THE UNIVERSITY OF SHEFFIELD

EXECUTIVE MBA
TIME: 1 HOUR

FINANCIAL REPORTING & MANAGEMENT ACCOUNTING

Students should answer 1 out of the 3 questions. All questions are of equal value.
Students will be expected to support their arguments using examples (real or
hypothetical if needed).
Your answers should draw upon academic literature where appropriate.

Question 1
The financial statements of Wirl-Wind Co are presented below.

Income Statement
Wirl Wind Company
Sales revenue $3,028,500
Less: Cost of goods sold
Fixed costs 1,350,000
Variable costs 1,260,600
--------------
Gross profits $417,900
Less: Operating expenses
Fixed expenses 4,500
Variable expenses 85,840
------------
Operating profits $327,560
Less: Interest expense 82,150
-------------
Net profits before taxes $245,410
Less: Taxes (40%) 98,164
-------------
Net profits after taxes $147,246
Less: Dividend 50,000
-------------
Increased retained earnings $ 97,246
Balance Sheet
Wirl Wind Company
ASSETS
Current assets
Cash $625,000
Marketable securities 298,000
Accounts receivable 580,000
Inventories 496,000
-----------
Total current assets $1,999,000
Land and building 625,000
 Machinery & equip. 765,000
Fixtures & Furn. 110,000
Total gross fixed assets 1,500,000
Less: Accumulated Depreciation 30,000
Net fixed assets $1,470,000
-----------
Total assets $3,469,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $267,000
Notes payable 135,000
Accruals 288,000
-------------
Total current liabilities $690,000
Long-term debts 1,200,000
-------------
Total liabilities $1,890,000
Stockholders' equity
Preferred stock 79,000
Common stock 750,000
Paid-in-capital 601,000
Retained earnings 149,000
-------------
Total stockholders' equity $1,579,000
-------------
Total liabilities and stockholders $3,469,000
Equity

Additional information:
 Sales are projected to increase by 15%.
 Total of $75,000 in dividend will be paid.
 A minimum cash balance of $650,000 is desired.
 A new asset for $50,000 will be purchased.
 Depreciation expense for next year is $50,000.
 Marketable securities will remain the same.
 Accounts receivable, inventory, accounts payable, notes payable, and accruals will
increase by 15%.
 $30,000 new issue of bond will be sold.
 No new stock will be issued.

Required

(a) The Wirl-Wind Company of America is trying to plan for the next year. Using the
current income statement and balance sheet given in the statements above, and the
additional information provided, prepare the new company's pro forma statements
(balance sheet and income statement) (45 marks)
(b) Compare and comment on the variances between the old statements above and the new
ones you will prepare and assess the financial position of the company and its
performance over this comparison.
(40 marks)
(c) Explain the difference between the return on equity ratio and the return on capital
employed ratio.
(15 marks)
(Total marks 100)

Question 2

a. Describe the main purposes of the cash flow statement and briefly explain three methods
that it can be manipulated? . (50 marks)
b. What are the three classifications of cash flows? Classify the following transactions under each
of the three classifications.
-- cash payments to acquire or cash receipts from investments in subsidiaries.
– cash payments to acquire or redeem own shares
– cash repayments of amounts borrowed
– cash advances made to or cash receipts from the repayment of loans made to
other parties
– cash payments for futures contracts and forward contracts.
– cash receipts form the issue of equity shares
– cash receipts from the sale of goods and services
– cash payments or refunds of income taxes
– cash receipts and payments from contracts held for dealing or trading
purposes.
(50 marks)
(Total marks 100)

Question 3

It is late summer and Greek Motors, an auto manufacturer faces a financial crisis. A large issue of
bonds payable will mature next March and the company must raise capital to pay off the maturing
bonds. Unfortunately profits and cash-flows have been declining over recent years and the investors
will not be eager to buy newly issued stock or bonds unless the cash-flow and profitability of the
company reported in the Financial Statements of the coming December have been improved.
The following proposals are available to achieve the improvements:

1. Require independent dealers to increase their inventories. This strategy could increase sales
for the current year by 5% and decrease equally the sales of the next year
2. Pressure dealers to pay for purchases more quickly (in 30 days’ time instead of 60 days)
3. Lengthen the useful life over which assets are depreciated from 5 to 7 years
4. As prices are rising switch from LIFO to FIFO method of valuing inventories. This switch
will result in a lower cost of goods sold but also in higher income taxes for the current year that will be
paid late next year.
5. Borrow at current short term interest rates (about 10%) and use the proceeds to pay off long
term debt bearing an interest rate of 13%
REQUIRED:

1. Fill in the following schedule indicating what effect do you expect each proposal to have on
the last three columns. Use the words “increase”, “decrease” and “no effect” (30 marks)

Proposal Net Income Net cash-flow Cash

2. Write a short paragraph for each proposal explaining the reasoning behind your answer.
(70 marks)
(Total marks 100)

END OF EXAM PAPER