Financial Accounting and Reporting - Exam Questions and Solutions

This examination will be open for twice the expected exam duration, to provide an inclusive approach to ensure that the requirements of those students who need additional examination time are already accommodated within this time period. It is also intended to allow sufficient time for all students to upload/download materials and as mitigation for any temporary network problems during the examination. No additional time can be added and late submissions cannot be accepted. Students should be able to complete the examination within the expected exam duration time period.

As Jennifer has been running her tai chi classes over the period, 1st September 2019 to 28th February 2020, she was keen to establish how well her business, Flow Freely was doing. She has gathered the following information for her first six-month trading period.

Jennifer runs fifty public tai chi classes a month. Each class is restricted to 10 participants and each participant pays £5 cash per class. Due to the popularity of tai chi, the classes are always full. In addition, Jennifer holds ten corporate classes a month for a number of different local companies. Each class costs the company £100 but companies do not need to pay their bill until two months after the class has been held.

On 1st September 2019, Jennifer paid £10,000 for tai chi equipment. She is confident that the equipment will last five years.

The tai chi classes are all held at the local sports centre. On her first day of trading, Jennifer had to pay cash of £6,000 for the annual rental of a gym hall. Due to illness during the trading period, Jennifer had to ask her pal Susan to take eight of the classes. She pays Susan £35 per class but still owes her money for two classes held in the final week of February 2020. Sundry other expenses, all paid, totalled £4,200 for the period. Tax - A bill of £5,000 should be provided for the trading period.

Flow Freely was financed, firstly by Jennifer and two other family members each putting £2,500 into the company and secondly by a £5,000 loan from the local bank. The loan was taken out on 1st September 2019 and attracts interest of 10% per annum, paid at the end of each year. The loan is due to be repaid on the 31st August 2024. The owners of Flow Freely are not looking for any return from their investment in the first three years.

Question 2

Prepare the income statement for Flow Freely for the six month period to 28th February 2020 and a balance sheet for the company as at 28th February 2020.

Davy Paton, Managing Director of Woodenhuts, was intrigued by a phrase quoted in the Business Manager magazine that he was reading ’don’t underestimate the benefit of management accounting’. His company, who make summer houses, had never used management accounting before. As he was in the process of recruiting a trainee accountant, he decided to ask applicants to attach a ‘managementaccounting’ memo to their application form.

Write a memo to Davy discussing how you would use management accounting to help improve the running of Woodenhuts.

Having just played three hours of bridge at their local club, Stuart and Liz were having a well-earned glass of wine with their opponents Phil and Maureen. The topic of conversation quickly got round to the recent publication of the Greggs Annual Report, in which they all had a vested interest. Stuart’s company supplied Greggs with the meat for their sausage rolls. Liz owned 1,000 shares in the company.

Phil worked behind the counter at the Dornoch branch of Greggs. Maureen, a bank manager, had just been approached by the company to lend them £5m.

Explain what information each of the bridge players would find useful in the Greggs Annual Report.

As a freelance financial consultant you offer a ‘virtual hour’ e-mail response service to managers of Scotland’s start-up companies. The first message you received at 6pm on 30th November 2020 is noted below Prior to my Management Meeting next week could you please send me a return e-mail answering the following queries:

a) Explain the significance of, and the difference between, operational gearingand financial gearing?

b) Our main competitors posted good profits in last year’s financial statementsbut have now gone into liquidation. How can this have happened?

c) Three of our key financial ratios moved significantly last year.

Could you give me some reasons why each of those ratios moved?

Greenwood is thinking of developing an ipad. It has gathered the following information to help it decide whether or not the venture will be worthwhile.

Annual selling costs £3,000

Raw material per ipad £10

Direct labour per ipad £60

Variable overheads per ipad £30

Annual factory rent £16,000

Annual machine depreciation £6,000

Selling price per ipad £150

Please treat each question independently

i) What would be Greenwood’s breakeven point? 25% weighting

ii) What will the profit be if Greenwood sells 876 ipads?

iii) If Greenwood sell 1,000 ipads and want to make a profit of £20,000 next year, what selling price would they need to charge?

iv) There are two possible machines that Greenwood could purchase to make the ipad. How could they make use of investment appraisal techniques to help ensure they buy the right one?