HERIOT-WATT MANAGEMENT PROGRAMME

ACCOUNTING STAGE 1
For Official Use Only

December 2007
Name: . No A B1 Matriculation No: . B2 C1 Seat No. (if applicable): . Course: .. Date: .. C2 D1 D2 Mark

Declaration I certify that I have read the Examination Regulations (see back cover) and understand that I am required to abide by them. Students Signature:.

INSTRUCTIONS TO CANDIDATES 1. At the start of the exam ensure that you have written all the details required above. 2. Read the instructions on page 2. 3. Start each question on a new page. 4. Rough workings should be confined to the left hand pages. 5. This book must be handed in entire and unfolded.
PLEASE READ THE EXAMINATION REGULATIONS ON THE BACK COVER

PART I

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EXAMINATION INSTRUCTIONS
The duration of the examination is 3 hours. The marks value of each section is shown below. You may allocate your time as you see fit. In the multiple choice questions, no marks are deducted for wrong answers. The paper is in four sections SECTION A: 40 marks SECTION B: 20 marks SECTION C: 20 marks SECTION D: 20 marks Answer ALL sections.

SECTION A: is a multiple choice section and you should indicate your response on the answer grid provided in Part II. No marks are deducted for wrong answers. Answer ALL questions in this section. SECTION B: Answer EITHER Question B1 OR Question B2. SECTION C: Answer EITHER Question C1 OR Question C2. SECTION D: Answer EITHER Question D1 OR Question D2

PLEASE NOTE: THIS EXAMINATION DOCUMENT IS IN TWO PARTS. Part I is the question booklet. Part II is the answer booklet, which also contains the ANSWER GRID for the multiple choice questions and the WORKSHEETS for Question B1 and Question B2. Please ensure that BOTH PARTS are returned at the end of this examination.

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SECTION A (40 marks) Section A contains multiple choice questions, which are not made available to students.

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SECTION B (20 marks) Answer EITHER Question B1 OR Question B2.

Question B1 The Trial Balance of Mash Monster Ltd as at 31 December Year 7 was as follows: 000 24 38 000

Administration expenses Bank Bad debt provision Creditor and accruals Debtors Delivery vehicles cost Delivery vehicles depreciation Disposal account Dividend paid Factory cost Factory depreciation Gas and electricity factory Interest Loan Repayable in Year 10 Office equipment cost Office equipment depreciation Plant and Machinery cost Plant and machinery depreciation Profit and loss Purchases of raw materials Sales Selling and distribution expenses Share capital Stock as at 31 December Year 6 Wages production staff Wages sales staff Wages clerical

10 28 250 330 108 32 20 1,200 192 66 8 400 80 40 420 160 480 680 2,002 546 800 150 270 110 __60 4,252

_____ 4,252

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Notes: 1. 2. Stock was counted at 31 December Year 7 and was valued at 184,000. Following a review of debtors at 31 December Year 7, it was decided (a) to write off two debts totalling 4,000. (b) to make a specific provision of 10% against five debtor balances totalling 60,000. (c) to make a general provision of 5% on debtors after giving effect to a) and b). Gas and electricity bills for the factory, amounting to 4,000 and relating to the year ended 31 December 2007, were unpaid at the year end. An independent valuation of the factory was carried out on 1 January Year 7. The directors decided to incorporate the revaluation of 1,600,000 in the financial statements, although no entries have been made so far. The factory was bought in 1999 and is expected to have a remaining useful life of 42 years. During the year, a vehicle which had cost 70,000 and had been depreciated by 48,000 was sold for 32,000. No entries have been made in respect of this sale, apart from the credit to disposal account of the sale proceeds. Depreciation is to be calculated as follows: Factory 2% of cost Plant and machinery 20% of cost Office equipment 10% of cost Vehicles 25% of book value A full year's depreciation is to be charged in the year of acquisition and none in the year of sale. 7. The directors propose to pay a final dividend of 40,000 for the year.

3.

4.

5.

6.

Required: The worksheets in PART II of the examination answer book should be used when answering this question and you should show clear working notes on a separate page in the examination answer book. (a) Prepare the Profit and Loss Account of Mash Monster Ltd for the year ended 31 December Year 7. (10 marks) (b) Prepare the Balance Sheet of Mash Monster Ltd as at 31 December Year 7. (10 marks) Total 20 marks

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Question B2 The new accountant of MiniMotors Ltd, a small company making electric motors, has prepared the Profit and Loss Account for the year ended 31 December 2007 and Balance Sheet as at that date. Unfortunately he is struggling badly with the Cash Flow Statement and has asked you to help. His Profit and Loss Account and Balance Sheet are detailed below, together with some notes he has made which he thinks may help you: MiniMotors Ltd Profit and Loss Account for the year ended 31 December 2007 000 Sales Cost of sales Gross profit Selling and distribution costs Administrative expenses Operating profit Interest received Interest paid Profit on ordinary activities before taxation Taxation Profit on ordinary activities after taxation Dividends Retained profit for the year Balance Sheet as at 31 December 2007 000 Fixed assets Land and buildings Plant and equipment Fixtures and fittings 000 2007 000 60 36 70 166 6 172 4 6 14 18 28 70 2006 000 62 36 64 162 2 164 2 2 6 14 18 42 000 508 178 330

238 34 272 58 4 2 2 60 8 52 10 42

Investment Current assets Raw materials Work in progress Finished goods Debtors Bank

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Current liabilities Bank loan (short term) Tax payable Dividend payable Creditors

4 6 6 56 72 (2) 170

4 8 6 62 80 (38) 126 14 112 10 2 100 112

Long term liabilities Bank loan (long term) Capital Share capital Share premium Profit and loss account

12 158 12 4 142 158

Notes: 1. Purchases of assets by cheque, during the year, were as follows: 000 10 18 28

Plant and equipment Fixtures and fittings

2.

The book value of assets sold during the year were as follows: 000 2 2 4

Plant and equipment Fixtures and fittings These were sold for a total of 6,000 cash 3. Depreciation charged for the year was: Buildings Plant and equipment Fixtures and fittings

000 2 8 10 20

4.

Share capital with a nominal value of 2,000 was issued during the year, at a premium of 2,000. All interest charged and credited in the profit and loss account was received/paid during the year.

5.

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Required: The worksheets in PART II of the examination answer book should be used when answering this question and you should show clear working notes on a separate page in the examination answer book. For the year ended 31 December 2007: (a) Prepare a Reconciliation of Operating Profit to Net Cash Flow from Operating Activities. (5 marks) (b) Prepare a Cash Flow Statement, using the indirect method. (7 marks) (c) Explain the usefulness of the cash flow statement and why it is prepared by businesses. (8 marks) Total 20 marks

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SECTION C (20 marks) Answer EITHER Question C1 OR Question C2.

Question C1 SweetyPie Ltd., a suitcase (travel luggage) manufacturer, is in the process of preparing budgets for the next few months and the following draft figures are available:

Sales forecasts: April May June July August

18,000 cases 22,500 cases 25,500 cases 21,000 cases 19,500 cases

A case has a standard cost of 28 and a standard selling price of 35. Each case uses 3 kg of materials and it is policy to have stocks of materials at the end of each month to cover 50% of next month's production. There are 25,200 kg in stock on 1 April. There are 2,200 finished cases in stock on 1 April and it is policy to have stocks at the end of each month to cover 10% of the next month's sales. Required: (a) Prepare a production budget (in cases) for the months of April, May, June and July. (3 marks) (b) Prepare a materials purchase budget (in kg.) for the months of April, May and June. (5 marks) (c) Calculate the budgeted gross profit for the period April to August. (2 marks) (d) Describe the advantages and disadvantages to a business of adopting: (i) A fixed budget system. (5 marks) (ii) A flexible budget system. (5 marks) Total 20 marks

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Question C2 You are the accountant of SpeedySend Ltd., a company with customers throughout the UK. Your company is considering purchasing its own transport fleet. The economic life of this transport fleet would be five years, after which time the vehicles would have to be disposed. The cost to your company of using an outside organisation for its transport needs is 550,000 for this year. It is projected that this cost will rise 10% per annum over the life of the project. The initial cost of purchasing your own transport fleet would be 1,600,000 and it is estimated that the following costs would be incurred over the next five years: Drivers' Costs 70,000 74,000 76,000 78,000 84,000 Repairs & Maintenance 20,000 28,000 34,000 42,000 44,000 Other Costs 308,000 306,000 316,000 294,000 322,000

Year 1 Year 2 Year 3 Year 4 Year 5

Other costs include depreciation. It is projected that the fleet would be sold for 200,000 at the end of year 5. It has been agreed to depreciate the fleet on a straight line basis. To raise funds for the project your company is proposing to raise a long-term loan at 12% interest per annum. As funds are limited, investment can only be made in one project. You are told that there is an alternative project that could be invested in, using the funds raised. It has the following projected results: Payback Accounting rate of return Net present value = = = 3 years 30% 240,000

Note: Assume the transport fleet would be purchased at the beginning of the project and all other expenditure would be incurred at the end of each relevant year.

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Required: (a) Prepare a table showing the net cash savings to be made by the company over the life of the transport fleet project . (8 marks) (b) Calculate the following for the transport fleet project: (i) (ii) (iii) Payback period. (2 marks) Accounting rate of return. (2 marks) Net present value. (4 marks)

(c) Comment and advise SpeedySend Ltd whether their investment should be committed to purchasing the transport fleet or using an outside organisation. (4 marks) Total 20 marks

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SECTION D (20 marks) Answer EITHER Question D1 OR Question D2.

Question D1 (a) What is an Operating and Financial Review? (2 marks) (b) What are the essential features of a companys Operating and Financial Review? (12 marks) (c) Give three examples of what a company would put in their Operating and Financial Review and explain, briefly, why this information is useful to the users of the companys financial statements. (6 marks) Total 20 marks

Question D2 The format of the audit report is governed by an auditing standard - SAS 600 Auditors' reports on financial statements. (a) What are the main elements contained in a basic audit report? (6 marks) (b) Describe, briefly, the two different types of situation when the auditors of a limited company are unable to give an unqualified audit report? (6 marks) (c) Explain, briefly, the two types of qualified report which the auditor might use. (8 marks) Total 20 marks

END OF PAPER

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Accounting Stage 1 Web Version December 2007

EXAMINATION REGULATIONS
Candidates are subject to the regulations governing examinations which are published by the University. The main points are summarised below. 1. A candidate shall not bring written, printed or any other material into the examination room except such as may be authorised by the examiners. Briefcases and other similar containers, the main purpose of which is to carry papers, shall not be brought into the examination room. 2. A candidate shall not communicate with, receive assistance from or copy from the paper of another candidate during an examination. 3. A candidate shall not leave the examination room less than half an hour after the start of an examination, except with the permission of the invigilator and shall not leave the examination room during the last fifteen minutes of an examination.
4.

At the end of the examination a candidate must return the answer book or books to the invigilator together with any other material on which he/she has written or drawn during the examination. Under no circumstances should a candidate remove an answer book, used or unused, from the examination room.

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