FAF1 QUESTION BANK Q1

(MANAGERIAL FINANCE EXAM 2013. MD)

WHERE’S ALICE?
(a) Jabberwock Limited

Compute the breakeven point for Jabberwock Limited the following production and sales data:

Sales price £5 per unit

Variable costs £3.50 per unit

Fixed costs £30,000

(b) Cheshire Cat Limited

Compute the breakeven point and margin of safety for the following production and sales data:

Expected sales £200,000

Expected sales volume 20,000 units

Total costs £185,000

Fixed costs included in above £45,000

Note: Margin of Safety

Margin of Safety is a given level of sales less the break even sales level (units or $)

(c) Mad Hatter Limited

Mad Hatter Limited makes and sells a single product:

Direct material cost £6 per unit

Direct labour cost £7 per unit

Variable production overhead cost £10 per unit

Sales price £28

Fixed costs £58,000 per annum

Required:

Determine the sales volume required if the company wishes to make a profit of £25,000 per annum

(d) White Rabbit Limited

White Rabbit Limited wishes to sell 20,000 units of its product, and wishes to make a profit of
£35,000. Costs are as follows:

Direct material cost £15 per unit

Direct labour cost £10 per unit

Variable production overhead cost £20 per unit

Fixed costs £85,000

Required:

Calculate the required sales price per unit

(e) Alice Limited

Alice Limited makes and sells looking glasses. The variable costs of production are £4 and the
current sales price is £7. Fixed costs are £3,500 per month and the annual profit of the company is
currently £27,000. The volume of sales demand is constant throughout the year.

The company is currently considering lowering the sales price to £6 to stimulate sales, but is uncertain
of the effect on sales volume.

Required:

(a) Calculate the minimum volume of sales required to justify the reduction in price.

(b) What would the percentage change in profit be if the sales increased to 30,000 units?

(f) Queen of Hearts Limited (QOH)

QOH Limited is a manufacturer of precision parts for electric motors. The company has developed a
new brush assembly for large industrial electric motors. The company expects to sell 20,000
units of this new product in the following year and wishes to make a profit of £95,000. Costs
are as follows:

Direct material cost £25 per unit

Direct labour cost £10 per unit

Variable production overhead cost £25 per unit

Fixed cost £70,000 per annum

Required:

(a) Calculate the required sales price per unit

(b) Calculate the breakeven sales price

(g) Through the looking glass

“Because of the assumptions underlying breakeven analysis, it is not a realistic model for business
decision making.”

Why might someone say this?

FAF1 QUESTION BANK Q2

Discounting and Annuity Practice

DISCOUNTING

1. What is the present value of £100 received 8 years from now if the interest rate is 5%?

2. Compute the sum to which £100 will accumulate with compound interest at 10% per annum:

a. At the end of one year

b. At the end of 5 years
c. At the end of 8 years
d. At the end of 15 years

3. Assume a 5% time value of money. With an outstanding liability of £1,000, what sum would
you be prepared to pay four years from now in order to defer payment?

4. Using the discount factor formula, compute the present value at 5% of £100 received
a. At the end of one year
b. At the end of 5 years
c. At the end of 8 years
d. At the end of 15 years

5. Assuming a 5% time value of money and that you have a liability of £1,000 due for payment in
3 years' time, what is the maximum amount you would be prepared to pay now to settle this
liability?

ANNUITIES

1. £5,000 debt due today cannot be paid. We agree to accept four equal annual instalments
starting in one year's time. What is the size of each instalment if the discount rate is 10%?

2. What is the present value of £3,000 received annually in perpetuity if interest rates are 6%?

3. Assume an 8% time value of money. Compute the present value of £2,000 received each
year in perpetuity, if the first payment is received one year from now

4. What would be the answer to the above question if the first payment was received
immediately?

5. Assume a 5% time value of money. The sum of £1,000 received immediately is equivalent to
what sum received in ten equal annual instalments, the first to be received one year from
now?

6. What would be the annual sum if the first instalment were received immediately?

7. Calculate the annual repayments on a building society mortgage of £60,000 over 15 years at
an interest rate of 12%. Assume that repayments are made at the end of each year.

IRREGULAR PROBLEMS

1. What is the present value of £1,000 received annually for 5 years if the first receipt is in three
years’ time and interest rates are 15%?

2. What is the present value of £3,000 per annum, first received in four years' time and every
year thereafter, if interest rates are 6%?
3. If interest rates are 10% for the first year and 20% for the second year, what is the present
value of the following cash flows: Invest £1m now; Receive £0.6m in one year; Receive £0.8m
in two years

4. What is the present value of £20,000 received in eighteen month’s time if the interest rate is
10%
FAF1 QUESTION BANK Q3

INTRODUCTORY FINANCIAL ACCOUNTING QUESTIONS

1. What is profit?

2. What is an accounting concept/convention? Can you name and describe some?

3. Name and describe some qualitative characteristics of information. What do you consider to be
the more important?

4. What problems are posed by valuation in the preparation of accounts?

5. Which three fundamental statements are commonly used to evaluate a business?

6. How are these financial statements linked to each other?

7. What different forms of business organisation exist?

8. How do reporting requirements differ for these different types of business?

9. What factors determine whether or not a new business is set up as a corporate enterprise?
FAF1 QUESTION BANK Q4

REVISION POINTS

1. What is the difference between cash flow and accrual accounting? What are accruals and
prepayments?

2. What is the equation for cost of goods sold (cost of sales)?

3. What do you understand by:

Gross profit;
Profit for the period;
Retained earnings?

4. A company has an item of plant which cost £22,000 in its Statement of Financial Position. It
acquired the asset 2 years ago and is charging depreciation at 10% p.a. on a straight-line
basis.

What will be the depreciation charge in year 3? How will the asset be shown in the Statement
of Financial Position at the end of year 3?

5. A company's Statement of Financial Position contains the following:

31.3.X5

£ £
Trade Receivables 150,000
Bad debt provision (3,000)
147,000

In the year to 31.3.X6 the company writes off debts of £10,000. Credit sales amount to
£750,000 and cash received from debtors totals £400,000. The company estimates £9,800 of
its trade receivables at 31.3.X6 to be doubtful as to their recovery.

Calculate what figures will be in the company's Income Statement in respect of bad debts
and show what trade receivables figures will appear in current assets at 31.3.X6.

6. Describe the different legal forms of business available in the UK. How does the Owner’s
Equity portion of the Statement of Financial Position/ Balance Sheet
differ between them?
FAF1 QUESTION BANK Q5

Practice Diagnostic

1. What are the 3 main financial statements? What does each one tell you? How are they linked
together?

2. A firm has opening inventories of £25,000 and closing inventories of £14,000. At the beginning of
the year trade payables are £20,000. During the year payments to suppliers total £55,000. At the
end of the year trade payables are £26,000.

Calculate cost of sales for the year.

3. Blotto plc buys a non-current asset for £200,000. It has an estimated scrap value of £20,000 and
an expected useful economic life of 10 years.
a) What depreciation will be shown in year 3’s Income Statement using straight line depreciation?

b) How will the asset be shown in the Statement of Financial Position at the end of year 3?

c) If the same non-current asset is sold for £120,000 (not on credit) in year 4 how will this affect
the Income Statement for year 4 and the Statement of Financial Position at the end of year 4?

5. A firm, this year, has closing trade receivables of £160,000. Of these, one customer who owes
£20,000 is expected to go into liquidation. It is not anticipated that any of the amount owed from
that firm will be received. The firm had made a provision last year in respect of this customer of
£10,000.

How will this be treated in this years financial statements?

6. X Ltd paid its annual insurances on 1st May 2012 of £5,000. On 1st May 2013 it paid £6,000.

What figures will appear in the company’s financial statements for the year ended 31st July 2013?

7. A firm has opening trade receivables of £250,000. One year later closing trade receivables were
£400,000. During the year bad debts of £50,000 were written off and amounts of £300,000 were
received from trade receivables.
What were the credit sales for the year?

8. Produce an Income Statement and a Statement of Financial Position from the figures below.

Plant and machinery 100,000

Accumulated depreciation on P & M 50,000
Motor vehicles 80,000
Accumulated depreciation on motor vehicles 50,000
Inventories 10,000
Trade receivables 12,000
Provision for doubtful debts 200
Bank balance (asset) 75,000
Trade payables 15,000
Mortgage (repayable in 10years time) 60,000
Share capital 70,000
Retained earnings (b/fwd) ???
Sales for year 300,000
Cost of sales 110,000
Wages Paid 25,000
Other expenses (inc provision change and depreciation for year) 66,000
9. A company with 100,000 50p ordinary shares is about to make a further share issue of 100,000
shares at £2 each. At the same time he is to revalue his land and buildings from £150,000 to
£400,000.
How will these transactions be reflected in all his financial statements?

10. If a retail company operates with a gross margin is 50%. What is the effective mark-up on its
products?

11. What do you understand by the term, Prudence?

MAKE SURE YOU ARE COMPLETE IN YOUR ANSWERS. SOME OF THEM MAY NEED SOME
RESEARCH, EITHER USING THE RECOMMENDED TEXT and/or OTHER RESOURCES.
FAF1 QUESTION BANK Q6

FURTHER REVISION QUESTIONS

1. What is depreciation? How would you account for the disposal of a non-current asset?

2. What are the three main financial statements used in the UK?

3. What is meant by working capital?

4. What is the difference between liquidity and profitability?

5. Dillon Ltd. began trading on 1st April 20X1 and on that date purchased equipment for £10,000
and 2 vans for £15,000 each. It has not bought any other assets since that date. The
company’s policy is to depreciate the vehicles over 4 years on a straight line basis with an
estimated residual value of £3,000 per van. The company depreciates equipment by 15% per
annum on a reducing balance method.
During the year ended 31st March 20X4 the company sells one van for £7,500 and an item of
equipment for £1,200. The item originally costed £1,500.
What entries would appear in the Income Statement and the Statement of Financial Position
for the year ended 31st March 20X4, in respect of these transactions?

6. a) On 1st June 2008 Y Ltd entered into a 1 year renewable lease of £12,000 rent per annum,
payable monthly on the first of the month. It also paid a returnable deposit of £2,000 in the
first month of the lease. What figures will appear in the financial statements of Y Ltd for the
year ended 31st December 2008 in respect of this lease?

b) Y Ltd also paid £16,000 in electricity charges in 2008. It had an accrual as at 31 st

December 2007 of £1,300. In February 2009 it paid an amount of £3,400 of which £1,800
related to December 2008. What figures will appear in the financial statements for the year
ended 31st December 2008 in respect of these charges?
FAF1 QUESTION BANK Q7

(Introduction to accounting examination 2014. THIS IS HARD, SO DON’T PANIC IF YOU DON’T
GET IT PERFECT OR RIGHT FIRST TIME)

‘The Eccles Cake’ is a bakery and café that rents some ideally positioned premises on the local high
street. Most sales are for cash but some local businesses have accounts for which they receive one
month’s credit. The accountant has recently been taken ill and the proprietor has asked for some help
in finishing off the latest accounts for the year ended 31 st December 2013. You have been sent the
following information, prepared by the accountant before he was taken ill.

Statements of Financial Position for Years Ended 31 December:

2013 2012

£ £ £ £ £ £

ASSETS

Non-current assets Cost Depn. NBV Cost Depn. NBV

Motor vehicle 21,600 6,700 14,900 18,700 12,809 5,891

Fixtures and fittings 34,700 6,250 28,450 13,000 3,500 9,500

43,350 15,391

Current Assets

Inventories 3,400 2,666

Trade receivables 9,533 5,677

Cash at bank - 2,430

12,933 10,773

TOTAL ASSETS 56,283 26,164

EQUITYAND LIABILITIES

Equity

Capital invested 30,000 15,000

Retained profits 16,021 2,979

46,021 17,979

Current Liabilities

Bank overdraft 5,522 -

Trade payables 4,590 7,845

Accrual 150 340

 10,262 8,185

TOTAL EQUITY AND LIABILITIES 56,283 26,164

1) The motor vehicle is depreciated on a reducing balance basis and fixtures and fittings are
depreciated on a straight line basis. None are fully depreciated as at 31 December
2013.It is the business’s policy to depreciate a full year’s depreciation in the year of
purchase but none in the year of sale.

2) The Eccles Cake makes use of a motor vehicle for the delivery of sandwiches to local
businesses. During 2013 the business traded the old vehicle in for a new one. £15,000
was paid and there was a trade-in allowance of £6,600 for the old vehicle. There were no
other disposals of non-current assets during the year.

3) The following amounts were paid out of the business bank account:
£4,566 of advertising costs,
£5,600 of professional fees,
£16,787 of other expenses (including telephone)
£24,000 salary of the shop and café manager

4) The accruals for 2012 and 2013 both relate to telephone costs.

5) Cash takings banked during 2013 totalled £456,909, after payments detailed in note 6 below.
Cheques received in respect of credit sales, totalling £89,966 were banked separately. All sales are
made at a gross profit margin of 20%.

6) The owner of The Eccles Cake withdrew £32,000 cash from the till (prior to banking) for his
own use during the year. He also used £15,000 of the cash to pay the café waiters. (Note: if it's
taken from the till and wasn't already there, it can only have come from cash sales which must be
added on to your calculated credit sales to give total sales.)

.
REQUIRED

(a) Prepare an Income Statement and a Statement of Cash Flows, for The Eccles Cake, for
the year ended 31 December 2013.

NOTE: THIS IS TOUGH, BUT IF YOU CAN DO IT YOU ARE SERIOUSLY WELL PLACED IN
GETTING ON TOP OF THE MATERIAL
[20 marks]
FAF1 QUESTION BANK Q8

“Budgets are essential and always bring organisational benefit." Discuss this statement.
FAF1 QUESTION BANK Q9
(MANAGERIAL FINANCE EXAM 2014. MD)

Katherine Wheels Ltd is a new small business engaged in manufacture of high-tech bicycle wheels for
the trade. The business hopes to grow, but currently has orders for a single product, the ‘big wheel’.
The company’s overdraft limit is £10,000 and the owners wish to ensure that this is not exceeded
between 1 July 2014 and the end of December 2014.

Each ‘big wheel’ has the following selling price and direct costs:

£
Selling price 100
Direct material (45)
Direct labour (10)
Variable production expenses (5)
Variable selling expenses (10)
Contribution £30

Predicted sales quantities for the next 6 months are:

Sales
Number
July 2014 250
August 2014 280
September 2014 300
October 2014 340
November 2014 360
December 2014 400

Extracts from the latest financial statements, as at 30 June, 2014

Non-Current Assets at cost 80,000

Accumulated Depreciation 20,000
Inventory 2000
Trade receivables due in July 2014 13,200
Capital 20,000
Retained Earnings 32,290
Loan 9000
Bank overdraft 1,000
Trade payables due to be paid in July 2014 10,500
Variable selling expenses due July 2014 2,200
Telephone payable in July 2014 210
Notes:

1. 40% of sales are expected to be for cash and the remaining sales will be on 1 month’s credit.

2. Purchases of direct material needed for that months sales are made in the month of sale and
Katherine Wheels Ltd takes one month’s credit from its suppliers.

3. Direct labour cost and variable production expenses are paid for in the month in which they
are incurred.

4. The variable selling expenses are paid in the following month.

5. Fixed costs of £4,500 are paid each month.

6. Katherine Wheels Ltd has a £9,000 loan on which interest of 10% is payable each year in two
equal instalments on 30 June and 31 December.

7. The company is planning to purchase additional machinery on 1 July, 2014 at a cost of

£12,000 payable in three equal instalments in July, August and September 2014.

8. The company is also planning to purchase a new delivery van costing £8,000 which will be
paid in full in August 2014.

9. Taxation for the 6 months is estimated to be £4,100 and will be paid on 31 December 2014.

10. Buffer inventories are held in case of emergency amounting to £2000 at cost. These remain
unchanged throughout.

11. Depreciation is charged every 6 months on a straight line per annum basis over 8 years on
cost and is not included in the fixed costs in note 5. Assets are depreciated for a full half-year
in their half-year of purchase. That is, any assets bought between July and December are
charged depreciation for the period in December’s financial statements.

12. Telephone expenses for the period are £240. These are to be paid in January 2015.

Required:

(a) Prepare a cash budget for the six months to 31 December 2014. [13 marks]

(b) Based on your answer to (a), suggest five realistic and meaningful actions that Katherine
Wheels’ managers might take. [5 marks]

(c) Construct a Statement of Financial Position for Katherine Wheels at 31 December 2014 and a
Statement of Comprehensive Income for the six months then ended.[12 marks]
FAF1 QUESTION BANK Q10
(MSC ACCOUNTING AND FINANCE SM)

Note to FAF1 Students - this is an MSc question so you are not expected to be able to do
or comment on all the ratios in part (c), only those you have covered in FAF1. You also
will not be able to make some of the detailed comments given in the answer. Just take
from the answer the comments that you can understand relevant to the ratios covered
in your course. You should be able to work through parts (a) and (b)

(a) Describe three groups of users of accounting information, comparing and contrasting the
needs that they would require from such information.

(b) At 30 June 2008 a company had a net book value of plant and equipment, of £120,800.
During the year ended 30 June 2009 it sold equipment for £34,000 that it had originally purchased in
July 2006 for £100,000. During the year ended 31 June 2009 equipment of £140,000 was also
purchased. Depreciation is charged at 25% using the reducing balance method. You may assume
there is a full years depreciation in the year of purchase but none in the year of sale.

Required:

a) What depreciation charge will appear in the Statement of Comprehensive Income for the year
ended 30 June 2009.
b) What other entry will appear in the Statement of Comprehensive Income in respect of the
above transactions.
c) What is the net book value of the equipment at 30 June 2009.

(c) Kenley PLC is a medium size operator in a fast growing high-tech electronics business. The
market for this business has grown by over 30% in the last year and is expected to continue growing
rapidly in the near future. Historically this industry sector has operated with a gross profit ratio of 20%.
Below are the most recent Statement of Comprehensive Income, Statement of Changes in Equity and
Statement of Financial Position, together with comparative figures for the previous year.
Required:
Write a report on the company’s financial position, making appropriate use of accounting ratios, for
the benefit of a shareholder in the company. Include notes of where you require further information.
[18 marks]

Statement of Comprehensive Income for the year ended 31 December

2007 2008
£m £m
Revenue 32.9 40.8
Cost of sales 24.0 34.8
Gross profit 8.9 6.0
Operating expenses 5.0 10.1
Finance costs - 1.0
Profit before tax 3.9 (5.1)
Income tax expense 1.0 -
Profit (Loss) for the year 2.9 (5.1)

(CONTINUED OVER PAGE)

KENLEY ( CONT)

Statement of Financial Position as at 31 December

2007 2008
ASSETS £m £m
Non-current assets
Land and buildings - 15.4
Plant and equipment 20.4 18.3
20.4 33.7
Current assets
Inventories 3.5 1.5
Trade receivables 7.9 11.9
Cash 6.4 -
17.8 13.4
Total Assets 38.2 47.1

EQUITY AND LIABILITIES

Equity
Share capital 0.5 0.5
Retained earnings 28.2 23.1
28.7 23.6
Non-current liabilities - 10.5
Current liabilities
Trade payables 6.0 10.9
Other liabilities 3.5 -
Bank overdraft - 2.1
9.5 13.0
Total Equity and Liabilities 38.2 47.1

NOTES
1. The dividend, as shown in the Statement of Change in Shareholders’ Equity, for the year
ended 31 December 2008 was nil (31st December 2007 - £2m.)
2. Operating expenses includes depreciation of £4m in the year to 31st December 2008 (31st
December 2007 - £2m).