18-May-2016 10:00AM

4SSMN135

King’s College London

This paper is part of an examination of the College counting towards

the award of a degree. Examinations are governed by the College
Regulations under the authority of the Academic Board.

BSC BUSINESS MANAGEMENT / BSC ECONOMICS & MANAGEMENT /

BA FRENCH & MANAGEMENT / BA GERMAN & MANAGEMENT / BA SPANISH &
MANAGEMENT EXAMINATION

4SSMN135 ACCOUNTING & FINANCIAL MANAGEMENT

EXAMINATION PERIOD 2 (May 2016)

TIME ALLOWED: THREE HOURS

INSTRUCTIONS TO CANDIDATES:
1. Answer SIX questions in total.
2. Candidates must answer THREE questions from SECTION A and THREE questions
from SECTION B.
3. Answer each question on a new page of your answer book and write its number
in the space provided.

SECTION A: Financial Accounting 49.5 marks

SECTION B: Management Accounting and Financial Management 49.5 marks
Overall exam paper presentation 1 mark

CALCULATORS MAY BE USED. ONLY THE FOLLOWING MODELS ARE PERMITTED:

Casio fx83
Casio fx85.

DO NOT REMOVE THIS EXAM PAPER FROM THE EXAMINATION ROOM

TURN OVER WHEN INSTRUCTED

2016 © King’s College London
 4SSMN135
Answer THREE questions from Section A (there are multiple parts to
each question; you must attempt all parts).

SECTION A: FINANCIAL ACCOUNTING

1. Alpha Football Club Ltd is a first division sports team in England.

The Finance Director is looking to provide the management team
with a January transfer budget and as part of this process the club’s
board wish to review how much gross profit has been made on the
sale of the home shirt this season as a consequence of falling
materials cost. The following information has been provided:

Beginning inventory and purchases

Units Cost Total Sales Units
£ £
August Inventory 100,055 21.0 2,101,155
August Sale 90,800
September Purchase 70,000 18.6 1,302,000
September Sale 10,022
October Purchase 10,000 13.2 132,000
October Sale 10,050
November Purchase 60,000 10.8 648,000
November Sale 50,455
December Purchase 80,000 7.1 568,000
December Sale 120,350
Total 320,055 4,751,155 281,677

Alpha Football Club Ltd home shirt has a selling price of £50.

a) Please calculate the cost of sales and closing inventory figure for
Alpha Football Club Ltd using each of the three different methods of
costing inventories (i.e. FIFO, LIFO and AVCO).
(12 marks)

b) Please calculate the gross profit that Alpha Football Club Ltd has
achieved for the sale of the home football shirt under each of the
three different approaches of costing inventories (i.e. FIFO, LIFO
and AVCO).
(4.5 marks)

Total marks for question 1 (16.5 marks)

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2. Bravo Rentals Ltd is a car hire company operating in the city centre
of London and contemplating purchasing a luxury executive car to
add to their current fleet of vehicles.

After reviewing a number of potential options, the car that the

management team have identified for purchase is priced at £40,000.
It is the strategy of Bravo Rentals Ltd to keep the car for five years.
The management team estimate that based upon the very high
millage at the end of this period, the residual value of the planned
executive car would be only £1,250.

a) ‘Deprecation is a process of allocation and not valuation of the

asset’. What is meant by this statement?
(2.5 marks)

b) To support the management team with their business decision,

prepare a table of deprecation charges and net book value for each
of the five years of the executive car using the STRAIGHT LINE
depreciation method.
(5 marks)

c) To support the management team with their business decision,

prepare a table of deprecation charges and net book value for each
of the five years of the executive car using the REDUCING BALANCE
depreciation method.
(5 marks)

d) Using the depreciations table you produced in Q2b and Q2c to

display the deprecation charges and net book value, demonstrate
the impact on the statement of financial performance (income
statement) and the statement of financial position (balance sheet)
after ONE FULL YEAR of ownership based upon using the two
different approaches to depreciation.

Please show your answers for each depreciation method separately,

so that the management team can observe how the non-current
assets and operating expenses will be accounted for differently
based up the two different method of cost allocation for the loss in
value of the car after ONE FULL YEAR of ownership.
(4 marks)

Total marks for question 2 (16.5 marks)

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3. The following are the summarised statement of financial position of
Charlie Ltd for the past year.

Statement of financial position as at 31st December

ASSETS
Non-current assets 16,500,000
Inventories 1,500,000
Trade receivables 4,450,000
Bank 50,000
Total assets 22,500,000

EQUITY AND LIABILITIES

Current liabilities 1,500,000
Long term liabilities 8,000,000
Share capital (£1 ordinary shares) 8,000,000
Retained Earnings 5,000,000

Total equity and liabilities 22,500,000

a) What is meant by a reserve? Distinguish between a revenue reserve

and a capital reserve.
(4.5 marks)
b) What is meant by a rights issue?
(2 marks)

c) Using the information above, prepare a statement of financial

position (balance sheet) for Charlie Ltd immediately after a one-for-
four rights issue at a price of £1.80 per share.
(10 marks)

Total marks for question 3 (16.5 marks)

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4. The following are the summarised financial statements of Delta Ltd
for the past year.
Statement of financial performance ending 31st December
£
Revenue 5,000,000
Cost of sales (3,500,000)
Gross profit 1,500,000
Operating expenses (500,000)
Operating profit 1,000,000

Statement of financial position as at 31st December

ASSETS
Non-current assets 10,000,000
Inventories 1,500,000
Trade receivables 4,450,000
Bank 50,000
Other current assets 2,500,000
Total assets 18,500,000

EQUITY AND LIABILITIES

Long term liabilities 8,000,000
Current liabilities 1,500,000
Share capital 8,000,000
Retained Earnings 1,000,000

Total equity and liabilities 18,500,000

a) Using the financial ratios you have learned, comment on the

liquidity, profitability, efficiency and gearing of Delta Ltd for the
past financial year.

(Use any 1 ratio for each category).

(12 marks)
b) Explain three limitations of ratio analysis.
(4.5 marks)

Total marks for question 4 (16.5 marks)

TOTAL MARKS FOR SECTION A (49.5 MARKS)

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Answer THREE questions from Section B (there are multiple parts to
each question; you must attempt all parts).

SECTION B: MANAGEMENT ACCOUNTING AND FINANCIAL

MANAGEMENT

5. Welco Ltd specialises in the manufacture of dry cider. The 1 litre

bottle sells for £3.00 each. The budget forecast shows the following
sales volumes:

Month Litres
August 400,000
September 340,000
October 300,000
November 260,000
December 320,000

Company policy is for closing stock levels of cider to be 20% of next

month’s sales. Stock of cider on 1 September was 80,000 litres. For
raw materials, stocks of apples, the policy is for closing stock to be
50% of next month’s usage. On 1 September, the stock of apples was
2,200 tonnes.

On average, 15 kilograms (kgs) of apples are needed to produce 1

litre of cider. Note: 1 tonne = 1,000 kg

a) For the period September to November, prepare i) the sales budget

in units and £; ii) the production budget in litres; iii) the material
usage and purchase budget in tonnes.
(12.5 marks)

b) Define the term ‘budget’ and explain the differences between a

budget and a forecast.
(4 marks)

Total marks for question 5 (16.5 marks)

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6. JCM Ltd produces a single range of refrigerators. It sold 6,250 units
in 2015 with the following results:

£ £
Sales 156,250
Variable costs 93,750
Fixed costs 37,500 131,250
Profit before tax 25,000
Less: taxation (40%) 10,000
Net profit after 15,000
taxation

In an effort to improve its product during the year 2015, JCM Ltd is
considering replacing a component, which currently costs £2.50 with a
new, more efficient component, which costs £4.50. At the same time,
it is planning to purchase a new machine costing £2,500.

a) Calculate the break-even point for the year 2015 expressed in sales
revenue (£).
(4 marks)

b) Calculate the number of units JCM Ltd would have had to sell to
earn of profit after taxation of £21,000.
(4 marks)

c) Calculate the new break-even point that will result if JCM Ltd
makes the product improvement and purchases the new machinery
in: (i) units of output; and (ii) sales revenue (£).

(5.5 marks)

d) Define the following terms: break-even point; margin of safety;

operating leverage.
(3 marks)

Total marks for question 6 (16.5 marks)

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7. Greek Ltd is evaluating two mutually exclusive projects: the Alpha

and the Beta. The company’s cost of capital is 8%. These projects
have the following cash flows. Greek Ltd can only invest in one
project.

Cash Alpha Beta

flows
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)
(8 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 relative merits of each method.
(6.5 marks)

Total marks for question 7 (16.5 marks)

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8. Furniture Trader Ltd makes cabinets and armchairs. Here are the
details of its May production:

(i) Cabinets

Budgeted Actual
Number of 15,000 16,000
cabinets (units)
Kilos of material 120,000 140,000
(total)
Price per kilo (£) 0.70 0.75

(ii) Armchairs

(a) Budgeted: 600 armchairs at 4 direct labor hour per chair.

Labor rate is £4.80 per hour;
(b) Actual production: 700 armchairs for a total of 3,000 hours.
Total actual labor cost is £13,500.

a) Calculate direct materials price and quantity variance for cabinets.

Indicate whether each variance is favorable or unfavorable.
(6.5 marks)

b) Calculate direct labor rate and efficiency variance for armchairs.

Indicate whether each variance is favorable or unfavorable.
(6.5 marks)

c) Identify and explain the possible causes leading to labour efficiency

variances.
(3.5 marks)

Total marks for question 8 (16.5 marks)

TOTAL MARKS FOR SECTION B (49.5 MARKS)

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Table to be used for Section B, Question 7

Final Page
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