can someone help me with question 3 to find the profit for the year?

UNIVERSITY OF MAURITIUS FACULTY OF LAW AND MANAGEMENT SECOND SEMESTER EXAMINATIONS MAY/JUNE 2014 BSc (Hons) Finance (Minor: Law) / BSc (Hons) Finance BSc (Hons) Banking and Finance BSc (Hons) International Business Finance BSc (Hons) Human Resource Management BSc (Hons) Management PROGRAMME BSc (Hons) Management (Minor: Business Informatics) BSc (Hons) Management (Minor: Entrepreneurship) BSc (Hons) Business Studies BSc (Hons) Management (Minor: Finance) - Level I ACCOUNTING & F INANCIAL ANALYSIS MODULE NAME DATE MODULE CODE Thursday DFA1020Y(1) 15 May 2014 TIME 09:30 - 12:30 Hours DURATION 3 Hours NO. OF QUESTIONS SET 5 NO. OF QUESTIONS TO BE ATTEMPTED 4 INSTRUCTIONS TO CANDIDATES There are Two Sections in this paper. Section A and Section B. Section A : Question 1 & 2 are COMPULSORY Section B : Answer Any Two (2) Questions ACCOUNTING & FINANCIAL ANALYSIS SECTION A- COMPULSORY Question 1 Nice Sand Ltd runs a retail business store supplying items to the wholesale trade (selling goods to shops). The company's Trial Balance at 30 April 2014, before any final adjustments have been made, is as follows: Dr Cr Rs Rs Shop fittings - cost 112,000 Depreciation (at 1 May 2013) 26,880 Vehicles - cost 72,800 Depreciation (at 1 May 2013) 25,760 Inventory (stock) (at 1 May 2013) 83,866 Trade receivables (debtors) 102,200 Provision for doubtful debts 3,080 Prepayment (at 1 May 2013) 3,584 Cash at bank 157,158 Trade payables (creditors) 64,208 12% Debentures (repayable 2018) 56,000 Ordinary share capital 70,000 (70,000 shares of Rs1 each) Retained profi t (at 1 May 2013) 12,634 Sales 1,122,130 Purchases 592,312 Wages and salaries 44,240 Directors' salaries 53,760 Rent paid 24,192 Electricity 16,576 Bad debts 1,000 Administration expenses 41,160 Distribution costs 64,344 Return inwards 2,100 Share Premium 8,400 Discounts allowed 500 Carriage inwards 5,300 Interim dividend paid 12,000 1,389,092 1,389,092 Page 1 of 8 ACCOUNTING & FINANCIAL ANALYSIS The following additional information is available: 1. Depreciation is to be provided as follows: Shop fittings - 10% per year on cost; Vehicles - 20% per year using the reducing balance method. 2. Inventory on hand at 30 April 2014 was valued at cost of Rs108,760. This figure included Rs 7,480 for some damaged goods which were sold in a clearance sale in May 2014 for Rs 3,870. 3. Provision is to be made for the audit fee of Rs5,000 and a full year's interest on the debenture loan. 4. A provision for doubtful debts is to be increased to Rs2,740. 5. Corporation tax on the profit for the year to 30 April 2014 is estimated to be Rs87,200. 6. The directors propose, on 4 July 2014, a final dividend of Rs0.15 per share. 7. Rent still outstanding and insurance prepaid (included in the distribution costs) at 30 April 2014 were Rs 2,818 and Rs Rs1,500 respectively. 8. The directors proposed to create and transfer an amount of Rs53,000 at the year end. Required: (a) Prepare an Income Statement for Nice Sand Ltd for the year ended 30 April 2014. [8 marks] (b) Prepare a Statement of Changes in Equity for Nice Sand Ltd for the year. [5 marks] (c) Prepare the Statement of Financial Position for Nice Sand Ltd as at 30 April 2014. [7 marks] (d) Explain how the purchase of a non current asset on credit would affect the statement of financial position in terms of assets, liabilities, working capital and shareholders' funds. [5 marks] Page 2 of 8 ACCOUNTING & FINANCIAL ANALYSIS [Total marks 25] Question 2 Eternal Springs is a public company that would like to acquire (100% of) a suitable private company. It has obtained the following draft financial statements for two companies, Grappa and Merlot. They operate in the same industry and their managements have indicated that they would be receptive to a takeover. The summarised accounts of Grappa and Merlot for the year September 2013 are given below. Income statements for the year ended 30 September 2013 Grappa Merlot Rs'000 Rs'000 Revenue 12,000 20,500 Cost of Sales (10,500) (18,000) Gross profit 1,500 2,500 Operating expenses (240) (500) Finance cost - loan (210) (300) - overdraft nil (10) - lease nil (290) Profit before tax 1,050 1,400 Income tax expense (150) (400) Profit for the year 900 1,000 Note: dividends paid during the year 250 700 Page 3 of 8 ACCOUNTING & FINANCIAL ANALYSIS Statements of financial position as at 30 September 2013 Grappa Merlot Rs'000 Rs'000 Rs'000 Rs'000 Assets Non-Current Assets Freehold factory {note (i)} Owned plant {note (ii)} Leased plant {note (ii)} 4,400 5,000 nil 9,400 Current Assets Inventory Trade receivables Bank 2,000 2,400 600 Total Assets Equity and Liabilities Equity shares of Rs1 each Property revaluation reserve Retained earnings 900 2,600 Non-Current Liabilities Finance lease obligations {note (iii)} 7% Loan notes 10% Loan notes Deferred tax Government grants nil 3,000 nil 600 1,200 nil 2,200 5,300 7,500 3,600 3,700 nil 5,000 14,400 7,300 14,800 2,000 2,000 3,500 5,500 nil 800 3,200 nil 3,000 100 nil 4,800 Current Liabilities Bank overdraft Trade payables Government grants Finance lease obligations {note(iii)} Taxation nil 3,100 400 nil 600 Notes: (i) (ii) 6,300 1,200 3,800 nil 500 200 4,100 14,400 Total Equity and Liabilities 800 2,800 5,700 14,800 Both companies operate from similar premises. Additional details of the two companies' plant are: Grappa Rs'000 - Owned plant - cost 8,000 Page 4 of 8 Merlot Rs'000 10,000 ACCOUNTING & FINANCIAL ANALYSIS - Leased plant - original fair value nil 7,500 There were no disposals of plant during the year by either company. (iii) The interest rate implicit within Merlot's finance leases is 7.5% per annum. For the purpose of calculating ROCE and gearing, all finance lease obligations are treated as long-term interest bearing borrowings. (iv) The following ratios have been calculated for Grappa and can be taken to be correct: (1) (2) (3) (4) (5) (6) (7) (8) (9) Return on year end capital employed (ROCE) 14.8% (Capital employed taken as shareholders' funds plus long-term interest bearing borrowings - see note (iii) above) Pre-tax return on equity (ROE) 19.1% Net asset (total assets less current liabilities) turnover 1.2 times Gross profit margin 12.5% Operating profit margin 10.5% Current ratio 1.2:1 Closing inventory holding period 70 days Trade receivables' collection period 73 days Trade payables' payment period (using cost of sales) 108 days (10) Gearing [see note (iii) above] 35.3% (11) Interest cover 6 times (12) Dividend cover 3.6 times Required: (a) (b) (c) Calculate for Merlot the ratios equivalent to all those given for Grappa above. [9 marks] Assess the relative performance and financial position of Grappa and Merlot for the year ended 30 September 2013 to inform the directors of Eternal Springs in their acquisition decision. [12 marks] Explain the limitations of ratio analysis and any further information that may be useful to the directors of Eternal Springs when making an acquisition decision. [4 marks] [Total marks 25] Page 5 of 8 ACCOUNTING & FINANCIAL ANALYSIS SECTION B - (Answer Any Two questions) Question 3 The financial statements of Jives Ltd for the year ended 31 May are as below: Jives Ltd: Balance sheet at 31 May 2012 Rs000 Non-current assets Property, plant and equipment Accumulated depreciation Current assets Inventories Receivables Bank Rs000 2013 Rs000 1,780 400 1,380 500 1,860 200 2,240 700 1,540 760 2,220 0 2,560 3,940 Equity and liabilities Equity Share capital Share premium Retained earnings 800 240 1,360 2,980 4,520 1,200 540 1,040 2,400 Current liabilities Payables Tax payable Bank overdraft Rs000 1,040 500 0 2,780 1,400 260 80 1,540 3,940 1,740 4,520 Additional information: During the year, property, plant and equipment with a net book value of Rs4,800 was sold for Rs5,400. These assets had originally cost Rs24,000. Interest payable on the bank overdraft of Rs5,000 was paid during the year. Page 6 of 8 ACCOUNTING & FINANCIAL ANALYSIS Last year's tax liability of Rs500,000 was paid during the year. No interim dividend was paid during the year. Required: (a) Prepare a cash flow statement, in accordance to IAS 7 for Jives Ltd for the year ended 31 May 2013. [15 marks] (b) What are the usefulness of cash flow statements (c) Explain the limitations of the income statement and balance sheet which have [5 marks] caused the International Accounting Standards Board (IASB) to require companies to produce a cash flow statement. [5 marks] [Total marks 25] Question 4 Mitsu Ltd manufactures a single product, the Perfume. The following figures relate to the Perfume for a one-year period. Activity Level 50% Sales and Production (Units) 400,000 800,000 Rs'000 Sales 100% Rs'000 8,000 16,000 Variable 3,200 6,400 Fixed 1,600 1,600 Variable 1,600 3,200 Fixed 2,400 2,400 Production costs: Sales distribution, administration costs: The normal level of activity for the year is 800,000 units. Fixed costs are incurred evenly throughout the year, and actual fixed costs are the same as budgeted. Page 7 of 8 ACCOUNTING & FINANCIAL ANALYSIS There were no stocks of Perfume at the beginning of the year. In the first quarter, 220,000 units were produced and 160,000 units sold. Required: (a) What would be the fixed production costs absorbed by Perfume if absorption costing is used? (b) [1 mark] What would be the under/over-recovery of overheads be during the quarter? [2 marks] (c) What would be the profit using absorption costing? [8 marks] (d) What would be the profit using marginal costing? [7 marks] (e) Why is there a difference between the answers to (c) and (d)? [2 marks] (f) Compare and contrast advantages of absorption costing with marginal costing. [5 marks] [Total marks 25] Question 5 (a) (b) (c) What is earnings management? [3 marks] Explain how companies manage earnings [8 marks] The International Accounting Standards Board (IASB) states that financial statements should be: (i) Relevant (ii) Reliable (iii) Comparable (iv) Understandable For each of the four criteria listed above: State what you understand by the criterion and discuss the extent to which you think financial statements generally satisfy the criterion. [9 marks] (d) What are the limitations of computerized accounting systems [5 marks] [Total marks 25] END OF QUESTION PAPER Page 8 of 8