AF101 Exam

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AF101: INTRODUCTION TO ACCOUNTING AND

FINANCIAL MANAGEMENT PART I

SCHOOL OF ACCOUNTING AND FINANCE

Final Examination
Semester 1, 2017

On-Campus & Print Mode


Duration of Exam: 3 hours + 10 minutes

Reading Time: 10 minutes

Writing Time: 3 hours

Instructions:

1. This paper has 2 sections. All questions are compulsory.


2. Answer all your questions in the answer booklet provided. Multiple Choice
questions to be answered on extra paper provided and attached to answer
booklet.
3. This examination comprises 50 % of overall mark.
4. There are 16 pages to this examination paper.
5. This is a closed book examination.
6. Materials allowed (Only calculator )
7. Assume GST of 10% in all GST related questions.
8. Relevant formulae is provided on page 16.
SECTION A MULTIPLE CHOICE QUESTIONS 25 MARKS
Answer in the ‘multiple choice grid’ provided by circling the correct answer.

1. Below is an extract from an income statement.

Beginning inventory 14 000

Gross sales 36 000

Freight-in 1 500

Sales returns 2 000

Ending inventory 12 700

Purchases 18 200

The cost of sales is:

a. $16 900.
b. $17 500.
c. $19 500.
d. $21 000.

2. If inventory prices are rising the method of inventory valuation that gives the highest
profit and the highest ending inventory is:
a. FIFO.
b. LIFO.
c. Weighted average.
d. Perpetual method.

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3. Millibrand Co uses a periodic inventory system with the specific identification method of
cost assignment.

Date Units Unit cost

Beginning inventory July 1 1000 9

Purchase 12 2000 11

Purchase 26 1000 12

On 27 July 500 units from beginning inventory and 1000 units from the 12 July purchase
were sold. What was the value of ending inventory at 31 July?

a. $20 500
b. $27 500
c. $23 000
d. $28 500

4. Value Vehicles is a car dealership. One of its models was used as a demonstrator during
the year. Presented below is information relating to the demonstrator as of 30 June 2016,
the end of the current financial year.

Normal sales price (net of GST) $29 990

Original cost (net of GST) 22 000

Estimated sales value in existing condition 23 500

Estimated selling and disposal cost 1 800

From the information, determine the value at which the demonstrator should be reported
in the 30 June 2016 financial statements.

a. $20 200
b. $28 190
c. $21 700
d. $22 000

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5. The primary purpose of (cash) settlement discounts is to:
a. convince the customer to buy the goods on credit.
b. provide discounts to customers who purchase large volumes of goods.
c. to encourage customers to pay for purchases in cash.
d. encourage the customer to settle their account early.

6. Under the perpetual inventory system what is the correct entry to record the cost of the
sale of 2 reclining chairs sold to a customer at $1100 per chair including GST? The items
were originally purchased on credit at $500 each plus GST of $50 per chair.

a. Debit cost of sales $2200; credit sales $2200


b. Debit cost of sales $1000; debit GST outlays $100; credit inventory $1100
c. Debit cost of sales $2000; credit inventory $2000
d. Debit cost of sales $1000; credit inventory $1000

7. According to the Conceptual Framework for the Preparation and Presentation of


Financial Statements, liabilities are:
a. past sacrifices of economic benefits;
b. future sacrifices of economic benefits that the entity is presently obliged to make as
a result of part transactions or events.
c. future sacrifices of economic benefits that the entity may have to make if another
event occurs;
d. past sacrifices of economic benefits that an entity has made as a result of past
transactions;

8. Which of these does not fit the IAS 37/AASB 137 definition of a provision as a liability
of uncertain timing or amount?

a. Provision for depreciation


b. Provision for warranties
c. Provision for environmental damage
d. Provision for long-service leave

9. Contingent liabilities are disclosed in financial reports:


a. in the liability section of the balance sheet.
b. as deductions from the asset accounts they relate to.
c. in footnotes to the reports.
d. in the financial expense section of the income statement.

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10. Kong car sales provides a one year labour and parts warranty with every car sold and at
the start of 2017 had a provision of $16 000 to cover warranty claims. On 30 March 2017
$2700 was paid out for repairs for vehicles under warranty. What is the correct
accounting entry to record the payment of the claims?
a. Debit warranty expense $2700; credit provision for warranties $2700
b. Debit provision for warranties $2700; credit bank $2700
c. Debit provision for warranties $2700; credit warranty expense $2700
d. Debit warranty expense $2700; credit bank $2700

Use the information below to answer questions 11 - 13.

ABC Ltd was registered as a corporation on 1 July 20X7. On 4 July 20X7, ABC Ltd issued a
prospectus offering 100 000 ordinary shares at an issue price of $2.50 each, payable $1.50 on
application and $1.00 on allotment.

Application closed on 1 August 20X7 with the company having received applications for 110 000
shares. The shares were allotted on 15 August 20X7, with the over-subscription amount being
refunded to unsuccessful applicants. All allotment monies were received by 31 August 20X7.

11. After application, and prior to allotment, the balance in the Application account would be:
a. $150 000 Debit;
b. $150 000 Credit;
c. $165 000 Debit;
d. $165 000 Credit.

12. Following the allotment the balance in the Share Capital account would be:
a. $100 000 Credit;
b. $250 000 Credit;
c. $100 000 Debit;
d. $250 000 Debit.

13. Following the allotment, the amount transferred from the Cash Trust account to the Cash
account would be:
a. $150 000;
b. $110 000;
c. $100 000;
d. $15 000.

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14. Underwriting and other share issue costs paid to a broker or a financial institution should
be reported in a balance sheet as:

a. a liability;
b. an asset;
c. an increase in retained earnings;
d. a reduction of share capital.

15. If a dividend of 18c per share is declared how much will a shareholder who owns 3000
shares receive if the shares were issued for $6 each and are currently selling on the stock
market at $5.40 each?
a. Nil
b. $496
c. $540
d. $1800

16. When a share dividend of 20 000 $1 shares, is declared and paid, the effect on total equity
in the company balance sheet is a(n):

a. increase in share capital of $20 000 and a decrease in reserves of $20 000, i.e. no
change in total equity.
b. increase in total equity of $20 000.
c. decrease in total equity of $20 000.
d. increase in the number of issued shares and a decrease in the book value of each
share.

17. What is the basic journal entry to create a general reserve?


a. Dr General reserve, Cr Retained earnings
b. Dr Profit or loss summary, Cr General reserve
c. Dr Retained earnings, Cr General reserve
d. Dr Income, Cr General reserve

18. Profit before finance costs is used in calculating return on total assets because:
a. the efficient use of resources should be examined independently of the method of
financing.
b. it is simpler to calculate than profit after deducting finance costs.
c. interest rates are hard to predict.
d. interest is a tax deduction for a company.

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19. Belfast Water Works had a profit of $300 000 before tax, after deducting $27 000 in interest
expense. Belfast's liabilities and equity total $2 725 000. Return on total assets, before
finance costs and tax is:
a. 10.4%.
b. 11.0%.
c. 12.0%.
d. unable to be calculated from the information provided.

20. Indooroopilly & Sons reports:

Total assets $ 950 000

Profit 80 000

Current liabilities 570 000

If current assets = 40% of total assets Indooroopilly's current ratio is:

a. 1 to 2.
b. 3 to 2.
c. 2 to 1.
d. 2 to 3.

21. A company has a current ratio of 3:1. Which action will decrease this ratio?
a. Issue of long-term debentures
b. Sale of equipment for cash
c. Declaration of a dividend
d. Collection of an account receivable

22. Kaplan has a current ratio of 2.5 to 1 and current liabilities of $12 000. If Kaplan has $9000
of inventory what is the quick ratio?
a. 2.25 to 1
b. 2.00 to 1
c. 1.75 to 1
d. 1.50 to 1

23. An increase in the inventory turnover ratio is normally considered to be favourable but
could be unfavourable if it means:
a. inventory is less likely to become obsolete.
b. the firm not carrying enough inventory to meet its customer’s needs.
c. liquidity is greater.
d. storage costs of inventory are lower.

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24. Fricker’s financial records reveal this information at 31 December 2016.

Net sales for 2016 $105 000

Cost of sales for 2016 $68 000

Ending inventory $15 000

Beginning inventory $19 000

The number of days taken to turn over average inventory for 2016 is:

a. 61 days.
b. 71 days.
c. 76 days.
d. 91 days.

25. Depreciation charged at the end of the accounting period is what type of entry?

a. Closing entry
b. Reversing entry
c. Adjusting entry
d. Correcting entry

~ Continue to Section B~

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SECTION B PROBLEM SOLVING QUESTIONS 75 MARKS
_____________________________________________________________________________________

--- Clearly show ALL workings done for Questions 26 - 28

QUESTION 26 RECEIVABLES 15 MARKS

Mountainview Furniture Ltd sells outdoor furniture settings on credit. The accounting records at
30 June 2017 reveal the following. The company is registered for GST.

Credit sales (for year) $1 070 000


Credit sales returns and allowances (for year) 90 000
Accounts receivable (balance 30 June 2017) 326 500
Allowance for doubtful debts (credit balance 30 June 2017) 1 500

In the past, the company’s yearly bad debts expense had been estimated at 2% of net credit sales
revenue. It was decided to compare the current method with an ageing of the accounts receivable
method. The following analysis was obtained with respect to the accounts receivable:
% estimated
Balance uncollectable
Accounts not yet due $175 600 1
2
Accounts overdue:10–30 days 61 000 2
31–60 days 44 000 10
61–120 days 25 400 25
121 days and over 20 500 40

$326 500
Required: [round off to two decimal points]

A. Calculate the Bad Debts Expense at 30 June, 2017 under:

1. the net credit sales method


[2 marks]
2. the ageing of accounts receivable method.

[5 marks]

B. Show the journal entries at 30 June 2017 under:

1. the net credit sales method


[1.5 marks]
2. the ageing of accounts receivable method.

[1.5 marks]

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C. Prepare the entry to write off the account of Oscar Ryan in July 2017, $2 650.

[3 marks]

D. Briefly explain how the Allowance for Doubtful Debts account might have a debit
balance before the end-of-period adjustment is made.
[2 marks]

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QUESTION 27 NON-CURRENT ASSETS 30 MARKS

This question has TWO parts – attempt both A & B.

PART A: DEPRECIATION METHODS 12 MARKS

Powerhouse Ltd purchased an excavator machinery on 2 January 2015, at a cost of $650 000 plus
GST. The Company also paid stamp duty of $2 620, and registration and third-party insurance of $940.
Costs of removing and installation at its location cost $850. The company financed this purchase by taking
a loan from the local bank.

The machinery is depreciated using the reducing balance method over a useful life of 8 years with
a residual value of $60 000.

Powerhouse Ltd financial year end is 31 December.

Required: [Round off to nearest whole number]

1. Prepare journal entry to record the purchase of the machinery on 2 January 2015

[3 marks]

2. Calculate depreciation expense for the excavator machinery for 2015 and 2016.

[6 marks]

4. The company manager curiously asks the accountant, “Why is the company using the
reducing balance method? Briefly explain to the company manager the reason of using
this method over the other methods of depreciation available.

[3 marks]

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PART B: REVALUATION & SALE 18 MARKS

On 1 January 2013, Hong Kong Ltd acquired two identical pieces of equipment for a total cost of
$600 000 plus GST by cash. It was estimated that each item would have a useful life of 8 years
and a residual value of $50 000 each. The company uses the straight-line method of depreciation
and its end of reporting period is 30 June.

On 1 July 2019, the company changed its accounting policy and revalued each item of
equipment upwards by a total of $65 000, based on an independent valuer’s report, to fair value.
There was no need to revise useful lives or residual amounts.

On 31 December 2020, one of the items of equipment was sold for $130 000 cash plus GST.

Required:

Prepare entries (in general journal format) in relation to the equipment from acquisition date to
31 December 2020:

i. 1st January, 2013


[1.5 marks]
th
ii. 30 June, 2013
[2 marks]
th th
iii. 30 June, 2014 - 30 June, 2019
[1.5 marks]
st
iv. 1 July, 2019
[3.5 marks]
th
v. 30 June, 2020
[5 marks]
st
vi. 31 December, 2020

[4. 5 marks]

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QUESTION 28 STATEMENT OF CASH FLOWS 30 MARKS

HIGHLAND LIMITED
INCOME STATEMENT FOR THE YEAR ENDED 30 JUNE, 2017
$ $

Sales 421,000

Cost of Goods Sold 151,000

Gross Profit 270,000

Less: Operating Expenses

Wages 100,000

Insurance 13,000

Interest 20,000

Depreciation 20,000

Loss on sale of equipment 4,000

Other Expenses 37,000 194,000

Net operating profit before tax 76,000

Income tax expense 27,000

Net operating profit after tax 49,000

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HIGHLAND LIMITED
COMPARATIVE BALANCE SHEETS AS AT 30 JUNE 2016 & 2017
2017 2016
$ $
CURRENT ASSETS

Cash 25,000 40,000

Accounts Receivable 90,000 70,000

Inventory 62,000 45,000

Prepaid Insurance 8,000 5,000

Total current assets 185,000 160,000


NON-CURRENT ASSETS

Land 400,000 200,000

Equipment (at cost) 280,000 150,000


- -
Less: Accumulated depreciation 58,000 45,000

Total non-current assets 622,000 305,000

TOTAL ASSETS 807,000 465,000


CURRENT LIABILITIES

Trade Creditors 60,000 40,000

Wages Payable 4,000 7,000

Taxes Payable 6,000 5,000

Interest Payable 11,000 10,000

Total current liabilities 81,000 62,000


NON-CURRENT LIABILITIES

Loans Payable 250,000 200,000

TOTAL LIABILITIES 331,000 262,000

NET ASSETS 476,000 203,000

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SHAREHOLDER'S EQUITY

Issued Capital 367,000 163,000

Asset Revaluation Reserve 50,000 -

Retained Profits 59,000 40,000

TOTAL SHAREHOLDER'S EQUITY 476,000 203,000

ADDITIONAL INFORMATION:

i. All sales and purchases are on credit.


ii. Other Expenses was all paid for cash during the year.
iii. Loans payable of $150,000 was paid back during the year.
iv. The Land was revalued upwards by $50,000.
v. Equipment that cost $30,000 was sold during the year for $19,000 cash.
vi. Assume cash purchases on all non-current assets.
vii. There was a dividend payment during the year.

REQUIRED [Show all workings]


a. Calculate the following:
i. Cash receipts from accounts receivable. (2 marks)
ii. Cash paid to trade creditors. (2 marks)
iii. Cash paid for insurance. (2 marks)
iv. Cash paid for wages. (2 marks)
v. Cash paid for interest. (2 marks)
vi. Cash paid for taxes. (2 marks)
vii. Cash paid for land. (2 marks)
viii. Cash paid for equipment. (2 marks)
ix. Cash received from loan. (2 mark)
x. Cash paid for dividends. (2 mark)

b. Using the direct method, show the ‘Cash flows from operating activities’ section only.
[6 marks]
c. The company director argues to the accountant, “We have the Income Statement and the
Balance Sheet, what’s the purpose of preparing the Cash Flow Statement.” Briefly,
explain to the director TWO (2) reasons for preparing the Cash Flow Statement.
[4 marks]
~ The End ~

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Relevant Formulae

1) Return on total assets = Profit before income tax + Finance costs


Average total assets

2) Profit Margin = Profit (after income tax)


Revenues

3) Current ratio = Current assets


Current liabilities

4) Quick ratio = Cash assets + Receivables


Current liabilities

5) Asset turnover ratio = Revenues


Average total assets

6) Debt ratio = Total liabilities


Total assets

7) Times interest earned = Profit before income tax + Finance cost


Finance costs

8) Receivables turnover = Net Sales Revenue


Average receivables balance

9) Inventory turnover = Cost of sales


Average inventory balance

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