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ACC201e Examination - July Semester 2015 Financial Accounting Friday, 13 November 2015 10:00 am - 12:00 pm ____________________________________________________________________________________ Time allowed: 2 hours ____________________________________________________________________________________ INSTRUCTIONS TO STUDENTS: 1. This examination contains SIX (6) questions and comprises NINE (9) printed pages (including cover page). 2. You must answer ALL questions. 3. This is a closed book examination. 4. All answers must be written in the answer book. 5. Included as an Appendix on Pages 8 to 9 is the Formula Sheet. At the end of the examination Please ensure that you have written your examination number on each answer book used. Failure to do so will mean that your work cannot be identified. If you have used more than one answer book, please tie them together with the string provided. THE UNIVERSITY RESERVES THE RIGHT NOT TO MARK YOUR SCRIPT IF YOU FAIL TO FOLLOW THESE INSTRUCTIONS. ACC201e Copyright 2015 SIM University Examination - July Semester 2015 Page 1 of 9 Question 1 The unadjusted trial balance of QP Pte Ltd for the financial year ending 31 December 20X1 is as follows: Account Title Cash Accounts receivable Prepaid advertising Prepaid rental Inventory Purchases PPE Accumulated depreciation - PPE Accounts payable Bonds (Long term) Unearned sales revenue Share capital Retained earnings Sales Utilities expense Salaries expense Transport expense Depreciation expense Interest expense Income tax expense Sales discount Debit $ 804,000 863,200 30,000 124,000 2,462,000 1,090,000 3,000,000 Credit $ 900,000 78,200 1,200,000 143,000 2,000,000 514,100 5,820,000 103,940 1,040,200 727,400 300,000 36,000 31,560 43,000 10,655,300 10,655,300 The firm uses a periodic inventory system. A stock count was made and the inventory at 31 December 20X1 was $183,000. Additional information: (i) The prepaid advertising was for a series of 10 advertisements to appear on the English channel programme. As at 31 December 20X1, 7 of the advertisements have been screened. (ii) On 1 July, the company made a rental payment of $124,000 for 2 years' rent. (iii) The long term bonds, issued at par, carry an annual interest of 6%. Interest payments will be made every 1 January and 1 July. (iv) On 28 December 20X1, the company delivered half of the outstanding sales order for customers who have already paid up fully for their goods a month ago. ACC201e Copyright 2015 SIM University Examination - July Semester 2015 Page 2 of 9 (v) As at 31 December 20X1, workers' salaries amounting to $6,900 has yet to be paid. (vi) The PPE has already been depreciated for 20X1. Required: Prepare the statement of comprehensive income of QP Pte Ltd for the year ending 31 December 20X1, incorporating all the necessary adjustments as given in the additional information. (You do not need to provide the adjusting journal entries). (15 marks) Question 2 (a) On 1 January 20X1, Abbot Engineering (Abbot) purchased a piece of machinery for $140,000. The machinery has a 5 year expected useful life and a $7,200 expected residual value. Initially, Abbot used double-declining balance depreciation. On 1 January 20X3, Abbot changed to straight line depreciation. The expected useful life and residual value are unchanged. Illustrate the accounting for depreciation by calculating the depreciation expense and the net book value of the assets for the 5 years. (10 marks) (b) Explain why there is a need for non-current assets to be depreciated. (5 marks) Question 3 Beng Supplies Pte Ltd began 20X1 with 600 units of its principle product. The cost of each unit was $20.00. The company uses the periodic inventory system. Transactions for the month of January 20X1 are as follows: Purchases Date Units 12 Jan 19 Jan Total 300 950 1,250 Unit cost $ 19.00 18.00 Sales Date 5 Jan 18 Jan 22 Jan Total Units 400 700 460 1,560 ACC201e Copyright 2015 SIM University Examination - July Semester 2015 Page 3 of 9 Required: Illustrate the accounting for inventory-related transactions by computing the ending inventory and cost of goods sold for the month of January using the following methods: (i) LIFO; (5 marks) (ii) FIFO; and (5 marks) (iii) Weighted average. (5 marks) Question 4 (a) Differentiate and explain the reasons for favouring the use of accrual basis of accounting over the cash basis? (4 marks) (b) On 1 July 20X1, OFC Pte Ltd (\"OFC\") sold 2 office desks and 10 arm chairs to B2B Enterprise Solutions, for $2,000 with credit terms of 30 days. On 10 July 20X1, B2B Enterprise Solutions paid up half of the outstanding amount and was given a 2% discount due to early payment. 31 July 20X1 is OFC's financial year end. On 3 August 20X1, OFC was informed that B2B Enterprise Solutions was ordered by the court to be wound up. OFC practises the direct write off method for bad debt accounting. Required: (i) Prepare the journal entries for each of the transactions. Journal narratives are not required. (7 marks) (ii) Explain to OFC why the direct method of accounting for bad debts is not ideal. (4 marks) ACC201e Copyright 2015 SIM University Examination - July Semester 2015 Page 4 of 9 Question 5 Extracts of the financial statements of RAL Pte Ltd for the years ended 31 December 20X2 and 20X3 are as follow: RAL Pte Ltd Comparative Income Statement (extract) Years Ended 31 December 20X2 and 20X3 20X2 $ $ Sales Revenue Cash Credit Cost of goods sold Beginning inventory Purchases ( all on credit ) Less: Ending inventory COGS Gross profit Less expense Profit before tax Less Income tax expense Profit after tax 20X3 $ 288,000 96,000 2,688,000 2,976,000 3,552,000 3,648,000 345,600 1,996,800 2,342,400 518,400 518,400 2,476,800 2,995,200 691,200 1,824,000 1,152,000 864,000 288,000 57,600 230,400 RAL Pte Ltd Comparative Statement of Financial Position As at 31 December 20X2 and 20X3 20X2 $ $ Current assets Cash Inventory Account receivables, net Non-current assets Property, plant and machinery, net Total assets Current liabilities Account payables Bank loan (6 months) Long term liabilities Bonds (5 years @5%) ACC201e Copyright 2015 SIM University Examination - July Semester 2015 $ 38,400 518,400 393,600 2,304,000 1,344,000 1,056,000 288,000 57,600 230,400 20X3 $ 67,200 691,200 950,400 604,800 1,363,200 96,000 1,046,400 393,600 19,200 $ 96,000 1,459,200 662,400 412,800 182,400 844,800 153,600 134,400 Page 5 of 9 Shareholders' equity Ordinary shares Total liabilities and shareholders' equity 480,000 1,046,400 480,000 1,459,200 Additional information: The accounts receivable as at 31 December 20X1 was $182,400. Required: (a) Compute the following ratios for the two years: (i) Current ratio; (ii) Quick ratio; (iii) Inventory resident period; (iv) Receivable collection period; and (12 marks) (b) Using the ratios you have computed, explain on the changes in the position of the company as revealed by the changes in these ratios. (8 marks) Question 6 The following financial information for UL Engineering Pte Ltd is as given below: UL Engineering Pte Ltd Comparative Statement of Financial Position As at 31 December 20X1 and 20X2 20X1 Assets Current Cash Inventories Account receivable Non-current Property, Plant & Equipment, net Total Assets Liabilities Current Accounts payable Income tax payable Non-current Bank loan ACC201e Copyright 2015 SIM University Examination - July Semester 2015 20X2 145,600 624,000 302,900 137,800 533,000 526,500 2,730,000 3,802,500 3,900,000 5,097,300 292,500 117,000 234,000 156,000 117,000 0 Page 6 of 9 Shareholders' equity Share capital Retained earnings Total equity and liabilities 3,022,500 253,500 3,802,500 4,095,000 612,300 5,097,300 Additional information: (i) The profit before tax for 31 December 20X2 was $546,000. (ii) Depreciation of $162,000 was charged for the year ending 31 December 20X2. (iii) An item of PPE with a net book value of $240,000 was sold at a gain of $60,000. (iv) Interest paid was $18,000 during the year ending 31 December 20X2. (v) There was no over or under provision of tax for the year ending 31 December 20X1. (vi) Dividends were declared and paid during the year ending 31 December 20X2. Required: Prepare a statement of cash flows for UL Engineering Pte Ltd for the year ending 31 December 20X2 using the indirect method. (20 marks) ----- END OF PAPER ----- ACC201e Copyright 2015 SIM University Examination - July Semester 2015 Page 7 of 9 Appendix: Formula Sheet Measuring Ability to Sell Inventory and Collect Cash 1. Inventory turnover = Cost of goods sold Average inventory 2. Accounts receivable turnover = Sales revenue credit sales Average net accounts receivable 3. Payable turnover = Cost of goods sold Average accounts payable 4. Cash conversion cycle = Receivable collection period + Inventory resident period Payable outstanding period 5. Receivable collection period = 365 Accounts receivable turnover 6. Inventory resident period = 365 Inventory turnover 7. Payable outstanding period = 365 Accounts payable turnover Measuring Ability to Pay Current Liabilities 8. Current ratio = Current assests Current liabilities 9. Acid-test (quick) ratio = Cash + Short-term investments + Net current receivables Current liabilities Measuring Ability to Pay Long-Term Debt 10. Debt ratio 11. Times-interestearned ratio = Total liabilities Total assests = Income from operations Interest expense ACC201e Copyright 2015 SIM University Examination - July Semester 2015 Page 8 of 9 Measuring Profitability 12. Gross or Operating or Net profit Gross/Operating/Net = 1 Profit margin Net sales 13. Asset turnover = Net sales Average assests Return on total assets (ROA) = Net income Average total assests Return on ordinary 15. shareholders' equity (ROE) = Net income Preference dividends Average ordinary shareholders' equity 14. Analysing Cash Flows 16. Free cash flow 17. Cash realisation ratio = Net cash provided by operating activities - Cash payments for investments in PPE = Net cash provided by operating activities Net Profit Analysing Shares as an Investment Earnings per 18. ordinary share (EPS) = Net income Preference dividends Weighted-average number of ordinary shares outstanding Price/earnings (P/E) ratio = Market price per ordinary share Earnings per share 20. Dividend yield = Dividend per ordinary share (or preference) Market price per ordinary share (or preference) Book value per ordinary share = Total shareholder' s equity Preference equity Number of ordinary shares outstanding 19. 21. 1 Also called the Gross/Operating/Net Profit percentage. ACC201e Copyright 2015 SIM University Examination - July Semester 2015 Page 9 of 9