# ACCT2127 Accounting For Management Decisions

## Questions:

### Question 1

Best Real Estate Agency has opened an office in Swanston Street. It generates its revenue through charging a commission (agency revenue) of 4.5% of the ultimate sale price achieved on behalf of the customer. The average monthly property sales is \$700,000 and the Estate agent generates its revenue via charging a commission (agency revenue) of 4.5% of the gross property sales. Fixed monthly costs are office rent (\$3,400), depreciation of office furniture (\$390), electricity (\$640), a multi-line telephone system (\$380), computer cabling connection (\$480) and salary of the office manager (\$7800). Variable costs include commissions for the sales staff (50% of agency revenue), supplies and printing (10% of agency revenue), and usage costs for phone and computers (7% of agency revenue). The average property sales per month are expected to be \$700,000 and the agency takes 4.5% of gross property sales, as agency revenue.

• Calculate the estate agency’s monthly break even commission / agency revenue in dollars.
• Calculate the commission / agency revenue needed to earn monthly net profit of \$10,000.
• From your answer in (b) above what is the gross property sales required to generate commission / agency revenue to make a \$10,000 profit above breakeven.
• When the managing partner of Best Real Estate Agency is shown your CVP calculations, he is quite dismissive. He says it is largely useless information because the reality of the real estate business is much more complex and dynamic with the model based on unrealistic assumption.   Prepare a detailed response to the managing partner, identifying model assumptions and potential use of the model.

### Question 2

XYZ Packaging Ltd purchased equipment for \$310,750 on 1 January 2015 for use in its parcel packaging business.  XYZ’s management estimates that the equipment will be technologically obsolete in 5 years, at which time it will have a residual value of \$26,000. The equipment will produce 60,000 batches of parcels in the first year, with annual production decreasing by 5,000 batches during each of the next 4 years (i.e., in the fifth year the equipment will be down to 40,000 batches of production capability).

• For each of three depreciation methods (straight-line, units-of-production, and reducing balance), prepare a depreciation schedule from acquisition showing the following balances each year for the 5 years: asset cost, depreciation expense, accumulated depreciation and asset carrying amount. For the reducing balance method, use a depreciation rate based on 45%.
• 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.
• 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?

### Question 3

Southern Star Company is considering replacing an existing piece of machinery with a more sophisticated machine. The existing machine was purchased 3 years ago at a cost of \$50,000 and is being depreciated to a zero residual value over 7 years. This machine has 4 years of usable life remaining and can currently be sold for \$55,000 net.

The new machine being considered will cost \$76,000 and requires an outlay of \$4,000 for installation. It will be depreciated over a 4 year period to a zero value and provide the benefit of reducing cash operating costs by \$10,000 per annum. (Note: Ignore Tax Implications)

• Given a required rate of return of 14% per annum on capital expenditure proposals, calculate the Net Present Value (Cost). In your own words interpret the meaning of the net present value calculated, nominating whether to continue with the old machine or replace it with the new machine. (Ignore tax implications. / show all working as part of your answer)

### Question 4

The management of Trucks Ltd, a transport business, wants to get a report from the accountant on the cash provided from various activities. The accountant has provide you the following information for the financial year ended 30 June 2016

 Item \$ Interest paid 3,000 Dividends paid to Shareholders 20,000 Profit after tax for year ended 30/6/2016 100,000 Cash at bank at July 1, 2015 1,000,000 Depreciation for the year 50,000 Payment for Motor vehicle purchased on 28th April 2016 40,000 Loan repayments made 60,000 Taxes paid to the Tax Office 76,000 Payments to employees 100,000 Cash received from the sale of machinery 100,000 Cash sales 650,000 Dividend received 240,000 Investments in companies listed on the ASX (Australia Security Exchange) 56,000 Cash received from accounts receivable 550,000 Bad Debts expense 10,000 Payments to suppliers 500,000 Credit sales for the year 750,000 Money borrowed from Net bank 250,000 Purchase of property and land for cash 800,000

Required

• Prepare a fully classified cash flow statement for the year ended 30th June 2016 for Trucks Ltd.
• Trucks Ltd management is confused in that their Income Statement is indicating they made a net loss (negative profit) over the same period whilst reporting a positive cash inflow from operations. Assuming both reports are accurate explain to Truck management providing two possible reasons why this discrepancy could occur when comparing cash flow from operations (cash profit) with accrual accounting profit / loss.  For each cause identified highlight the impact on Assets  = Liabilities  + Owners Equity and profit versus cash flow (80 word limit)
• 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)

### Question 5

The Good Men Ltd competes in the home electrical markets alongside Harvey Norman and The Good Guys. The business is in its growth phase of its business life cycle and has decided to review its performance as regard the management of its working capital. You have been asked to review their performance utilizing figures and ratios calculated over the past four years and comment on their performance taking into account benchmark figures / industry averages / budgets also detailed below. Once you have analyzed their performance provide some strategies and recommendations to assist in improving any weaknesses in working capital management identified. As part of your recommendations identify the associated potential benefits and costs of each recommendation.

Working Capital Ratios

2014 2015 2016 2017

Accounts Receivable Days 29.2 days 39.1 days 43.8 days 50.2 days

Inventory Days 32.0 days 33.5 days 36.9 days 45.6 days

Accounts Payable Days 29.6 days 30.2 days 38.2 days 53.0 days

Note: Ratios are based on assuming end year figures are the average throughout the majority of the year

Extracts from Financial Statements

Cash on hand 0.35mill 0.3mill .01mill .005mill

Sales – all on credit 15 mill 14 mill 15mill 16mill

Accounts Receivable Balance 1.2 mill 1.5 mill 1.8 mill 2.2 mill

Inventory 0.7 mill 0.78 mill 0.9 mill 1.15mill

Cost of Goods Sold 8.0 mill 8.5 mill 8.9 mill 9.3 mill

Accounts Payable 0.65mill 0.7 mill 0.95 mill 1.35 mill

Budgeted Figures

Cash on hand 0.3 mill 0.3 mill 0.31 mill 0.32 mill

Accounts Receivable Balance 1.2 mill 1.22 mill 1.28 mill 1.35 mill

Inventory Balance 0.7 mill 0.72 mill 0.78 mill 0.80 mill

Accounts Payable 0.64 mill 0.65 mill .07 mill 0.71 mill

Accounts Receivable Terms 30 days   30 days   30 days   30 days

Accounts Payable Terms 45 days 45 days 45 days 45 days

Industry Averages

Accounts Receivable Days 30.1 days 29.6 days 30.4 days 33.1 days

Inventory Days 30 days 31 days 33 days 32.2 days

Accounts Payable Days 30 days 28.5days 17 days 15 days

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My Assignment Help (2021) ACCT2127 Accounting For Management Decisions [Online]. Available from: https://myassignmenthelp.com/free-samples/acct2127-accounting-for-management-decisions/investments-in-companies-listed-on-the-asx.html
[Accessed 05 February 2023].

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