University of Bedfordshire Business School

Department of Law and Finance

Managerial Accounting and Finance

AAF037-2/ 2019-20
Mock exam

Date of Exam: Assessment Department to complete

Start Time: Assessment Department to complete
Time Allowed: Two (2) hours (including reading time)
Unit Tutor: Dr. H. El Kaddouri

INSTRUCTIONS TO CANDIDATES

 This is a closed book examination

 Answer ALL the questions
 Section A: 25 Marks
 Section B: 75 Marks

 Additional instructions:
 Non-programmable calculators are permitted
 Answer all questions in the answer booklet and NOT on the question paper

PLEASE DO NOT OPEN THIS PAPER UNTIL INSTRUCTED TO DO SO BY THE

SENIOR INVIGILATOR

Page 1 of 8
Section A

In this Section, you are required to answer ALL of the questions.

Question A1 (2 marks)

Non-cash items refer to:

a- Accrued expenses.
b- Inventory items purchased using credit.
c- The ownership of intangible assets such as patents.
d- Expenses which do not directly affect cash flows.
e- Sales which are made using store credit.

Question A2 (2 marks)

Which one of the following statements concerning net working capital is correct?

a- Net working capital increases when inventory is purchased with cash.

b- Net working capital must be a positive value.
c- Total assets must increase if net working capital increases.
d- A decrease in the cash balance also decreases net working capital.
e- Net working capital is the amount of cash a firm currently has available for
spending.

Question A3 (2 marks)

A firm has £520 in inventory, £1,860 in non-current assets, £190 in trade

receivables, £210 in trade payables, and £70 in cash. What is the amount of the
current assets?

a- £710
b- £780
c- £990
d- £2,430
e- £2,640

Question A4 (2 marks)

Your firm has total assets of £4,900, non-current assets of £3,200, long-term debt of
£2,900, and short-term debt of £1,400. What is the amount of net working capital?

a- -£100
b- £300
c- £600
d- £1,700
e- £1,800

Page 2 of 8
Question A5 (2 marks)

Russell's Deli has cash of £136, trade receivables of £87, trade payables of £215,
and inventory of £409. What is the value of the quick ratio?

a- 0.31
b- 0.53
c- 0.71
d- 1.04
e- 1.07

Question A6 (2 marks)

Uptown Men's Wear has trade payables of £2,214, inventory of £7,950, cash of
£1,263, non-current assets of £8,400, trade receivables of £3,907, and long-term
debt of £4,200. What is the value of the net working capital to total assets ratio?

a- 0.31
b- 0.42
c- 0.47
d- 0.51
e- 0.56

Question A7 (2 marks)

A firm has sales of €68,400, costs of €42,900, interest paid of €2,100, and
depreciation of €6,500. The tax rate is 34 per cent. What is the value of the cash
coverage ratio?

a- 12.14
b- 15.24
c- 17.27
d- 23.41
e- 24.56

Question A8 (2 marks)

Al's Sport Store has sales of £897,400, costs of goods sold of £628,300, inventory of
£208,400, and trade receivables of £74,100. How many days on average, does it
take the firm to sell its inventory assuming that all sales are on credit?

a- 74.19 days
b- 84.76 days
c- 121.07 days
d- 138.46 days
e- 151.21 days

Page 3 of 8
Question A9 (2 marks)

A firm has net working capital of £2,715, net non-current assets of £22,407, sales of
£31,350, and current liabilities of £3,908. How many pounds worth of sales are
generated from every £1 in total assets?

a- £1.08
b- £1.14
c- £1.19
d- £1.26
e- £1.30

Question A10 (2 marks)

The Purple Martin has annual sales of £687,400, total debt of £210,000, total equity
of £365,000, and a profit margin of 5.20 per cent. What is the return on assets?

a- 6.22 percent
b- 6.48 percent
c- 7.02 percent
d- 7.78 percent
e- 9.79 percent

Question A11 (2 marks)

Taylor's Men's Wear has a debt-equity ratio of 42 percent, sales of £749,000, net
income of £41,300, and total debt of £198,400. What is the return on equity?

a- 7.79 percent
b- 8.41 percent
c- 8.74 percent
d- 9.09 percent
e- 9.16 percent

Question A12 (3 marks)

A firm has a debt-equity ratio of 57 per cent, a total asset turnover of 1.12, and a
profit margin of 4.9 per cent. The total equity is £511,640. What is the amount of the
net income?

a- £28,079
b- £35,143
c- £44,084
d- £47,601
e- £52,418

Total marks for Section A (25 marks)

Page 4 of 8
Section B

In this Section, you are required to answer ALL of the questions (25 marks each
question)

Question B1
Alpha Corporation is a small clothing company operating in the north of
Bedfordshire. One particular garment has a standard material cost of £13.50,
comprising 3 metres of cloth at £4.50 per metre. The standard labour time allowed
for making up the garment is 15 minutes, and employees are paid at a rate of £5 per
hour. For the month of August 2019, the company was able to produce 10,000
garments. The budgeted output level was 9,000 garments.
The purchasing manager was very pleased as he had managed to buy 45,000
metres of cloth for £4.25 per metre. However, the production manager was not so
pleased because he claims the cloth was of poor quality which resulted in
operational inefficiency.
Actual data for August is as follows:
Wages paid £12,740
Hours worked 2,600 hours
Cloth issued 32,000 meters
Required:
1. Calculate for August 2019:
i material usage variance;
ii material price variance;
iii labour efficiency variance;
iv labour rate variance;
(16 Marks)
2. Comment on the points of view of both the Purchasing Manager and the
Production Manager. Do you think the Purchasing Manager was correct to
buy the cloth at £4.25 per metre if it was responsible for operational
problems?

(8 marks)
3. What do you understand by the term "inter-relationship of variances"?
(1 mark)

Total marks for question B1 (25 marks)

Page 5 of 8
Question B2

The profit statements for two different companies in the same industry are as follows:

Company A Company B
(£000) (£000)
Sales 10,000 10,000
Less: Variable costs 8,000 4,000
Contribution margin 2,000 6,000
Less: Fixed Costs 1,000 5,000
Profit 1,000 1,000

(a) Calculate the degree of operating leverage for each company.

(4 marks)

(b) Calculate the break-even point in sales for each company. Explain why the
break-even point for Company B is higher.
(7 marks)

(c) Assume both companies experience a 50 % increase in sales revenues.

Calculate the percentage increase in profit for each company and explain why the
percentage increase in Company B’s profits is significantly larger than that of
Company A.
(8 marks)

(d) Explain the following terms:

(i) Operating Leverage;

(ii) Margin of safety;
(iii) Indirect cost

(6 marks)

Total marks for question B2 (25 marks)

Page 6 of 8
Question B3

GBG Ltd is evaluating two mutually exclusive projects: the Project 1 and the Project
2. The company’s cost of capital is 8%. These projects have the following cash
flows. GBG Ltd can only invest in one project.

Cash flows Project 1 Project 2

Year £ £
0 (25,000) (16,000)
1 3,000 7,000
2 3,000 5,000
3 4,500 3,000
4 6,000 2,000
5 8,900 3,000
6 10,700 1,500

(a) Calculate for each project:

(i) Payback period
(ii) Net present value (NPV)

(10 marks)

(b) Explain which project you would recommend for acceptance.

(2 marks)

(c) List the four methods in capital budgeting decisions, and briefly discuss the
advantages and disadvantages of each method.
(13 marks)

Total marks for question B3 (25 marks)

End of Exam Paper

Page 7 of 8
Table to be used for Question B3

Page 8 of 8