Question 2 The following table lists the sale and purchase records of an inventory item, i.e. souvenir packs, which were made by the souvenir shop of the Sky Travel Ltd. in the month of March 2020. Assume the beginning inventory on the first day of March consisted of 6 units, which were purchased at a unit cost of $100 each, and that the periodic inventory system is in use. Unit Total Units Units purchased 8 cost cost sold $108 $864 Transaction date 2020 Mar 8 Mar 15 Mar 23 Mar 30 7 10 $120 $1,200 9 (Show all your workings clearly in appropriate tabular formats) (a) Calculate the cost of sales by using the first-in-first-out (FIFO) method. (5 marks) (b) Calculate the cost of sales by using the last-in-first-out (LIFO) method. (4 marks) (c) Calculate the cost of sales by using the weighted average cost method. (4 marks) (d) Distinguish between the periodic inventory system and the perpetual inventory system. Give an example to illustrate. (7 marks) Question 3 Mr. Wong rents a property to operate Queen Restaurant. The rental agreement is about time for annual renewal and he is currently in negotiation with the landlord. In next year, the landlord offers Mr. Wong two options. He can choose to pay either a fixed lease with a monthly rent of $60,000 or a variable lease with monthly rent to be paid at 15% of the restaurant's revenue. The restaurant owner expects that the annual revenue would be $4,500,000 for the coming year. To expand his business, Mr. Wong also considers expanding his business by purchasing one of the following two similar retail shops, namely, Ko Shop and Lo Shop. He has asked for your advice on which one of these two shops is the better investment. Current revenue of each shop is $500,000 per year. Ko Shop has annual variable costs of 60% of revenue and fixed costs of $80,000; Lo Shop has annual variable costs of 70% of revenue and fixed costs of $30,000. Mr. Wong think he is s that, if he purchases Ko Shop, he could save $20,000 a year on interest expense. Alternatively, if he purchases Lo Shop, he could improve staff scheduling so that the wage savings will reduce its total variable costs to 65%. In either case, he thinks that the revenue can be increased by 15% a year. (a) For the proposed new lease for the restaurant, answer the following questions: (1) Calculate the 'indifferent revenue level of the restaurant for the coming year. (2 marks) (ii) Explain, with reasons, which lease option that the restaurant owner should take. (3 marks) (b) Prepare a comparative statement to show the existing cost structures and net incomes of both retail shops. (5 marks) (c) Prepare a comparative statement to show the resultant cost structures and net incomes of both retail shops after the purchase. (5 marks) (d) Advise Mr. Wong which retail shop he should buy and the caution he should take. Give an example to illustrate. (5 marks) Question 4 The Financial Director of Hong Kong HCM Hotel Group Limited plans to renovate the existing hotel building. He has selected two projects for further studies. The following table shows the projected net cash inflows of the two projects over the coming four years. Project A Project B Year 1 Year 2 Year 3 Year 4 $4,550,000 $3,450,000 $2,600,000 $2,600,000 $2,860,000 $4,490,000 $2,600,000 $1,300,000 Under each project, an initial investment of $8,000,000 is needed and the discount rate is set at 18% per annum. Discount factors for the discount rate at 18% per year are as follows: Year 3 Year 1 0.8475 Year 2 0.7182 Discount Factor 0.6086 Year 4 0.5158 Required: (a) Calculate the payback period (in years) for each project. Show your steps clearly. (5 marks) (b) Complete an evaluation for each project using net present value (NPV) at the discount rate at 18% for Year 1 to Year 4. (12 marks) (c) Based on the results in (b), comment on the two projects and recommend which one or both projects that the Financial Director should accept and implement. (3 marks) Questions You are given the financial information of Hong Kong F&B Supplies Limited for the financial years of 2018 and 2019 as follows: 2018 SODO 2019 SODO 1.800 Revenue (all credit sales) Less: Cost of Sales Gross profit Less: Operating expenses Operating profit before tax Less Income tax expense Net income 1,400 900 61% 342 77 950 sse 100 3.30 19 214 292 301 1.451 415 Accounts receivable Inventories Non-current asset(net) Accounts payable Accrued expenses Bank loan, repayable in 2023 Share capital Retained earnings 10 999 500 775 Required: (a) Calculate to 2 decimal places the following ratios for the company for the year of 2019: Gross profit ratio Net income to revenue ratio (ater tax) (in Retum on shareholders' equity after tax) (iv) Current ratio (v) Quick ratio (vi) Accounts receivable collection period (in days) (vii) Debt-to-equity ratio (viii) Inventory tumover (in times) marks) Page 1 (6) The industry averages for 2019 that the company refers to as its benchmarks are provided as follows Industry age Gross profit ratio Net income to revenue ratio (after tax) 19.87% Return on shareholders' equity after tax) Current ratio Quick ratio 0.88:1 Accounts receivable collection period in days) 30 31 days Use the ratios computed in (a) to compare Hong Kong F&B Supplies Limited's performance to the industry averages and comment on the company's profitability and liquidity respectively (12 marks)