THE UNIVERSITY OF EDINBURGH BUSINESS SCHOOL

ACCOUNTING FOR BUSINESS 1

ACCN08012

Exam Date: Thursday 15th December 2022

From and To: 13:00 – 15:00

Exam Diet: December Diet - 2022/23

Please read full instructions before commencing writing

Exam paper information

Answer both compulsory questions 1 and 2. [50 marks each question]

Special instructions
Formulae sheet is attached

Special items
University approved calculator models are permitted

This examination will be marked anonymously

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ACCN08012
Page 2 of 9

ACCN08012
 Answer compulsory questions 1 and 2
Each question is worth 50 marks

QUESTION 1

Jack Hill has recently come into a small inheritance from his grandmother and
is looking to invest his money. He has identified two companies in the town
where he lives and is keen to invest in one of these to help promote industry
and jobs in the locality. Both are private companies involved in retail
distribution, and both are looking for some additional investment in return for
share ownership in the business. As an initial step Jack has asked you to
examine the most recent financial statements of both companies and offer a
view, based on the figures, which you would advise to invest in. Both of the
companies under consideration are of a similar size in terms of turnover,
which is the business size that Jack wishes to invest in. The most recent
financial statements of these two companies, both with a financial year end of
31st December, are given below.

Income statements for the year ended 31st December

Barcastle Ltd Fordham Ltd

Y/E 31st December Y/E 31st December
£000’s £000’s
Sales Revenue (all credit) 2,550 2,500
Cost of Sales (2,030) (1,950)
Gross Profit 520 550
Operating expenses (270) (375)
Operating Profit 250 175
Interest charges (10) (0)
Profit before Tax 240 175
Taxation (15) (7)
Profit after tax 225 168

Continued …

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ACCN08012
Statements of Financial Position as at 31st December

Barcastle Ltd Fordham Ltd

As at 31st December As at 31st December
£000’s £000’s

Non-Current Assets 575 372

Current Assets:
Inventory 460 228
Trade Receivables 403 265
Cash at bank 540 73
1,403 566

TOTAL ASSETS 1,978 938

Equity and Reserves:

£1 ordinary shares 575 345
Retained Earnings 921 268
1,496 613

Non-Current Liabilities
Long term borrowings 115 0

Current Liabilities:
Trade Payables 287 219
Taxation Due 80 106
367 325

TOTAL EQUITY & LIABILITIES 1,978 938

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ACCN08012
QUESTION 1 – Show all workings clearly

(a) Based on the information above compute three profitability, three

efficiency, two liquidity, and two gearing accounting ratios for each
company, Barcastle Ltd and Fordham Ltd, which provide insights
into the financial position and performance of the company for the
most recent financial year. Show clearly the basis of calculation for
each ratio for each company. Sales and purchases are all made
on a 30 day credit basis for both companies. Use cost of sales as a
replacement figure for purchases, and use year-end balance sheet
figures where applicable.
(10 marks)

(b) Using the information produced in (a) above, advise Jack which
company he should invest in if the decision was to be made on the
results on these financial statements alone.
(25 marks)

(c) Outline any three other considerations which Jack might consider
when deciding which of the two companies to invest in?
(12 marks)

(d) Financial Statements are prepared in accordance with certain rules

and regulations. Briefly outline which rules would apply to a public
listed company in the preparation of its accounts.
(3 marks)

[TOTAL 50 MARKS]

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ACCN08012
QUESTION 2

Jane Hill operates a number of gift shops in Scotland selling a range of

Scottish products and all are purchased as finished product from local
suppliers. Jane is now planning to offer a new range scarves which she will
purchase from a manufacturer in Aberdeen and is looking to do this for a trial
period over the autumn/winter months to see how things will go and whether it
will be worthwhile in the long term. The details for the expected sales and
costs for this range for the next four months are as follows:

(1) Budgeted sales of scarves:

SEPT OCT NOV DEC

300 400 600 800

(2) Each scarf will be priced at £16. On the basis of past experience 30% of
sales will be for cash and 70% by card. Assume the full proceeds from
sales by card are received by the company, and that these are received
from the card company in the month after sale.

(3) Each scarf will cost Jane £8 to purchase from the supplier per box. The
business will keep a stock of 50% of the following month’s requirements.
Sales in January are expected to be the same as December. The full
requirement for Sept will be purchased in that month. Suppliers will be
paid in the month following purchase.

(4) The business will employ a new part-time marketing assistant to build up
the profile of the new product and increase sales over time both in the
shops and online. This salary for this person will be £2,500 per month.

(5) Other variable costs associated specifically with the new product will be
£2 per scarf sold, and these will be paid the month after being incurred.

(6) The business will receive a grant of £6,000 in October from the Local
Enterprise Board who are tasked with promoting local businesses.

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ACCN08012
QUESTION 2 – Show all workings clearly.

(a) For the first 4 months of trading prepare the following for Jane’s business
for the new product of the scarves:
(i) A Sales/Receivable budget.
(ii) A Purchases/Payables budget.
(iii) A Cash budget for the 4 months and in total.
(iv) Based on the figures arrived at give your opinion as to whether
Jane should introduce the scarves as a product line.

(30 marks)

(b) Jane does not currently carry out any breakeven analysis for her
business and this is something that her accountant has been advising
her to do. She is not familiar with any of the terminology involved and
has asked you for some help with this.

You are required to explain to Jane the following terms and how these
would apply in the sale of her new scarves line above. Use the figures
from part (a) above to demonstrate the meaning of the terms.

(i) Variable cost

(ii) Fixed cost
(iii) Contribution
(iv) Breakeven
(v) Margin of Safety

(20 marks)

[TOTAL 50 MARKS]

[END OF PAPER]

EXAM FORMULAE SHEET INCLUDED ON NEXT PAGE

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ACCN08012
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ACCN08012
Exam Formulae Sheet

1. Return on Capital Employed: Operating Profit before interest and tax (EBIT)
Total capital (Shareholders equity + Long term debt)

2. Operating Profit Margin: Operating Profit before interest and tax (EBIT)
Sales Revenue

3. Gross Profit Margin: Gross Profit

Sales Revenue

4. Current Ratio: Current Assets

Current Liabilities

5. Acid test(Quick) Ratio: Current Assets less Inventory

Current Liabilities

6. Receivables (Debtors) days: (Average) Trade Receivables

(Credit) Sales

7. Payables (Creditors) days: (Average) Trade Payables

(Credit) Purchases/(or Cost of sales)

8. Inventory turnover days: (Average) Inventory

Cost of sales

9. Gearing Ratio: Long term debt

Total capital (Shareholders Equity + Long term debt)

10. Interest Cover: Operating Profit before interest and tax

Interest charge

11. Earnings per Share: Profit after interest and tax available to ordinary
shareholders Number of ordinary shares in issue

12. Price Earnings (P/E) Ratio: Market Price per share

Earnings per share

13. Dividend Cover: Earnings for the year available for dividend
Dividend announced for year

14. Dividend Yield: Dividend per share

Market value per share

Cash Budget Layout:

- Inflows
- Outflows
- Net Inflows/Outflows
- Opening Cash Balance
- Closing Cash Balance

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ACCN08012