. ROCE worse √ by 1.83 % points √

ii. EPS is worse √ by 1p per share √ iii. Dividend cover is less so funds not retained in the business √ by 1.34 times √ iv. Own figure rule applies for all figures

c. Conclusion -Red Arrow plc as a business has performed worse than the industry average. √√

6. (b) Evaluate the project for the company, using the calculations made and considering any other relevant factors.

a. FOR INVESTMENT i. Payback method says invest √ as within a 4 year payback period √ profits

will be earned for 1 year and 3 months √ (could be argued against investment)

ii. ARR states invest √ as to meets % return figure of 8% √ b. AGAINST INVESTMENT

i. Payback is 3 years plus 9 months which maybe considered too long – but reason must be given as to why it is too long √

ii. Accuracy of predictions? √ iii. What happens after 5 years? √ iv. Net Present Value calculations? √ no account taken of falling value of money

over time √ v. Other possible investment projects available? √

vi. Objectives/strategy of company? √ vii. How can the company finance this investment ? √

viii. Opportunity cost ? √ Are there any alternative investment possibilities ? √ c. CONCLUSION: Must relate to points made above Eg Make a bid for the project √√

7. (c) Evaluate the effectiveness of break-even analysis as an aid to business decision-making.a. FOR effectiveness

i. A tool that allows a business to forecast profit/loss√ at different output levels. √

ii. Helps a business break down costs √ into fixed or variable √ iii. Helps identify margin of safety √ and the angle of incidence √

b. AGAINST effectiveness i. Cost and revenue figures are only predictions √ and cannot be assumed as

100% accurate. √ ii. Eg in practice, straight lines on graphs are likely to be curves √ as discounts

are given or received for bulk sales √ or overtime worked at a higher rate. √ iii. Theory assumes that all output is sold. √√ iv. Costs and sales figures are affected by outside influences √ eg inflation, √

boom or recession, √ seasonal factors, √ fashions, √ life styles √ etc (max of two reasons)

c. CONCLUSION Break-even analysis is / is not an effective aid to business decision-making

Jan 2011

1. (b) Evaluate the importance of the Directors’ Report that accompanies the financial statements of a company.

a. Case For Importance of Directors’ Report i. Report gives information to eg shareholders √ which they could use to make

a decision √ eg invest more funds in the company. √ ii. Shareholders may be assured the company is acting in an ethical manner √

iii. Other stakeholders eg pressure group √ may use information in the Report to bring about change in company policy √ eg treatment of disabled √

iv. Disclosures may be required under Stock Exchange regulations, √ which may be appropriate in the Directors’ Report √ eg legislation pending √

v. Information is given to shareholders which allows them to see in some detail how the company is performing √ �

1. Eg principal activities, √ review of position of business √ � 2. Post balance sheet events, √ future developments √ � 3. Names of directors, √ interests of directors √ � 4. Employee involvement, √ disabled employees policy √ � 5. Political √ and charitable donations √ � 6. Creditor payment policy, √ creditor payment days √ (Maximum of 4

marks for listing of items contained in Report)

b. Case Against Importance of Directors’ Report i. Report costs personnel time √ to prepare and money to print etc √

ii. Directors may use Report to “window dress” accounts, √ give an unrealistic positive view of the company, √ as it is in their interest to do so. √

iii. Readers with no knowledge of accounts may not understand the report. √ c. Conclusion: Should relate to above points. Eg Directors’ Report is important. √√

2. (b) Evaluate the project for the company, using the calculations made and considering any other relevant factors.

a. Answers may includei. Payback method says invest √ as project does pay back √. However, is the

payback period of 4 years 3.89 months (o/f) acceptable for the company? √ Is it too long? √

ii. Project is profitable (each year) √ NPV method states do not invest √ as NPV is negative (o/f) √

iii. NPV may be a better method to use √ as it includes falling value of money over time √

b. Other Relevant Points i. £2m has to be raised √ which may worsen the gearing ratio √

ii. How accurate are the predictions √ for costs, cost of capital, and revenues? (need 2 of these 3) √

iii. Chance of renewal of contract after 5 years ?√ Would this be profitable √ iv. Other possible investment projects available at present? √ More or less

profitable? √ v. Objectives/strategy of company? √ Is this investment in line with objectives?

√ c. Overall Conclusion - 2 marks Company should/ should not invest. √√

3. (d) Evaluate how well the directors of Thames Technical Services Limited have managed the liquidity of the business during the year ended 31 December 2010

a. Handled poorly i. Working capital has decreased √ from £22 610 √ to (£940) √ ie by £23 550 √

ii. Working capital ratio has worsened √ from 1.84:1 √ to 0.98 : 1 √ iii. Liquid (acid test) ratio has decreased √ from 0.85 : 1 √ to 0.36 : 1 √ iv. Bank/Cash has decreased √ by £21 290 √ v. Directors paid themselves an enormous √ interim dividend √

b. Handled well i. Tax due at the start year has been paid. √

ii. Funding via issue of debenture and/or ordinary shares √ that covers redemption of preference shares √

c. Conclusion: Liquidity has been handled poorly by the directors through the year.4. (c) Evaluate the two options for the telephone charge, and recommend which option

should be chosen.

a. Case for keeping Fixed charge (Option 1) i. Profit is higher √ by £3 000 o/f √ (if 2400 units are sold, option 2 telephone

charge is £6000) ii. Profit is the most important aim of a business √ more important than

reducing break-even point √ especially when break-even point is easily met. √

b. Case for changing to Measured charge (Option 2) i. Measured charge sees break even point reduced √ by 30 units o/f √ which is

beneficial to firm √ especially if trading is tough. √ ii. Margin and safety is greater √ from 1650 (option 1) to 1680 (option 2) √ by

30 o/f √ c. Conclusion: Keep with fixed charge method / measured charging method must be

rejected. √√ 5. (c) Evaluate whether South East Asia Brick Company should use Chinclay plc or Earthworks

Limited as a future supplier of claya. Case for Chinclay

i. Probably better quality clay √ as no material usage variance. √ii. Earthworks has adverse usage variance √ so probably poorer quality clay. √

0.3 kilos o/f √ of clay less used per brick √ iii. Overall cost of using Chinclay is cheaper √ by £672 √ iv. Cost of 1 brick for Chinclay is 5.6p, which is 0.56p √ cheaper than v. Earthworks √ which is 6.16p.

b. Case for Earthworks Limited i. Cost per kilo of clay is cheaper √ by 0.04 pence per kilo. √

c. Conclusion: Best to stay with Chinclay 6. (c) Evaluate whether Bharti should sell her shares in Krishnanor Industrials plc

a. Case for selling shares i. Dividend yield is low. √ She could possibly earn a better return in another

company, √ or maybe even in a bank deposit account. √ ii. Price/Earnings ratio is high, √ so a seller would get a good price. √

iii. Profit of £836 has been made √ b. Case for holding shares

i. Dividend policy looks reasonably generous √ with about 75% √ large amount of this years profit paid as a dividend. √

ii. Price/Earnings ratio is high, √ which means the market has confidence in the share, √ so price may continue to rise. √

iii. Capital return of 9.59% per year is reasonably good √ and may continue. √ c. Conclusion: Appears to be a share worth holding √√

7. The company is considering a rights issue to ordinary shareholders, to finance the construction of a second marina.

a. The Sales Director asks you the following question. “Can you explain the difference between a rights issue of shares and a bonus issue of shares?” (b) Explain the difference between a rights issue of shares and a bonus issue of shares.

i. A rights issue sees existing ordinary shareholders √ being offered the first right to purchase newly issued shares. √ The shares would be issued at a discount to the market value, √ to benefit the shareholders subscribing. √ The shareholder may be able to sell this right, √ if they do not wish to take up the issue themselves. √ Shareholders who do not take up the rights issue lose out √ by owning a smaller share of the company. √ A rights issue will involve the company receiving cash √ for the shares. The double entry would be Dr Cash √ Cr Ordinary shares. √

ii. A bonus issue would involve the company issuing new shares √ to existing ordinary shareholders. √ The shareholders do not have to pay any money √ to the company for the shares. √ They may be issued to make the market price of the share lower, √ and therefore easier to trade. √ Or, the issue could be to make the balance sheet appear more like that of a “large company” √√. The shareholders do not really benefit, √ as they still hold the same percentage ownership of the company. √ If company has no cash for dividends √ they may give a bonus issue instead √ The double entry would be Dr Any Reserve √ Cr Ordinary shares. √

b. As an alternative to issuing shares, the company is considering issuing debentures to finance the second marina. (c) Evaluate on behalf of the company, the issue of debentures to finance the second marina.

i. Case for debentures 1. Company raises cash required for new investment. √ 2. Fees are likely to be low √ compared to an issue of shares √ e.g.

prospectus, advertising, √ etc 3. No capital repayments √ over the life of the debenture √ Interest is

fixed √ which allows budgeting to take place √ 4. Debenture interest is allowed against tax √ so less corporation tax is

paid on profits √ 5. Issuing debentures instead of shares reduces the chance of a

takeover √√ ii. Case Against debentures

1. There will be some expenses involved in debenture issue √ e.g. administration, underwriting etc √

2. When debenture matures, √ a large capital sum has to be repaid √ 3. Interest must be paid on debenture√ even when the company

makes a loss √ and interest will reduce the profits √ 4. Issue of debenture means gearing ratio √ will increase √ 5. Debenture holders are likely to insist on a charge √ over company

assets √ 6. Debenture holders may insist on some form of control √ e.g. a seat

on the board √ iii. Conclusion: As a source of finance for the new marina, a debenture is

probably (not) a good idea. √√

June 2011

1. (b) Evaluate the importance of sending a copy of the financial statements of a public limited company to shareholders at the end of the financial year.

a. FOR Usefulness/ Importance i. Legally the shareholders must receive a copy/or have copy made

available of the accounts √ and they can see how the funds they have invested are being used/ how company is performing √

ii. Shareholders may be happy (or unhappy) with the performance of the company √ and may decide to buy more (sell) shares. √

iii. Accounts are prepared in standard format √ which allows shareholders to compare the accounts of one company with another.√ E.g for investment potential. √

b. AGAINST Usefulness/Importance i. Preparing the accounts is time consuming, √ and time means money. √

ii. Expenses associated with preparation and sending eg printing costs √ and postage. √

iii. However shareholders could be sent an abridged (smaller) version of the accounts √ which are much cheaper. √

iv. Some figures are estimates √ e.g. Depreciation √ v. Some shareholders will not understand the accounts √ as they have little

accounting knowledge √ vi. The accounts may not be totally reliable √ e.g. due to ‘window dressing’,

fraud etc √ c. CONCLUSION: Should relate to points made above. Eg It is important they

receive a copy of the accounts. √√2. (c) Explain to a potential investor the difference between ordinary shares and

preference shares.a. Ordinary shares

i. Usually one vote per ordinary share held. √ at AGM /shareholders meetings. √

ii. Dividend per year is not fixed, √ but varies according to performance. √ iii. Last in the queue when dividends paid out of profits. √ iv. Last in the queue for payments √ if a company is wound up. √

b. Preference shares i. Usually no votes to preference shareholders. √

ii. Dividend per year is usually fixed, √ despite performance √ iii. Before Ordinary shareholders in the queue when dividends paid out of

profits. √ iv. Before Ordinary shareholders in the queue for payments √ if a company

is wound up. √

3. d) Evaluate how well the directors of Arkotari Limited have managed the liquidity of the business during the year ended 31 March 2011.

a. Handled poorly i. Working capital has decreased √ from £12 210 √ to £2 460 √ ie by £9

750 √ ii. Working capital ratio has worsened √ from 1.29:1 √ to 1.05 : 1 √

iii. Acid ratio has decreased √ from 0.26 : 1 √ to 0.24 : 1 √ Bank + Cash has decreased √ by £6 385 √ OR overdraft increased √ by £5 900 √

iv. Creditors have increased. √ by £4 620 √ v. A number of vehicles have been sold off and generated funds. √ Are

these vehicles required for the business √ or are they surplus to requirements? √ (could be in “handled well”)

vi. Some Ordinary shares have been redeemed which must be a drain on liquid resources. √√ However, this may mean a reduction in future dividends. √√

b. Handled well i. Bank loan has been repaid in full √ and this should avoid future interest

payments which helps future liquidity √ but this may be a problem now √

ii. Dividends paid have been very modest. √√ Ordinary shareholders based on year end figure have only received 2% dividend. √√

c. Conclusion: Liquidity has been handled poorly/well by the directors through the year

4. (c) Evaluate the performance of Goldstar Refrigerators plc during the year ended 31 March 2011 by comparing the performance to the year ended 31 March 2010.

a. Better than last year i. Sales units figure is better √ 6 500, than last years figures by 500 √

ii. Sales price per unit is better √ £240, than last year by £20 √ iii. Sales Revenue is better √ £1.56 m than last years £1.32 m √ by £240 000

√ b. Worse than last year

i. Profit of £40 000 o/f is worse than last year √ of £88 000 √ (by £48 000 o/f). √

ii. Variable costs of £160 per unit are higher √ than last year of £132 √ by £28 o/f √

iii. Fixed costs of £480 000 are higher √ than last year by £40 000 √ iv. Break even figure for units is higher √ 6000 o/f, compared to last years 5

000 √ v. Angle of Incidence worse √

vi. Margin of Safety is worse √ (last year 1000, this year 500) √ so 500 worse √

vii. Total costs have risen √ from £1 240 000 to £1 520 000 √ c. Conclusion (does not have to be at end): Should relate to above points. Profit is

lower so this year is worse than last year. √√

5. (d) Evaluate non-financial factors that may be considered by SE Asia Rubber plc in making the decisions in (b) and (c).

a. Non-Financial Factors to Consider i. Contract with FitFast could lead to further business in the future √ and

this could be at a higher price √ with a greater profit margin √ ii. Enables their tyres to be sold in a different market √ which should raise

profile of company √ iii. Contract with supplier may lead to further business in future √ perhaps

with a keener price √ or in times of high demand √ iv. Selling at the lower price √ may upset the Byby plc√ who may demand a

lower price √ or find a different supplier √ v. Quality of the products supplied √ may be better/worse than products

produced themselves √ vi. Workers earn a higher rate if overtime is paid √ and this increases

motivation √ b. Case Against considering Non-Financial Factors

i. Directors’ duty is to the shareholders √ who want a return on their investment. √

ii. Loss making firms will go out of business √ in the long term. √ c. Conclusion: SE Asia Rubber plc should/should not consider non-financial factors.

6. (c) Evaluate the company’s policy of producing ovens for expected sales, rather than producing ovens to match actual orders.

i. For Policy 1. Customers do not have to wait for their orders.√ Waiting for

orders could mean customers go elsewhere.√ 2. Production may fluctuate if only for actual orders, √ especially if

demand is seasonal √ 3. If sudden increase in demand √ stock is available √ 4. If delays in production this is not a problem √ as order can be

met promptly √ ii. Against Policy

1. Producing for expected orders means some stock may be unsold √ which is risky √

2. Unsold stock may build up √ and this involves a number of costs eg rent, insurance, √ and ties up working capital √√

iii. Conclusion marks available for overall conclusion, should relate to points made above. i.e. policy is good/bad.

7. (d) Evaluate the position of the original shareholders, after the conversion of the bank loans into ordinary shares.

a. Better Position i. As less interest to pay √ of £80 million √√ (and less capital repayments to

make √) so annual profits will be higher √ so more available for dividends√

ii. Gearing ratio has improved √ falling from 200% to 12.5% (from 66.6% to 11.1%) √ o/f, so less risk √

iii. Net Book Value of business rises √ so share price in theory may rise √

b. Worse Position i. Ownership diluted √ so smaller share of votes√

ii. More shareholders now to receive dividends√ so dividends per share may be less √

iii. Share price will fall √√ as more shares/on the open market √ iv. Interest on loan meant a lower profit √ so tax bill may now be higher on

higher profit √ c. Conclusion: Ie Better or worse off √√

June 2012

1. The information given includes revenues and expenses for unused shop premises that Columbo Fireworks plc rents out. Next year, Columbo Fireworks plc intends to sell these premises and record this in the accounts as a Discontinued Activity. (b) Evaluate the usefulness of recording the shop premises as a Discontinued Activity in next year’s accounts

a. The fireworks activities should be shown as Continued Operations √ in the accounts next year. All revenues and expenses relating to these should be shown separately. √

b. For usefulness i. This will benefit users of accounts because they can see that profits

or losses from the Discontinued Operations will not be expected to be realised in the future√√

ii. This allows reader to predict more accurately future expected performance. √ This may help future potential investors / shareholders / creditors √ etc with decision making.

iii. Eg buy more shares/allow credit√ Should be beneficial if required to be shown √ by FRS3 / IFRS 5 √

c. Against usefulness i. Adds more figures and details to the accounts √ so makes them

more difficult to understand. √ especially for those with little accounting knowledge. √

ii. Takes time to add extra detail √ and therefore this means extra expense √

d. Conclusion Should conclude that it is beneficial to show Discontinued Activities. √√

2. Bernard Miles, the Chief Executive of Miles of Tiles Limited, has stated “If there is an adverse variance, this must be bad for the business.” (d) Evaluate this statement.

a. For statement i. If this is a cost variance √ then expenditure has been more than

expected √ ii. If budget is realistic, this is bad √ and may be caused by :

1. Workers not working as hard as they could √ 2. Workers being paid more than a market rate wage √

iii. Inefficient machinery √ iv. Materials being wasted √ v. Paying more than the market rate for materials √

vi. If this is a sales variance, √ then revenue is less than expected √ vii. This could be caused by:

1. Sales volume being less than expected √ 2. Sales price being less than expected √

b. Against statement i. Budget set may be unrealistic √ and actually the business has

performed well. √ ii. There may be a positive aspect to the adverse variance eg:

1. Material prices have risen on the world market, √ but our buyers are still getting a comparatively good price √

iii. Adverse variances may be due to production being greater than expected √ which is good for the business √

c. Conclusion: Statement is (correct)/not correct √√3. (d) Evaluate the decision to raise further finance by issuing ordinary shares,

rejecting the possibility of raising funds by the issue of debentures.a. Case for Ordinary shares / Case Against Debentures

i. Shareholders do not have to be paid dividends, √ useful when short of funds / making a loss. √ Dividends could be variable √ interest on debentures must be paid √

ii. No “outside” parties having any influence on running of company √ eg place on Board √

iii. No interest has to be paid, √ so profits of company higher. √ iv. No assets offered as security, √ so no claims on assets by debenture

holders, if debenture not repaid, or company fails. √ v. Reduces gearing ratio √ and therefore risk √

vi. Debenture results in higher gearing √which increases risk to company√

vii. Very important here as if debenture used, gearing goes above 50% √ at 51.5% √√

b. Case for Debentures / Case Against Ordinary Shares i. Interest is allowable for tax, √ so company may be able to retain

more funds than if paying dividends. √ ii. Debenture issuer may bring expertise and experience to company, √

and maybe Board. √ iii. No possible dilution of ownership for existing shareholders √ which

means earnings per a share will fall √

iv. May be quicker to issue than ordinary shares √ v. Costs of arranging debenture may be lower √eg no prospectus to

issue√ c. Conclusion: Should relate to above points made. E.g. Ordinary shares are a

preferable source of finance. √√4. (c) Evaluate the Internal Rate of Return as a project appraisal method.

a. Case For IRRi. An accurate return can be calculated. √

ii. Takes account of falling value of money over time. √ iii. Can be compared to target value of business √ to decide whether to

invest in project.√ iv. Can be calculated fairly easily by computer. √

b. Case against IRR i. Calculation of IRR involves use of complicated formula √ requiring

numerical skill √ Or calculation may involve much “trial and error” to arrive at the IRR. √

ii. May need a computer √ and computing skills to calculate IRR. √ c. Conclusion IRR is a good / not a good method of project appraisal. √√

5. (d) Evaluate the treatment of the goodwill created in the accounts of Panoramic Cinemas Limited following the purchase of Luxury Cinemas Limited

a. Correct treatment of goodwill would be to amortize √ over its useful economic life. √ Shown as an intangible non-current asset √

b. Case For this treatment i. Likely to derive benefits from the expenditure over a number of

years, √ so spread the cost of this expenditure over a number of years √ ie matching concept √ gives a True and Fair view of the accounts. √

ii. To write off immediately may make profit unrealistically low, √ and tax charge would be unfairly low. √

iii. In line with recommended practice √ ie FRS 10 / IAS 38√ c. Case Against this Treatment

i. If written off immediately against reserves, √ the prudence concept is followed. √

d. Conclusion i. Writing off over a number of years is recommended and beneficial

as it gives a true and fair view in the accounts. √√6. (c) Evaluate the figures calculated in (b) to make a decision as to the future of each

of the four minesa. Just calculate…

7. Henna Mahmood, a director of Chittagong Stores plc, has stated at a board meeting “liquidity is more important than profitability”. Required: (c) Evaluate this statement.

a. Profit most important i. Without profit, business would close down√ in the long run. √

ii. If short term liquidity problem, √ many sources are available as source of finance √ eg banks, shareholders, debt factoring etc (need two sources). √

iii. No/low profits may result in firm unable to attract finance √ or investors/shareholders. √

iv. No/low profits may see share price fall, √ as investors lose confidence. √

b. Liquidity most important (or both equally important) i. Liquidity problems result in unable to pay daily bills √ eg wages,

electricity (need two) √ ii. Unable to pay some bills may result in closure of business √ eg tax

bill √ iii. Unable to pay some bills may mean business unable to operate √ eg

electricity cut off √ iv. Can survive short term losses √ if previous profits have been built up

√ c. 2 √ for Conclusion eg Profit more important

January 2013

1. (b) Evaluate the statement of the Marketing Director, concerning the liquidity position of Channel Oil plc, at 31 December 2012.

a. FOR statement i. Current ratio is 2 508 600 : 293 250 √ which is 8.56 : 1 √ O/F

ii. This is way above / too high √ ideal ratio of 1.5/2 : 1. √ iii. Too much working capital √ is tied up in stocks of oil √ iv. Acid ratio is (2 508 600 – 2 273 600) : 293 250 √ which is 0.80 : 1 √ O/F v. This is below/ too low √ the ideal ratio of 1:1 √

vi. A tax bill of £198 000 must be paid in 30 days √ but there is only £131 000 vii. Cash and cash equivalents √

b. AGAINST statement i. A current ratio of above 2:1 is better than below 2:1. √ If the business can

sell stocks quickly, then liquidity problem can be avoided. √ ii. The nature of the industry √ may mean that it is normal for large stocks of oil

to be carried. √ iii. Working capital is £2 215 350 √ which is a healthy figure. √ iv. Bank balance is positive at £114 000 √ which can be used to pay debenture

and loan interest √ and settle trade and other payables √ c. Conclusion (two √’s) Channel Oil plc has a liquidity problem √√

2. The directors of Khulnar Carpets Limited expect higher costs to apply in January 2013, but have decided not to charge these extra costs to customers, i.e. they will not increase the price of each carpet sold. (d) Evaluate the decision not to charge the extra production costs to the customer.

a. AGAINST Passing on the increase in production cost i. Could absorb rising costs √ by increasing efficiency. √

ii. Customer could be unhappy and not buy √ and go to a rival supplier. √ iii. New price could make firm’s price higher than rivals. √ iv. Present price of £299 is psychological √ and an increase will take them

through the £300 barrier. √ b. FOR Passing on the increase in production cost

i. Need to maintain profit margin, √ this (or mark up) could be fixed √ otherwise business makes losses / goes bankrupt √

ii. Cannot keep same selling price for ever √ will have to increase price some day √

iii. Customers may be quite willing to pay the higher price√ if they still think they get good value √

iv. New price may still be below that of rival firms.√ c. CONCLUSION (√√) Should relate to above eg passing on increased costs is

wrong/right √√3. Another shareholder stated at the meeting. “I think that the company should have issued

bonus shares in September instead of a rights issue. This would have been better for Med Isle Travel plc.” (c) Evaluate this statement on behalf of Med Isle Travel plc.

a. For statement i. Company will not have pay cash dividends, √ which is beneficial if a liquidity

problem √ ii. Bonus shares makes the Statement of Financial Position look like that of a

larger company √ which may help to raise finance etc √ iii. Original shareholders would have been kept happy √ and therefore quiet √

as they would have received free shares√ and these shares are eligible for dividends. √

iv. Quicker/cheaper to issue bonus shares √ b. Against statement

i. Bonus shares bring in no cash for the company √√ but a rights issue does bring in cash √ which is used to run the business/ pay bills √ or expand the business √ or strengthen the company Statement of Financial Position √

ii. Issue of bonus shares sees share price fall √ more than the possible fall if a rights issue √

iii. Bonus shares will result in more shares eligible for dividends√ so dividend per share likely to fall. √

c. Conclusion Bonus issue would not be better for company √4. (b) Evaluate the level of drawings that Kim Seng is taking out of the business each month.

a. FOR correct drawings i. April balance is £1 218 but needs to have monthly rent of £1199 deducted, √

leaving a “balance” of £19, √ so Kim cannot draw out any more. √ ii. May will be the first month of “normal” sales revenue √ of £6 160 √ which

leaves a “balance” of £481. √ iii. This will be needed for irregular payments eg truck service, √ as a

precaution, √ and to pay back the loan eventually. √ b. AGAINST correct drawings

i. £481 per month is not enough to meet irregular payments/bills√ as a precaution, √ and pay back the loan. √ The drawings should be smaller. √

ii. With these drawings, March has a negative balance. √ c. CONCLUSION

i. Should relate to points made above ie Drawings are at correct/incorrect level. √√

5. (b) Evaluate the project for Metro Clean plc, using the calculations made and considering any other relevant factors.

a. Against Investment i. Payback method says do not invest √ as project not within 3 year payback

period √ ii. May be better investment projects available? √

b. For Investment i. ARR states invest √ as meets % return figure of 10% √

ii. Project is profitable overall √ having total cash inflow £986 000 o/f √ iii. It is possible to dispute 3 year payback period √, perhaps longer is better. √ iv. What happens after 5 years? – renewal of contract?√ Any other/further

business? √ v. Customer is in the public sector √ so little chance of bad debts. √

c. Other Relevant Points : i. Accuracy of predictions? √

ii. Objectives/strategy of company? √ iii. Both methods ignore time value of money √ unlike NPV √ iv. Could use other methods of appraisal √

d. Conclusion : √√ Must relate to points made above 6. (c) Evaluate the information and figures calculated in (b) to decide which store should stay

open, and which store should close.a. Case for Higher End staying open

i. Lower break even point √ by 10 550 units. √ ii. Lower level of fixed costs √ by £15 900 √ if stays open, no need to pay rent

on other store. √ iii. Higher contribution per unit √ by £5 per unit √

b. Case for Lower End staying open i. Higher profit √ by £1 716 √

ii. Greater margin of safety √ by 892 units. √ iii. Higher level of sales √ by 11 442 units √

iv. If other store closes, building could be sold, √ and maybe this stores building purchased. √

c. Conclusion√√ Should CLOSE Higher end store as lower profit made . √√7. (d) Evaluate the appropriateness of revaluing assets and liabilities before a takeover.

a. AGAINST Revaluations i. The larger party may be in a position of strength and abuse this position √ to

revalue assets to their own advantage √ ie lower value than true market value √

ii. Revaluing assets and liabilities a pointless waste of time and money √ because the buyer can agree to pay whatever goodwill they feel is appropriate. √

iii. Professional valuers may be required √ and these may charge considerable fees √

b. FOR Revaluations i. Even if one party is in a position of strength, the other party does not have

to agree to a sale √ if they do not like the value put on assets. √ii. It is only fair √ that assets and liabilities are sold for their correct market

value, √ not some historical book value √ that may not reflect market value. √

c. Conclusion 2 marks available It is appropriate for revaluations. √√

June 2013

1. (b) Evaluate the usefulness of the Auditors’ Report to the users of the published accounts of Hong Kong Cameras plc.

a. FOR Importance i. Auditors are independent scrutineers of the accounts who report that the

accounts have been prepared “correctly” in accordance with International Accounting Standards or rather, give a True and Fair view or do not

ii. Auditors are reporting on how Directors have used the funds invested by shareholders. The auditors duty is to the shareholders.

iii. Auditors may give tax authorities more confidence that the tax computation is correct.

iv. Professional supervisory bodies exist to give guidelines to auditors eg Audit and Assurances Council. Auditors should be professionally qualified eg Chartered Accountants.

v. Report is required by the Companies Act/legislation vi. If Auditors are unhappy with the accounts the Auditors Report will be

qualified vii. The report may help users make a decision eg buy or sell shares in the

company

b. AGAINST Importance i. Auditors may not be very independent, going along with the wishes of

clients, i.e. conflict of interest in order to keep their custom/earn feewhich may include non-audit work.

ii. Auditors could be misled by the directors and provide an inaccurate report. iii. Auditors do not guarantee that material fraud has not occurred.

c. CONCLUSION - 2 marks Should relate to points made above. Eg Auditors’ Report is important and of value.

2. (d) Evaluate whether Chandpur Sounds Limited should use marginal costing or absorption costing to value inventory

a. Case for Marginal Costing i. Could be said to help decision making in the short term when deciding

whether to accept an offer price or make or buy or discontinue a product/profit centre or a limiting factor problem

ii. Sees costs allocated to a time period, so it may be argued that profit for that time period is more accurate. External accounts are drawn up on the basis of a time period.

iii. Follows prudence concept as closing stock and profit figures are lower. b. Case for Absorption Costing

i. Sees costs allocated to products. Could be useful for management when fixing prices or reviewing if a product/project has been profitable in the long term. Recommended by SSAP 9.

ii. Gives a realistic figure for profitiii. Follows matching concept as revenues for the product are matched against

costs. c. Other Points

i. If figures in the future are similar, choice of stock valuation will not have very much effect on the profit.

d. Conclusion Max 2 marks available. Should use absorption costing as per accounting standards.

3. (b) Evaluate the current liquidity position of Larnaca Distributors plc.a. Liquidity position good

i. Firm has healthy level of cash and cash equivalents ii. Current Ratio now stands at 2.31: 1 which is good.

iii. Acid ratio now stands at 1.04 :1 which is ideal iv. Liquidity has been improved by issue of ordinary sharesv. Working capital is £629 000 - £272 000 = £357 000 which is healthy/ means

current liabilities can be paid. b. Liquidity position worsening/problems

i. Net cash outflow of £6 000 ii. Inventories are a large figure and rising is there a problem with unsold

inventories/ is it perishable?iii. Trade Receivables rose by 15 000. Credit control/ chasing up debtors needs

to be carried out immediately as figure is very high.

iv. Big increase in Trade Payables to very large sum Is firm paying on time and obtaining cash discounts etc

v. Cash and Cash Equivalents of £71 000 are unable to pay Current Liabilities of £272 000

vi. Dividend policy needs to be reviewed. Ordinary shareholders have been paid an interim dividend for 2013 of £22 000 on a profit before tax of £8000 which is very high.

vii. Debenture has been redeemed which uses liquid funds but helps future liquidity as no more interest has to be paid.

c. Conclusion on current liquidity position max 2 marks ie Liquidity position is good4. (d) Evaluate whether it would be advisable to pay direct labour a lower rate per tray, for

Sunny Kipwat to achieve a profit of £2 000 per month.a. Case for lower labour rate.

i. Business has profit target and has to take action to achieve these targets. ii. May not possible to decrease other costs, especially if fixed eg loan

repayment, rent etc iii. May not be possible to increase selling price to increase profit, as will result

in reduced sales b. Case against lower labour rate.

i. Workers will be demotivated and workforce morale will be low. ii. It may not be possible for workers to pick extra fruit, to maintain overall

wage level. iii. Could try to reduce other costs instead eg shop around for lower insurance.

c. Conclusion - It is a good/bad idea to lower labour rate.5. Jahingar, the uncle of Imran, is also interested in investing in shares and has given Imran

the following advice.a. “Do not buy the shares in Bengal Life plc at a market price of £2.00. You should

buy the shares in Oceanic Assurance at £2.25. They have a higher share price, so they must be a better share.” (b) Advise Imran as to the value of this statement.

i. A higher share price does not mean a “better” share. The nominal or face value of the share needs to be considered.

ii. Also the total number of shares in the company. iii. Also important is the movement in the value of the share – is it moving up

or down? iv. Very important is the demand and/or future/confidence of the market in the

share – if Imran buys now, will he make a profit or a loss on the share. v. Many factors both inside the company and outside the company can affect

the price of a share. b. Jahingar also states “There is only one ratio that is important and worth knowing

about, and that is the dividend per share”. (c) Evaluate this statement on behalf of Imran.

i. For the statement 1. Investors are usually interested only in the return on their

investment, which is shown in the dividend per share, which is used to calculate how much the investor receives.

2. Investors are more concerned with what they actually receive, than how easily the company can afford to pay the dividend, as shown by the dividend cover.

ii. Against the statement 1. Investors also have a capital gain when the share price rises, which is

partly shown in the Price/Earnings ratio. 2. Dividend yield shows the return for every pound invested, which is

more important than dividend per share. 3. Earnings per share is an important ratio, as it shows how much

profit is being generated for each share invested. These profits are then used to pay dividends.

4. Other ratios concerning profitability and liquidity etc are important, as they show how well the firm is doing.

iii. Conclusion 2 marks 1. Dividend per share is not the only important ratio worth knowing

about.6. (b) Evaluate whether Venture Vending Limited should draw up a new set of budgets to

replace the existing budgets for Months 2 and 3.a. For Decision to draw up new budgets.

i. Existing budgets are not likely to be accurate so there is little point in sticking with them.

ii. Good budgeting should be flexible, so changes should be made to this ongoing process with regular reviews taking place.

iii. A new business should not draw up a three month budget, as it is likely to be unsure of the predicted figures, not having any past figures to rely on

iv. A new budget would help planning / changes eg reduce the purchases for each month

v. New budgets may have targets staff can reach which will increase motivation

b. Against Decision to draw up new budgets i. Will take time and money to draw up new budgets.

ii. Variance analysis could be carried out and actions taken to meet original budgeted figures.

iii. The new budget will only be estimates anyway, so may not be accurate iv. The only budget directly affected by a lower sales level is trade receivables

so there maybe a need just to draw up trade receivablesv. This is a new business, and sales may pick up to meet month 2 an3 figures in

the original budget, making it accurate.c. 2 marks available for overall conclusion, should relate to points made above.

7. Vandeloos Fencing Limited applied management by exception to the figures for April 2013. The cost accountant decided to ignore the labour variance, but to investigate the material variance. (d) Evaluate the decision of the cost accountant to ignore the labour variance, but to investigate the material variance.

a. For the decision i. Material variance is larger / labour variance is smaller

ii. Labour variance is £317.20 adverse, which is £380.32 less than the adverse material variance of £697.

iii. Maybe the policy is to investigate variances over a particular limit eg £500. iv. The labour variance is only 3.56%, whereas the materials variance is 15.3%

which is much bigger. v. Management by exception tries to make the management time cost

effective, so no time is wasted investigating small variances. b. Against the decision

i. It is possible that all costs, including labour could be reduced so the adverse variance should be investigated.

ii. If you ignore an adverse variance below a certain limit, the cost could “creep up” each year without any action being taken.

iii. It is possible that any reduction in costs after investigation is cost effectiveiv. ie could be greater than management time spent investigating.

c. Conclusion Should relate to above points eg decision was correct/incorrect

Jan 2014

1. (c) Evaluate the project for the company, using the calculations made in (a) and (b) above and considering any other relevant factors.

a. For investment i. NPV method states invest √ as NPV is positive √

ii. Payback method says invest √ as project does pay back √ . iii. Payback period of 2.94 years should be acceptable for the company√ iv. Positive cash flows received each year √ Other Relevant Points – could be

b. For or Against investment. i. How accurate are the predictions √ for costs, cost of capital, and revenues?

√ ii. Chance of renewal of contract after 4 years?√ Would this be profitable? √

iii. Other possible investment projects available at present? √ More or less profitable? √

iv. Objectives/strategy of company? √ Is this investment in line with objectives? √ Is supermarket ethical? √

v. Other methods could be considered e.g. Accounting rate of return √ vi. Future prospects of investment √

vii. Sandwich market is very competitive √ viii. Sandwiches/food is a basic essential product √

c. Overall Conclusion Company should invest. √√2. (b) Evaluate the raising of capital for a plc by issuing a debenture instead of taking out a

bank loana. Advantages of debentures

i. Debenture may have a lower rate of interest √ which would have been fixed on issue √. The bank loan may have a higher rate if there is a period of high or rising interest rates. √

ii. Interest only has to be paid on a debenture every 6 months √, whereas bank loans require monthly repayments √. The debenture therefore allows the company some breathing space √ which is useful if trading is seasonal, or going through a period of low sales. √

iii. Debenture may be for a longer period of time, √ which may benefit company, especially if to finance a long term project. √

iv. Bank may wish to be involved in decision-making etc if loan given √ e.g. ask for a seat on the board √

b. Could argue either/both sides (as one √ each) i. Interest on both is allowable for tax√√ Both have the same effect on gearing

ie worsens √√ ii. Both would require assets √ to be offered as security/collateral. √

iii. Bank loan could be renewed/refinanced √ to be the same length as a debenture√

iv. Neither result in dilution of ownership √ so share price may not fall √ c. Advantages of bank loans

i. Interest rate may be lower √ ii. Bank loan is likely to be for shorter period √ so less interest may be paid. √

iii. Monthly repayments may be preferable √ to larger six-monthly repayments.√

iv. Bank may have good relationship with company √ and give advice etc √ v. Debenture holders may wish to be involved in decision-making/control √

e.g. ask for a seat on the board √ d. Conclusion Debentures / bank loans are better √√ 2 marks

3. (d) Evaluate the creation and utilisation of a Capital Redemption Reservea. Case For;

i. CRR acts as a creditors’ buffer √√ ii. Capital base is maintained √

iii. CRR is a Capital Reserve √ so it prevents directors/shareholders √ from taking cash/ capital out of the business, √ leaving little/nothing for creditors in the event of the company experiencing liquidity/ trading problems. √

iv. Cannot be transferred back to the Statement of Comprehensive Income √ and then used to pay out dividends √

v. Presence of CRR may help a company obtain credit√ or investment/ buying of company shares√ as Statement of Financial Position appears stronger √

vi. In certain circumstances e.g. redemption of shares, the CRR must be created by company law √ therefore should be of benefit. √

vii. CRR can be used for a bonus issue of shares √

b. Case Against ; i. Creating a CRR takes time and money √ and accounting expertise. √

ii. Reduces flexibility, √ as company may not be able to do what they want to do e.g. redeem shares, √ if e.g. insufficient funds in revenue reserves. √

c. Conclusion Capital Redemption Reserve is worthwhile/ useful/ effective.4. (d) Evaluate the three payment options from the point of view of Auto Albion Motors plc.

5. (c) Evaluate the two possible future policies for Saidpur Household Appliances Limited to follow for the next 6 months.

a. Maintaining Output and decreasing Selling Price i. Advantages –

1. Reducing price may lead to higher sales, √ when trading conditions are tough. √

2. This may allow SHA Ltd to survive √ until trading conditions improve √ , and competitors to fail. √

3. No need to lay off any staff if output is not reduced, √ which may involve redundancy costs etc. √

ii. Disadvantages – 1. Reduction in price of £0.26 √ is very little √ and may have no effect

on sales. √ 2. SHA Ltd may find they have unsold stock in these difficult conditions.

√ 3. Kettles are not a necessity in a downturn √ as substitutes exist √ 4. Break-even point will be higher √ because contribution per unit is

lower √ 5. Total sales revenue decreases √

b. Maintaining Selling Price and decreasing Output i. Advantages –

1. Keeping the same selling price may mean SHA Ltd maintains market position √ i.e. does not appear to go down market. √

2. Avoids build up of unsold stock when trading is difficult √ 3. Could make a loss assembling kettles that cannot be sold, √ so

avoids unnecessary expense. √ 4. Break-even point does not decrease √ because contribution per unit

does not change. ii. Disadvantages –

1. Total sales revenue decreases √ 2. Reducing output may see resources wasted/unused √ e.g. materials,

staff etc. √ 3. Fixed costs are spread over a smaller output, √ so fixed costs per

unit will rise.– 2 marks Should maintain output (or selling price) and decrease selling price (or output).

6. (c) Evaluate the performance and position of Southern Gas plc as a business compared to Northern Gas plc for the financial year ended 31 December 2013.

a. BETTER than Northern Gas plc i. Gearing in Southern Gas is better √ as Northern Gas has a ratio higher than

50% benchmark. √ ii. This makes Northern Gas a risky investment,√ they have probably taken out

loans, debt capital etc√ iii. ROCE is better √ in Southern Gas by 0.5 percentage points.√ Perhaps the

large debt capital of Northern means the returns are lower √ e.g. due to interest payments √

b. WORSE than Northern Gas plc i. Earnings per ordinary share in Northern Gas are about 1 pence √ per share

higher which is better √ ii. Perhaps Northern have a smaller equity share base √ which means EPS will

be higher. c. Conclusion Southern Gas plc as a business has performed better/worse than

Northern Gas plc. √√7. Shares in Sheung Wan Construction plc were trading on the market at £0.72 per share.

Shares in Ngau Builders plc were trading at £2.30 a share on the market. (e) From the point of view of a shareholder in Ngau Builders plc, evaluate the purchase of the company by Sheung Wan Construction plc.

a. FOR purchase i. Goodwill received √ Profit on realisation √ 745 600 √ o/f £3.00 received per

share which is £0.70 √ more than the share in Ngau Builders plc trading at £2.30 √

ii. Larger firm may achieve benefits √ eg economies of scale √ and share price in

iii. Sheung Wan plc may rise in future. √ iv. Horizontal integration √

v. Large liabilities on Ngau builders Statement of Financial Position √ which another company can settle √

vi. Sheung Wan has a healthier Statement of Financial position √ and is therefore a safer investment. √

vii. Reduces competition √b. AGAINST purchase

i. Larger firm may lead to problems √ eg diseconomies of scale √ and share price in Sheung Wan may fall in future. √

ii. Reduced power of shareholder from Ngau Builders plc, √ as large numbers of other shareholders in Sheung Wan Limited. √

iii. No control in new company √. c. Conclusion Purchase is beneficial/ not beneficial. 2 marks

June 20141. (b) Evaluate the financial performance of Wavelength Asia plc for the year ended 31 March

2014 and the financial position at 31 March 2014.a. Strengths

i. Gross Profit is good √ at 41% of sales. √ (own figure applies) ii. Net Profit before tax is good √ at 16% of sales. √ (own figure applies)

iii. Profit for this year added to retained earnings is £1million, √ nearly as much as all previous retained earnings. . √ (own figure applies)

iv. Gearing is good . √ at 31.4% . √ (own figure applies) ROCE = 25% √ which is very good √ (own figure applies)

b. Weaknessesi. Current ratio is poor at 0.87:1 √ (own figure applies)

ii. Acid ratio is poor √ at 0.62:1 √ (own figure applies) iii. Working capital is negative/poor √ at £ (201 000) √ (own figure applies) iv. Company has taken out a short term loan of £500 000 √ perhaps due to

liquidity problems. √ v. Company has tax bill of £399 000 to pay in 30 days, √ but only £125 000 in

the bank √ c. Conclusion – 2 marks Should relate to points made above. Eg Wavelength Asia plc

has had a good trading year √ but has liquidity problems √2. At the start of Week 16 another business, Hellenic Design Limited, asks Grecian Glass

Limited if it is interested in a regular contract. Hellenic Design Limited will supply 50 ornaments a week to Grecian Glass Limited, at a price of £35 per item, for one year. (f) Evaluate whether the directors of Grecian Glass Limited should accept the offer from Hellenic Glass Limited.

a. For Accepting Offer i. Grecian could buy for £35 and sell for £41 so making a profit / positive

contribution √ of £6 per item. √ This may realise a total profit of £300 √ if all are sold. √

ii. May allow Grecian to meet ALL orders promptly √ which keeps customers happy. √

iii. Demand may increase still further, √ and Grecian can meet this increase. √ iv. Avoid possible production problems √

b. Against Accepting Offer. i. Marginal costing theory √would say do not accept buying for £35 when

business can make for £30 √ as this would be £5 more expensive. √ ii. Grecian are only 15 items short on meeting an order, √ so do not need 50

items, √ as this gives an extra 35 items. √ iii. There may not be any demand for the extra 35 items. √ iv. There may not be any storage space for the extra 35 items. √ v. The increase in demand for week 16 may be temporary√ so more than 35

items may be left unsold.√ Possible quality issues √ vi. Hellenic are interested in a regular/long term contract which may be

problematic √ c. Conclusion Grecian Glass should / should not accept contrac

3. Barisal Industrials plc redeemed some shares during the year.a. (b) Explain:

i. (i) two advantages to a company of redeeming Ordinary Shares.1. Company may have excess/large amounts of cash, √ which they feel

would be best used / no better use than redeeming shares. √ 2. Less funds will have to be paid out in the future √ in terms of

dividends. √ Certain ratios will improve, √ eg Return on Capital Employed, Earnings per share.√ (need one)

3. This will make managers and directors and company look better. √ 4. The share price will rise√ as less shares are on the market. √

ii. (ii) two disadvantages to a company of redeeming Ordinary Shares 1. Drain on company’s liquid resources. √ ie cash and cash equivalents.

√ 2. Liquidity ratios will worsen. √ eg Current ratio, and Acid ratio √ 3. Gearing ratio will worsen. √ as Debts is a larger percentage of capital

employed. √ 4. The company’s Statement of Financial Position has a smaller equity

base √ which gives the impression of a smaller company √ b. Over lunch, a new member of the Finance Department asks “What are the

differences between reserves, provisions, and liabilities?” (c) Explain the following terms, including how each is created:

i. (i) reserves1. Revenue reserves √ are appropriation of retained profit ie created

after net profit has been calculated. √ Eg General reserve √ 2. Capital reserves √ may arise for a specific reason.√ Eg issuing shares

at a premium, √ or revaluing a non-current asset, √ or redeeming own shares without an issue of new shares. √ (max 2 examples).

ii. (ii) provisions

1. Provisions are amounts set aside before arriving at net profit √ eg for depreciation.√ Provisions reduce the value of assets. √ The reason for the provision will be specific √ eg for damages in a court case, √ but the amount of the provision would be an estimate. √

2. Provisions follow the concept of prudence √ 3. Provisions enable a true and fair view to be shown/using matching

concepts √ iii. (iii) liabilities

1. Liabilities are debts that have been incurred by the business √ and must be paid. √

2. Short term (current) liabilities must be paid back within one year. √ Eg trade payables to suppliers.√

3. Long term liabilities are to be repaid in a term greater than one year. √ Eg long term bank loan. √

c. On behalf of the company, evaluate whether the total dividend of 3.5 pence per share paid in the last financial year was generous.

i. Dividend payment is generous 1. 3.5% return on nominal value of share £1 √ may be higher than

interest rate in a bank. √ 2. May be higher than other companies. √ 3. May be a good return for this industry. √

ii. Dividend payment is not generous 1. 3.5p may be a lower return than what could have been gained on a

debenture √ or bond.√ iii. Other factors (could appear on either side or argument)

1. Need to know the price paid/market price for the share, √ which will tell us the yield √ie true return on investment. √

2. Need to know the state of the world/national economy. √ If a boom year, then 3.5p is low. √ If a recession, 3.5p could be regarded as high. √

3. How does 3.5p compare to previous year’s dividends? √ May be seen as higher or lower. √

4. A member of staff states “I do not know why we bother drawing up budgets, because most of the figures in the Statement of Comprehensive Income are out of our business’s control.” (d) Evaluate budgets as a management tool for control

a. FOR Budgets as a tool for management control i. Some costs are under management control √ eg rate paid to direct labour. √

ii. Budgets allow business to see how a level of costs eg direct labour √ impacts on profit. √ This may result in management deciding on an appropriate level of pay rise. √

iii. Variances can be analysed √ and remedial action taken. √ iv. Budgets are good motivators √ especially where staff meet targets/bonus

payments etc √ v. Budgets help coordination within the business √

b. AGAINST Budgets as a tool for management control i. Some costs are out of management control √ eg commodity prices such as

sugar. √ ii. Some figures/costs may change, √ so drawing up budgets is a waste of time

and money. √ iii. Need to employ a specialist so wage rises √

c. Conclusion Budgets are a useful tool for management control5. (b) Evaluate the performance of Chang Tao Stores plc concerning liquidity, over the

financial year ended 31 March 2014.a. Liquidity handled well

i. Positive cash and cash equivalent balances √ at start and end of year. √ ii. Payments to purchase shares in other companies,√ seemed to have been

almost entirely financed by issue of shares and debentures √ (long term finance). √

iii. Operations are making a profit and generating funds. √ iv. Low level of dividends √ appear to have been paid, so cash not leaving the

company. √ b. Liquidity not handled well

i. Cash and cash equivalents has decreased over the year. √ Fall in cash is worrying √ , especially as company has stores, which should be taking in cash. √

ii. Issue of shares and debentures √ not quite enough to finance purchase shares in other companies. √

iii. All of Net cash from Operating activities may have been used buying non-current assets√

c. Conclusion Liquidity has been handled well/badly √√6. (d) Evaluate the decision of Wilson Onyango to close one of the stores for the year ended

31 March 2015.a. FOR Closing store

i. Loss turns into a profit, √ an improvement of £23 198 √ on the bottom line. ii. Break even point is lower √ by 351 units. √

iii. Business may be leaner/lower fixed cost base √ which helps when trading is difficult. √

iv. Margin of safety is now 276 units whereas before breakeven point was not reached √

b. AGAINST Closing Store i. Sales in units have fallen √ by 50 units. √

ii. Business has less store outlets √ to take advantage of upturn in trading conditions. √

iii. Possible redundancy costs √ iv. Figures are only predictions √

c. Conclusion Store should close √√