AD1101 Financial Accounting. Semester 1 Examination 2014-2015 ...
ATTENTION: The Singapore Copyright Act applies to the use of this document. Nanyang Technological University Library
AD1101 NANYANG TECHNOLOGICAL UNIVERSITY
SEMESTER 1 EXAMINATION 2014-2015
AD1101 -Financial Accounting
November 2014
Time Allowed: 2 Y2 hours
INSTRUCTIONS
1
This paper contains THREE (3) questions and comprises SIX (6) pages and ONE (1) appendix of ONE (1) page.
2
Answer ALL THREE (3) questions.
3
The number of marks allocated is shown at the end of each question.
4
Begin your answer to each question (not each part) on a separate page of the answer book.
5
Please write clearly. Undecipherable writing cannot be marked.
6
Answers will be graded for content and appropriate presentation. Show complete workings where appropriate.
QUESTION 1 BEGINS ON PAGE 2
1
ATTENTION: The Singapore Copyright Act applies to the use of this document. Nanyang Technological University Library
AD1101 Question 1
The following information regarding Lotus Blue Pte Ltd (Lotus Blue) as at 31 December 2013 has been provided to you.
Accounts Receivable Allowance for impairment of AR
31112/2013
31112/2012
14,000 (3,000) 11,000
16,200 (3,200) 13,000
In addition to sales on credit, Lotus Blue also sold $50,000 worth of goods for cash and wrote-off an uncollectible accounts receivable of $2,900. The company's average collection period is 36.5 days. Required (i)
Determine the total revenue reported by Lotus Blue for the year ended 31 December 2013. (4 marks)
(ii)
Compute the total cash collected from its customers during the year ended 31 December 2013. (3 marks)
(iii)
Prepare the journal entries to record the total revenue earned, collection of cash from its customers, and impairment of accounts receivable (if any) for the year 2013. (8 marks)
Lotus Blue Pte Ltd uses a periodic inventory system. In its physical stock count taken at 31 December 2012, Lotus Blue's employees failed to count the merchandise in the store's window display. The cost of these merchandise amounted to $2,300. Lotus Blue reported a pretax income of $267,000 and $355,000 for the financial year ended 31 December 2012 and 31 December 2013 respectively. Required (iv)
Compute Lotus Blue's correct pretax income for the year ended 31 December 2012 and 2013. (4 marks)
Note: Question No. 1 continues on page 3 2
ATTENTION: The Singapore Copyright Act applies to the use of this document. Nanyang Technological University Library
AD1101 Question 1 (continued) (v)
Determine the effect of the inventory error on the total pretax income over the 2 years ended 31 December 2013. (2 marks)
(vi)
Does it matter whether the inventory error is corrected or not? Explain. (4 marks) (TOTAL: 25 marks)
Question 2
On 1 January 2014, Parbury Ltd, a company incorporated in Singapore, purchased a plot of freehold land for $100,000 in Upper East Coast Road, Singapore with the intention of keeping it for capital appreciation. The company is undecided on whether to use the fair value model or the cost model of accounting for investment property under FRS 40 Investment Property. As the company's senior manager, you have been tasked with taking this decision. After a study of the property market, you concluded that property prices in the east of Singapore is expected to increase by 10% per year for the next two years. The company's financial year end is 31 December. Required (i)
Assuming the company's intention is to maximise profits in the next two years, which model should the company adopt to account for its investment property? Explain how you arrive at this decision. (4 marks)
(ii)
Based on the decision taken in requirement (i), prepare the necessary journal entries to account for the investment property on 1 January 2014 and 31 December 2014. (4 marks)
(iii)
Would your decision be different if the company's intention is to maximise net assets? Provide a reason for your answer. (2 marks)
Note: Question No.2 continues on page 4 3
ATTENTION: The Singapore Copyright Act applies to the use of this document. Nanyang Technological University Library
AD1101 Question 2 (continued)
On 1 January 2014, Parbury Ltd is considering an upgrade to a key machine that is used in the manufacture of high power bulbs. The machine was purchased on 1 January 2011 for $100,000 and its useful life was estimated to be 5 years with no residual value. The company uses the straight-line depreciation method to depreciate its machines. The upgrade of the machine will improve its capacity and increase the useful life of the machine by another 3 years. The cost of the upgrade is $40,000. The distributor of the machine, while happy to upgrade the machine, provides an alternative in which Parbury purchases a new machine for $72,000. The new machine will have a useful life of 6 years and no residual value. He offers to pay $32,000 for the old machine. The quality of the finished product and annual capacity for both machines are expected to be the same. Required (iv)
Show the impact of the two alternatives on the company's statement of profit or loss and statement of cash flows for the year ended 31 December 2014. (12 marks)
(v)
Assuming Parbury's management make their decision based on maximising the reported profit for the year ended 2014, which alternative will they select? Explain whether their decision is an optimal decision for the company. (3 marks)
(vi)
Prepare the necessary journal entries on 1 January 2014 and 31 December 2014 to record the accounting effects of both alternatives, assuming the upgrade of the old machine or the purchase of the new machine took place on 1 January 2014. (10 marks) (TOTAL: 35 marks)
4
ATTENTION: The Singapore Copyright Act applies to the use of this document. Nanyang Technological University Library
AD1101 Question 3 Marvel Pte Ltd (Marvel) produces industrial chemicals and sells them to all its retailers on terms "2/10, net 30". In a budgeting exercise towards the end of the financial year 2014, Marvel's CEO Mr Hulk was pleased that the company had forecasted yet another year of increase in net profit in the financial year 2015. However, Marvel's accountant Ms Lucy highlighted to him that the company might face a shortage of cash in the financial year 2015. "That is to be expected", said Mr Hulk, "we have been expanding in the past few years as can be seen in our increasing profits. It is only natural that our working capital needs increase due to our larger scale of operations." Mr Hulk decided to approach the company's bank to obtain a loan to expand its operations.
Ms Lucy tabulated the company's working capital information below together with some other financial information (all in thousands of dollars):
2012 $'000
As at 31 December 2013 2014 (projected) $'000 $'000
Current Assets Cash Accounts Receivable Inventory
200 220 154
233 322 170
268 470 188
110
125
131
1,074 310
1,205 403
1,386 519
Current Liabilities Accounts Payable Total Assets Total Liabilities
2012 $'000 Sales Depreciation
2,000 20
For the year ended 2013 2014 (projected) $'000 $,000 2,210 20
2,450 20
Industry Averages 62% 4.5
Debt/Equity (Total liabilities/Equity) Current ratio
The company earns a gross profit margin of 20% and a net profit margin of 5%.
Note: Question No. 3 continues on page 6 5
ATTENTION: The Singapore Copyright Act applies to the use of this document. Nanyang Technological University Library
AD1101 Question 3 (continued) Upon looking at the financial information, Mr Hulk commented that the company's cash position is healthy as can be seen from its increasing cash balances each year. However, Ms Lucy warned that the company's operating cash flows are actually declining. Mr Hulk brushed that aside by pointing out that the declining operating cash flows is due to the increased holding of inventory, which is necessary due to the higher forecasted sales. Furthermore, Mr Hulk said that the company's debt-to-equity ratio and current ratio are much stronger than the industry averages. Despite Mr Hulk's optimism, he is aware that an important factor that banks will consider for the approval of loans is the ability of the company to generate cash flows from its operation. Consequently, at the beginning of 2015 Mr Hulk met with one of the company's primary vendors, Mr Bat. Mr Hulk and Mr Bat have been close business contacts for many years. Mr Hulk asked Mr Bat to identify all of Marvel's purchases of perishable supplies as equipment on the vendor's sales invoices. The reason Mr Hulk gave for his request was that Marvel's board of directors has imposed stringent budget constraints on operating expenses but not on capital expenditures. Mr Hulk planned to capitalize the purchase of perishable supplies and include them in the Equipment account on the balance sheet. Required (i)
Compute Marvel's cash flow from operations for the years 2013 and 2014. Evaluate Mr Hulk's comment that the company's cash position is healthy because of its increasing cash balances each year. (10 marks)
(ii)
Compute Marvel's accounts receivable average collection period and inventory average holding period for the years 2013 and 2014. Is Mr Hulk's claim about the reason for Marvel's declining operating cash flows valid? Given Marvel's increasing net profit, will you be concerned with the declining operating cash flows? Why or why not? (12 marks)
(iii)
Compute Marvel's debt-to-equity ratio and current ratio for all the three years (2012 to 2014). Comment on Mr Hulk's claim that Marvel's debt-to-equity ratio and current ratio are stronger than the industry averages. (12 marks)
(iv)
Explain how Mr Hulk's arrangement with Mr Bat would affect Marvel's statement of cash flows. Is this arrangement ethical? (6 marks) (TOTAL: 40 marks)
-END OF PAPER-
6
ATTENTION: The Singapore Copyright Act applies to the use of this document. Nanyang Technological University Library
AD1101 Appendix I
List of Financial Ratios and Formulae Financial ratios Average collection period
Formulae 365 I Receivable turnover ratio
Average days' in inventory
365 I Inventory turnover ratio
Current ratio
Current assets I Current liabilities
Debt-to-equity
Total liabilities I Total equity
Dividend payout
Dividend I Net income
Dividend yield
Dividend per share I Market price per share
Gross profit margin
Gross profit I Net sales revenue
Inventory turnover
Cost of goods sold I Average inventory
Net profit margin
Net income I Net sales revenue
Quick ratio
(Cash+ Short-term investments+ Net accounts receivable) I Current liabilities
Receivables turnover
Net sales revenue I Average net receivables
Return on assets
Net income I Average total assets
Return on equity
Net income I Average stockholders' equity
Times interest earned
(Net income + Interest expense + Income taxes expense) I Interest expense
- END OF APPENDIX -
7
ATTENTION: The Singapore Copyright Act applies to the use of this document. Nanyang Technological University Library
AD1101 FINANCIAL ACCOUNTING
Please read the following instructions carefully:
1. Please do not turn over the question paper until you are told to do so. Disciplinary action may be taken against you if you do so.
2.
You are not allowed to leave the examination hall unless accompanied by an invigilator. You may raise your hand if you need to communicate with the invigilator.
3.
Please write your Matriculation Number on the front of the answer book.
4.
Please indicate clearly in the answer book (at the appropriate place) if you are continuing the answer to a question elsewhere in the book.
AD1101 NANYANG TECHNOLOGICAL UNIVERSITY
SEMESTER 1 EXAMINATION 2014-2015
AD1101 -Financial Accounting
November 2014
Time Allowed: 2 Y2 hours
INSTRUCTIONS
1
This paper contains THREE (3) questions and comprises SIX (6) pages and ONE (1) appendix of ONE (1) page.
2
Answer ALL THREE (3) questions.
3
The number of marks allocated is shown at the end of each question.
4
Begin your answer to each question (not each part) on a separate page of the answer book.
5
Please write clearly. Undecipherable writing cannot be marked.
6
Answers will be graded for content and appropriate presentation. Show complete workings where appropriate.
QUESTION 1 BEGINS ON PAGE 2
1
ATTENTION: The Singapore Copyright Act applies to the use of this document. Nanyang Technological University Library
AD1101 Question 1
The following information regarding Lotus Blue Pte Ltd (Lotus Blue) as at 31 December 2013 has been provided to you.
Accounts Receivable Allowance for impairment of AR
31112/2013
31112/2012
14,000 (3,000) 11,000
16,200 (3,200) 13,000
In addition to sales on credit, Lotus Blue also sold $50,000 worth of goods for cash and wrote-off an uncollectible accounts receivable of $2,900. The company's average collection period is 36.5 days. Required (i)
Determine the total revenue reported by Lotus Blue for the year ended 31 December 2013. (4 marks)
(ii)
Compute the total cash collected from its customers during the year ended 31 December 2013. (3 marks)
(iii)
Prepare the journal entries to record the total revenue earned, collection of cash from its customers, and impairment of accounts receivable (if any) for the year 2013. (8 marks)
Lotus Blue Pte Ltd uses a periodic inventory system. In its physical stock count taken at 31 December 2012, Lotus Blue's employees failed to count the merchandise in the store's window display. The cost of these merchandise amounted to $2,300. Lotus Blue reported a pretax income of $267,000 and $355,000 for the financial year ended 31 December 2012 and 31 December 2013 respectively. Required (iv)
Compute Lotus Blue's correct pretax income for the year ended 31 December 2012 and 2013. (4 marks)
Note: Question No. 1 continues on page 3 2
ATTENTION: The Singapore Copyright Act applies to the use of this document. Nanyang Technological University Library
AD1101 Question 1 (continued) (v)
Determine the effect of the inventory error on the total pretax income over the 2 years ended 31 December 2013. (2 marks)
(vi)
Does it matter whether the inventory error is corrected or not? Explain. (4 marks) (TOTAL: 25 marks)
Question 2
On 1 January 2014, Parbury Ltd, a company incorporated in Singapore, purchased a plot of freehold land for $100,000 in Upper East Coast Road, Singapore with the intention of keeping it for capital appreciation. The company is undecided on whether to use the fair value model or the cost model of accounting for investment property under FRS 40 Investment Property. As the company's senior manager, you have been tasked with taking this decision. After a study of the property market, you concluded that property prices in the east of Singapore is expected to increase by 10% per year for the next two years. The company's financial year end is 31 December. Required (i)
Assuming the company's intention is to maximise profits in the next two years, which model should the company adopt to account for its investment property? Explain how you arrive at this decision. (4 marks)
(ii)
Based on the decision taken in requirement (i), prepare the necessary journal entries to account for the investment property on 1 January 2014 and 31 December 2014. (4 marks)
(iii)
Would your decision be different if the company's intention is to maximise net assets? Provide a reason for your answer. (2 marks)
Note: Question No.2 continues on page 4 3
ATTENTION: The Singapore Copyright Act applies to the use of this document. Nanyang Technological University Library
AD1101 Question 2 (continued)
On 1 January 2014, Parbury Ltd is considering an upgrade to a key machine that is used in the manufacture of high power bulbs. The machine was purchased on 1 January 2011 for $100,000 and its useful life was estimated to be 5 years with no residual value. The company uses the straight-line depreciation method to depreciate its machines. The upgrade of the machine will improve its capacity and increase the useful life of the machine by another 3 years. The cost of the upgrade is $40,000. The distributor of the machine, while happy to upgrade the machine, provides an alternative in which Parbury purchases a new machine for $72,000. The new machine will have a useful life of 6 years and no residual value. He offers to pay $32,000 for the old machine. The quality of the finished product and annual capacity for both machines are expected to be the same. Required (iv)
Show the impact of the two alternatives on the company's statement of profit or loss and statement of cash flows for the year ended 31 December 2014. (12 marks)
(v)
Assuming Parbury's management make their decision based on maximising the reported profit for the year ended 2014, which alternative will they select? Explain whether their decision is an optimal decision for the company. (3 marks)
(vi)
Prepare the necessary journal entries on 1 January 2014 and 31 December 2014 to record the accounting effects of both alternatives, assuming the upgrade of the old machine or the purchase of the new machine took place on 1 January 2014. (10 marks) (TOTAL: 35 marks)
4
ATTENTION: The Singapore Copyright Act applies to the use of this document. Nanyang Technological University Library
AD1101 Question 3 Marvel Pte Ltd (Marvel) produces industrial chemicals and sells them to all its retailers on terms "2/10, net 30". In a budgeting exercise towards the end of the financial year 2014, Marvel's CEO Mr Hulk was pleased that the company had forecasted yet another year of increase in net profit in the financial year 2015. However, Marvel's accountant Ms Lucy highlighted to him that the company might face a shortage of cash in the financial year 2015. "That is to be expected", said Mr Hulk, "we have been expanding in the past few years as can be seen in our increasing profits. It is only natural that our working capital needs increase due to our larger scale of operations." Mr Hulk decided to approach the company's bank to obtain a loan to expand its operations.
Ms Lucy tabulated the company's working capital information below together with some other financial information (all in thousands of dollars):
2012 $'000
As at 31 December 2013 2014 (projected) $'000 $'000
Current Assets Cash Accounts Receivable Inventory
200 220 154
233 322 170
268 470 188
110
125
131
1,074 310
1,205 403
1,386 519
Current Liabilities Accounts Payable Total Assets Total Liabilities
2012 $'000 Sales Depreciation
2,000 20
For the year ended 2013 2014 (projected) $'000 $,000 2,210 20
2,450 20
Industry Averages 62% 4.5
Debt/Equity (Total liabilities/Equity) Current ratio
The company earns a gross profit margin of 20% and a net profit margin of 5%.
Note: Question No. 3 continues on page 6 5
ATTENTION: The Singapore Copyright Act applies to the use of this document. Nanyang Technological University Library
AD1101 Question 3 (continued) Upon looking at the financial information, Mr Hulk commented that the company's cash position is healthy as can be seen from its increasing cash balances each year. However, Ms Lucy warned that the company's operating cash flows are actually declining. Mr Hulk brushed that aside by pointing out that the declining operating cash flows is due to the increased holding of inventory, which is necessary due to the higher forecasted sales. Furthermore, Mr Hulk said that the company's debt-to-equity ratio and current ratio are much stronger than the industry averages. Despite Mr Hulk's optimism, he is aware that an important factor that banks will consider for the approval of loans is the ability of the company to generate cash flows from its operation. Consequently, at the beginning of 2015 Mr Hulk met with one of the company's primary vendors, Mr Bat. Mr Hulk and Mr Bat have been close business contacts for many years. Mr Hulk asked Mr Bat to identify all of Marvel's purchases of perishable supplies as equipment on the vendor's sales invoices. The reason Mr Hulk gave for his request was that Marvel's board of directors has imposed stringent budget constraints on operating expenses but not on capital expenditures. Mr Hulk planned to capitalize the purchase of perishable supplies and include them in the Equipment account on the balance sheet. Required (i)
Compute Marvel's cash flow from operations for the years 2013 and 2014. Evaluate Mr Hulk's comment that the company's cash position is healthy because of its increasing cash balances each year. (10 marks)
(ii)
Compute Marvel's accounts receivable average collection period and inventory average holding period for the years 2013 and 2014. Is Mr Hulk's claim about the reason for Marvel's declining operating cash flows valid? Given Marvel's increasing net profit, will you be concerned with the declining operating cash flows? Why or why not? (12 marks)
(iii)
Compute Marvel's debt-to-equity ratio and current ratio for all the three years (2012 to 2014). Comment on Mr Hulk's claim that Marvel's debt-to-equity ratio and current ratio are stronger than the industry averages. (12 marks)
(iv)
Explain how Mr Hulk's arrangement with Mr Bat would affect Marvel's statement of cash flows. Is this arrangement ethical? (6 marks) (TOTAL: 40 marks)
-END OF PAPER-
6
ATTENTION: The Singapore Copyright Act applies to the use of this document. Nanyang Technological University Library
AD1101 Appendix I
List of Financial Ratios and Formulae Financial ratios Average collection period
Formulae 365 I Receivable turnover ratio
Average days' in inventory
365 I Inventory turnover ratio
Current ratio
Current assets I Current liabilities
Debt-to-equity
Total liabilities I Total equity
Dividend payout
Dividend I Net income
Dividend yield
Dividend per share I Market price per share
Gross profit margin
Gross profit I Net sales revenue
Inventory turnover
Cost of goods sold I Average inventory
Net profit margin
Net income I Net sales revenue
Quick ratio
(Cash+ Short-term investments+ Net accounts receivable) I Current liabilities
Receivables turnover
Net sales revenue I Average net receivables
Return on assets
Net income I Average total assets
Return on equity
Net income I Average stockholders' equity
Times interest earned
(Net income + Interest expense + Income taxes expense) I Interest expense
- END OF APPENDIX -
7
ATTENTION: The Singapore Copyright Act applies to the use of this document. Nanyang Technological University Library
AD1101 FINANCIAL ACCOUNTING
Please read the following instructions carefully:
1. Please do not turn over the question paper until you are told to do so. Disciplinary action may be taken against you if you do so.
2.
You are not allowed to leave the examination hall unless accompanied by an invigilator. You may raise your hand if you need to communicate with the invigilator.
3.
Please write your Matriculation Number on the front of the answer book.
4.
Please indicate clearly in the answer book (at the appropriate place) if you are continuing the answer to a question elsewhere in the book.
