OFFICE USE ONLY

Monash University
Semester One Examination 2012
Faculty of Business and Economics
Department of Accounting and Finance
EXAM CODES:

AFC1000

TITLE OF PAPER:

PRINCIPLES OF ACCOUNTING AND FINANCE

EXAM DURATION:

3 hours

READING TIME:

10 minutes

THIS PAPER IS FOR STUDENTS STUDYING AT: (office use only - tick where
applicable)
Berwick
Clayton
Open Learning

Peninsula Distance Education

Caulfield

Sunway

Gippsland

Hong Kong

Other (specify)

During an exam, you must not have in your possession, a book, notes, paper,
calculator, pencil case, mobile phone or any other material/item which has not been
authorised for the exam or specifically permitted as noted below. Any material or
item on your desk, chair or person will be deemed to be in your possession. You are
reminded that possession of unauthorised materials in an exam is a disciplinable
offence under Monash Statute 4.1.
AUTHORISED MATERIALS
CALCULATORS

YES

NO

(If YES, only calculators with an 'approved for use' Faculty label are permitted)
OPEN BOOK

YES

NO

SPECIFICALLY PERMITTED ITEMS

YES

NO

This paper consists of ten (10) questions printed on a total ofeight (8) pages.

STUDENT ID: ...

DESK NUMBER: .

PLEASE CHECK THE PAPER BEFORE COMMENCING. THIS IS A FINAL PAPER.

THIS EXAMINATION PAPER MUST BE INSERTED INTO THE ANSWER BOOK AT
THE COMPLETION OF THE PAPER. NO EXAMINATION PAPERS SHOULD BE
REMOVED FROM THE EXAMINATION ROOM

AFC1000 John Gerrand

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AFC1000 PRINCIPLES OF ACCOUNTING AND FINANCE

Question 1

10 marks

You are the accountant for Serry Company which has agreed to act as a
guarantor on a loan of $2 million obtained by Webster and Sons. Serry
Company, as guarantor, is required to pay back the loan if Webster and Sons
cannot pay.
In light of the AASB Framework, justify how the guarantee of the loan would
be shown in the books of Serry Company.
Question 2

14 marks

The following information relates to Judd Ltd and Hayes Ltd respectively. Both
companies operate in the veterinary products industry.

2010
.12
1.41
.38
.27
5.8

Judd Ltd
2011 2012
.13
.17
1.63
1.87
.41
.43
.23
.17
6.7
7.9

Profit Margin (ROS)

Sales turnover
Return on Equity
Debt Ratio
Times interest covered

Hayes Ltd
2010 2011 2012
.12
.10
.09
1.71
1.46
1.26
.36
.32
.27
.51
.56
.58
2.3
2.2
2.1

Required:
Evaluate and compare the profitability and solvency of the two companies. In
doing so, discuss reasons why the profitability and solvency differ between
the two companies.

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Question 3

(2 + 2 + 2 + 2)=8 marks

The following relates to Morningstar Enterprises. The entity uses the accrual
system of recognising transactions. At the end of the financial year on 30
June 2011, the following balance day adjustments and other information have
not been entered into the general ledger.
(a) Annual rent revenue for the financial year of $60,000 is receivable in
four equal quarterly instalments. To 30 June 2011, only three instalments
have been received.
(b)The account, office supplies on hand, has a debit balance of $410 on 1
July 2010. Supplies of $360 were purchased during the year (the
accounts clerk usedthe asset approach to record inventories of supplies).
On 30 June 2011, $110 of supplies are on hand.
(c) Morningstar Enterprises purchased equipment on 1 July 2009 at a cost of
$200,000 with a residual value of $50,000.The life of the equipment was
expected to last for 5 years but Morningstar Enterprise expected to use
it for 3 years. The company adopted the straight line method of
depreciation.
(d)Morningstar Enterprises pays its insurance annually in advance on 1 May
each year and records it as an expense. On 1 May 2011 the annual
premium was $2,700.
Required:
Prepare the journal entries to record the necessary adjustments on 30 June
2011 for each of the above items (narrations not required).
Question 4

(7 + 3 = 10 marks)

Your accountant has come to you, the CFO of a small company, for advice. He
says he cannot choose between the following competing projects as the
overall profit and return is the same.
Year
0
1
2
3

Project A
$100,000
$60,000
$50,000
$40,000

Project B

Project C

-$100,000
$50,000
$50,000
$50,000

-$100,000
$40,000
$50,000
$60,000

Required:
(a) If the company requires a 12 per cent rate of return, which project would
you choose?

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(b)Explain your decision to your accountant why you choose the project
you did pointing out the reason that he could not come to a decision.
Question5
(3 + 3 = 6 marks)
Share A is currently trading at $22, and is expected to pay a dividend of
$1.50 in a years time, and dividends are expected to grow at a constant rate
of 5 per cent per year.
Share B is currently trading at $12.5, and is expected to pay a dividend of
$1.50 in a years time, and dividends are expected to grow at a constant rate
of zero per cent.
Share C is currently trading at $8, and is expected to pay a dividend of $1.50
in a years time, and dividends are expected to grow at a constant rate of -2
per cent.
Required:
(a) Calculate the intrinsic value of each share if your required rate of return
is 12 per cent.
(b)Which share would you buy and why? Explain your answer.
Question 6

(2 + 2 = 4 marks)

Define and explain using an example, Business risk and financial risk.
Question 7

(4 + 8 = 12 marks)

a)

Identify and distinguish between the different types of investors.

b)

Identify and distinguish between the main types of financial securities.

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Question 8

(2 + 2 + 2 + 2 + 3 = 11 marks)

A young student is considering ways to make money while he completes his

university degree. He had an idea to set up an online store selling good
quality, affordable tablet PCs. He has estimated that fixed costs will be
$36,500 per annum, and variable costs associated with each tablet PC will be
$310.
Required:
(a) If the student decides to sell the tablet PCs for $440 each, calculate how
many he must sell to break even.
(b)Advertising campaigns in the media lately have offered similar tablet
PCs for $399 each. Determine how the break-even point will be affected
if the student sells his tablet PCs for the reduced price of $399 to attract
sales.
(c) The student would like to earn a profit of $5,000 in the first year.
Calculate how many tablet PCs he would need to sell at the reduced
price of $399 to achieve this objective.
(d)The student estimates that he could operate the online store from home
up to a capacity of 150 tablet PCs per year, after which he would need to
move to larger premises. Discuss how the relevant range can impact the
break even calculations prepared earlier.
(e) The Australian Securities Exchange has published Principles of Good
Corporate Governance and Best Practice Recommendations for entities
to adopt. Summarise if these principles and best practice
recommendations apply to the students small online business scenario.
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Question 9

(6 + 4 + 2 = 12 marks)

The owner/manager of Matthews Mechanical Repair Workshop is currently

preparing cash budgets for the coming months in 2012. He requires
assistance in completing the budgets, and has provided you with the
following information:
Service revenue (actual and expected)
May

June

July

August

September

(actual)

(actual)

(expected)

(expected)

(expected)

$75,000

$66,000

$61,000

$82,000

$88,000

The owner/manager expects 40% of service revenue to be in cash each

month, and the remaining 60% to be on credit. Of the credit service revenue,
80% is likely to be collected in the month following service, with the final
20% being collected two months after service.
The owner/manager has provided other information that may be relevant:
He expects to make a loan repayment in August of $15,000.
He will take cash drawings of $2,800 per month.
Depreciation of equipment is $10,000 per month.
He will pay wages of $43,000 per month.
The cost of supplies used in the mechanical repairs average 20% of the
service revenue each month. Supplies are purchased on credit and paid
in full the month following purchase.
Other cash expenses will total $4,100 per month.

Required:
(a) Prepare a schedule of cash receipts expected from credit customers for
the months of July, August and September 2012.
(b)Determine the cash surplus (deficit) for the month of July 2012 by
providing the details of cash receipts and cash payments for July 2012 in
the form of a cash budget.

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(c) The owner/manager is considering reviewing the credit policy offered to

customers. Explain how budgeting will assist him with that decision.
Question 10
+ 4 + 2 = 13 marks)

(2 + 2 + 3

Sk8boards Incorporated is a small business operating from two locations in

Victoria. One store is located in the inner suburb of Caulfield while the other
is located in country Bendigo. The business sells a wide range of
skateboards, scooters, roller blades and accessories. Financial details for the
past year are presented below:
Caulfield

Bendigo

Total

878,600

226,500

1,105,100

(528,200)

(149,900)

(678,100)

Contribution margin

350,400

76,600

427,000

Less Divisional fixed

costs

(119,700)

(58,600)

(178,300)

230,700

18,000

248,700

(88,200)

(37,800)

(126,000)

142,500

(19,800)

122,700

281,000

119,000

400,000

Sales Revenue
Variable costs

Less Share of corporate

costs
Divisional profit
Cost of capital

5%

Investment required

The management accountant has prepared the above information for the
owner. He must explain the difference in performance across the two
locations. All inventory is purchased by the head office which is located in
Melbourne City. There is no difference in cost price of inventory between
stores, but delivery costs may vary. The owner has a policy of ensuring the
selling price is consistent between locations.
Required:
(a) Calculate the return on investment (ROI) for each of the two divisions.
(b)Calculate the residual income (RI) for each of the two divisions.
(c) Discuss the performance of the Caulfield store in comparison to the
Bendigo store based on absolute profit, and your calculations of ROI and
RI.

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(d)The management accountant is concerned that the owner will see the
results and want to close the Bendigo store. Explain whether you agree
with that suggestion.
(e) Analyse possible reasons for the difference in variable costs and fixed
costs between the stores.
END OF EXAMINATION

AFC1000 John Gerrand

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