QUESTION 2 (6 + 6 + 5 + 3 = 20 marks)
ABC Packaging Ltd purchased equipment on 1 January 2015 for $66,000. The
expected life of the equipment is 10 years, or 100,000 units of production, and its
residual value is $6,000. The equipment produces 7,000 units and 9,000 units in
years 2015 and 2016 respectively. Under three depreciation methods, the annual
depreciation expense and the balance of accumulated depreciation at the end of
2015 and 2016 are as follows:
Year
2015
2016 Method A
Annual
Accumulated
depreciation
depreciation
expense
expense
6,000
6,000
6,000
12,000 Method B
Annual
Accumulated
depreciation
depreciation
expense
expense
4,200
4,200
5,400
9,600 Method C
Annual
Accumulated
depreciation
depreciation
expense
expense
14,107
14,107
11,053
25,160 REQUIRED (a) Identify the depreciation method used in each instance, and show how the
annual depreciation has been calculated (Rounded to the nearest dollar/
showing full workings).
(b) Assume continued use of the same method in 2017. Determine the annual
depreciation expense, accumulated depreciation and carrying amount of the
equipment for 2015 to 2017 under each method, assuming 12,000 units of
production in 2017.
(c) Depreciation is a concept used in accrual accounting. Of the depreciation
methods above discuss the reasons for selecting one alternative method of
depreciation over another as dictated by accrual accounting and the matching
principle. (60 words limit)
(d) Depreciation allocates cash to eventually replace the asset once it has reached
the end of its useful life. Discuss stating whether you agree or disagree with the
statement and why? (40 words limit) Page 1 of 6 QUESTION 3 (9 + 4 + 7 = 20 marks) Northern Star Company sets a hurdle rate of 14% per annum for evaluating
investment proposals. Currently, it is considering three competing proposals and
does believe that it will have sufficient finance to fund all three. Details of the
proposals, all of which will cover a five year term, are given below:
A
B
C
Investment cost
$400,000 $750,000 $600,000
Estimated annual net cash inflow (per annum)
$125,000 $225,000
$195,000
REQUIRED (a) Calculate the Net Present Value (NPV) for the 3 investment proposals. Ignore tax
implications.
Additional information:
The present value of $1, ie. (1+r)-n Where: r = discount rate; n = number of periods
until payment.
Discount rate (r)
14% Present value of
$1 Periods (n)
1 2 3 4 5 0.877 0.769 0.675 0.592 0.519 (b) In your own words interpret the meaning of the net present value figures calculated
above and rank the 3 investment proposals in order, nominating which investment/s
you would accept or reject justifying your answer. (60 words limit)
(c) The factory manager at Northern Star says she has heard that the data used in NPV
calculations can be unreliable, especially estimates of future cash flows, and that
alternative methods of assessing a capital investment would be more reliable.
Discuss in your own words the limitations and advantages of NPV analysis over
other alternative capital evaluation techniques reviewed throughout the semester.
(180 words limit) Page 2 of 6 QUESTION 4 (9 + 6 + 5 = 20 marks) The management of ABC Trading Ltd a retailer of electrical goods is extremely
concerned at the accounting information presented below. Specifically that their
Income Statement presented below, constructed under accrual accounting,
highlights a profit of $785,000 yet the cash flow from operations (cash profit)
shows a net cash OUTFLOW of $301,000
REQUIRED
(a) With reference to the statements below describe three reasons why
ABC Trading Ltd made a profit of $785,000 for the year ending 31
December 2016 yet generated a negative cash flow from operations
over the same period. (Hint: Review movements in current assets to
explain Income Statement Figures to Cash Flow Figures) With each
cause identified highlight the impact on Assets = Liabilities +Owners
equity and profit versus its impact on cash flow.
(120 words limit) (b) Given the above differences discuss which statement (Income
Statement or Cash Flow from Operations) better reflects the financial
performance / wealth creation for the period ending 31 December
2016. (Justify your answer with reference to accrual accounting) (80
word limit)
(c) Compare and contrast the major purpose of the balance sheet, income
statement and cash flow statement in terms of its information content
provided to interested end users. (80 words limit) Financial Statements of ABC Trading Limited
Extract of the Income Statement (abstract) for the year ended 31 December
2016
$’000
Sales
1,700
Cost of sales
(750)
Gross profit
950
Loss on sale of equipment
(80)
Depreciation of equipment
(45)
Salaries
(22)
Other expenses
(18)
Operating Profit
785 Page 3 of 6 Extract of the Balance Sheets as at 31 December
2015
2016
$’000
$’000
Inventory
180
400
Accounts Receivable
285
700
Accounts Payable
600
100
Accrued expenses
100
20
Extract of the Cash Flow from 0pertions for the year
ended 31 December 2016
Cash Flow from Operating Activities
2016
$’000
Cash Receipts Cash Paid Cash Paid from to Customers
$1285 Suppliers for Other (1700+285-700) (750-180+400+600-100)
($1470)
Expenses
($98) (18+100-20) Cash Paid for salaries
($18)
Net Cash Outflow
($301) Page 4 of 6 QUESTION 5 (4 + 5 + 3 + 4 + 4 = 20 marks)
Fresh Food Ltd is a food processing company whose main product is canola
cooking oil. The CEO, Maggie, is contemplating expanding the business by
selling its canola oil product into the growing Chinese market. She asks
you, as the company’s accountant, whether financial planning structures
and processes within the company are set up to deal with this expansion of
operations and greater financial complexity associated with export trading.
You know that the company has developed very detailed processes for
preparing its production and cash budgets. But other areas of budgeting,
especially financial, and capital budgets have not been formally
established. You tell the CEO you will look into it and provide her with
advice in next month’s meeting.
The budget committee of the company has provided the following
information: Cash sales are 70% of total sales. Debtors are expected to pay: 60% of in the month of sales; and 40% in the
month following the sale. 2017 Sales April
May
June
July $500,000 Actual sales
$600,000 Actual sales
$800, 000 Estimated sales
$900,000 Estimated sales REQUIRED
(a) Prepare a schedule of expected receipts from debtors for June and
July 2017. (show all workings as part of your answer).
(b) Distinguishes between the various types of budgets and their
purpose that the company should put in place as part of the overall
planning and control process. (90 words limit)
(c) Provide three examples of how the sales budget will impact
budgets set in other related parts of the organization. (50 words
limit)
(d) Discuss the steps that would be necessary to establish a fully
integrated set of budgets that will enable effective planning and
control for the company in the future, and gain positive coordination and behavioral change necessary to attain corporate
objectives. (100 words limit)
(e) Working capital management is concerned with the effective
management of the cash operating cycle. Discuss the meaning of
the cash operating cycle and how a lengthening cash operating
cycle due to a building up of excessive inventory can reduce
profitability / increase costs (60 words limit)
Page 5 of 6 Page 6 of 6

 

• 1496300919-coursehero - .docx

SuperTutor

(15)

Status NEW Posted 01 Jun 2017 07:06 AM My Price 20.00

-----------

Attachments

file 1496300921-Solutions file.docx preview (51 words )

S-----------olu-----------tio-----------ns -----------fil-----------e -----------Hel-----------lo -----------Sir-----------/Ma-----------dam----------- T-----------han-----------k y-----------ou -----------for----------- yo-----------ur -----------int-----------ere-----------st -----------and----------- bu-----------yin-----------g m-----------y p-----------ost-----------ed -----------sol-----------uti-----------on.----------- Pl-----------eas-----------e p-----------ing----------- me----------- on----------- ch-----------at -----------I a-----------m o-----------nli-----------ne -----------or -----------inb-----------ox -----------me -----------a m-----------ess-----------age----------- I -----------wil-----------l b-----------e q-----------uic-----------kly----------- on-----------lin-----------e a-----------nd -----------giv-----------e y-----------ou -----------exa-----------ct -----------fil-----------e a-----------nd -----------the----------- sa-----------me -----------fil-----------e i-----------s a-----------lso----------- se-----------nt -----------to -----------you-----------r e-----------mai-----------l t-----------hat----------- is----------- re-----------gis-----------ter-----------ed -----------onÂ----------- th-----------is -----------web-----------sit-----------e -----------Tha-----------nk -----------you----------- -----------

Not Rated(0)

• Buy Answer