SECTION A: FINANCIAL ACCOUNTING [50 MARKS] Question 1 (35 marks) Presented here are a Statement of Income and Retained Earnings and Comparative Balance Sheets for Madison Gardens Pty Ltd, which operates a national chain of sporting goods stores. Statement of Income and Retained Earnings for the Year ended ended 31 December 2016 Net sales R48000 Cost of goods sold R36000 Gross profit 12000 Selling, general and admin expense 6000 Operating income 6000 Interest expense 280 Income before tax 5720 Income tax expense 2280 Net income 3440 Preference dividends 100 Income available to ordinary shareholders 3340 Ordinary dividends 500 To retained Earnings 2840 Retained Earnings 1/1/2017 12000 Retained Earnings the end of the year 14840 Comparative Balance Sheets as at December 31 2016 2015 Cash 840 2700 Accounts receivable 12500 9000 Inventory 8000 5500 Prepaid insurance 100 400 Total current Assets 21440 17600 Land 4000 4000 Buildings & Equipment 12000 9000 Accumulated Depreciation (3700) (3000) Total long-term Assets R12300 R10000 Total Assets R33740 R 27600 Accounts Payable 7300 5000 Taxes Payable 4600 4200 4 PBA4807 MAY/JUNE 2019 PORTFOLIO EXAMINATION [TURN OVER] Notes Payable 2400 1600 Current portion of mortgage bond 200 200 Total current Liabilities 14500 11000 Mortgage Bond 1400 1600 Total liabilities 15900 12600 Preference shares 1000 1000 Ordinary shares 2000 2000 Retained earnings 14840 12000 Total 17840 15000 R33 740 R 27600 Required A. Prepare a statement of cash flows for Madison Gardens Pty (Ltd) for the year ended December 31, 2016, using the indirect method in the Operating Activities section of the statement. (15) B. Madison Gardens (Pty) Ltds management is concerned with its short-term liquidity and its solvency over the long run. To help management evaluate these, compute the following ratios, rounding all answers to the nearest one-tenth of a percent: 1. Current ratio 2. Acid-test ratio 3. Cash flow from operations to current liabilities ratio 4. Accounts receivable turnover ratio 5. Number of days' sales in receivables 6. Inventory turnover ratio 7. Number of days' sales in inventory 8. Debt-to-equity ratio 9. Debt service coverage ratio 10. Cash flow from operations to capital expenditures ratio (10) C. Comment on Madison gardens liquidity and its solvency. What additional information do you need to fully evaluate the company? (10) 5 PBA4807 MAY/JUNE 2019 PORTFOLIO EXAMINATION [TURN OVER] Question 2 (15 marks) Overstatement of net income might have dire consequences on the financial position of a company. Financial results are made available to users of financial information for decision making therefore the misinformation might lead to improper financial decisions. Depreciation is one of the expenses that affect net income. The following extract from two employees of Mzansi (Pty) Ltd, Sihle, who is the accounts payable clerk and Ntombi, the cashier, went as follows: Sihle: Ntombi, could I get your opinion on something? Ntombi: Sure, Sihle. Sihle: Do you know Mavis, the fixed asset clerk? Ntombi: I know who she is, but I do not know her very well, why? Sihle: Well, I was talking to her at lunch last week about how she liked her job, etc. You know, the usual.and she mentioned something about having to keep two sets of books one for taxes and another for the financial statements. That cant be good accounting, can it? What do you think? Ntombi: Two sets of books it doesnt seem right to me Sihle: It doesnt seem right to me either. I was always taught that you must use generally accepted accounting practice (GAAP) or IFRS to write up a set of books. What can be the difference between the two sets of books? If you were Ntombi how would you respond? Do you think this is ethical? SECTION B: MANAGEMENT ACCOUNTING [50 MARKS] Question 1 (20 marks) Gauteng Potteryworks makes a variety of pottery products that it sells to retailers. The company uses a job-order costing system in which predetermined overhead rates are used to apply manufacturing overhead cost to jobs. The predetermined overhead rate in the Moulding Department is based on machine-hours, and the rate in the Painting Department is based on direct labour cost. At the beginning of the year, the companys management made the following estimates: 6 PBA4807 MAY/JUNE 2019 PORTFOLIO EXAMINATION [TURN OVER] Department Moulding Painting Direct labour-hours 12,000 60,000 Machine-hours 70,000 8,000 Direct materials cost R510,000 R650,000 Direct labour cost 130,000 420,000 Manufacturing overhead cost 602,000 735,000 Job 205 was started on 1 August and completed on 10 August. The companys cost records show the following information concerning the job: Department Moulding Painting Direct labour-hours 30 85 Machine-hours 110 20 Materials placed into production R470 R332 Direct labour cost 290 680 Required A. Compute the predetermined overhead rate used during the year in the Moulding Department. Compute the rate used in the Painting Department. B. Compute the total overhead cost applied to Job 205. C. What would be the total cost recorded for Job 205? If the job contained 50 units, what would be the cost per unit? D. At the end of the year, the records of Gauteng Potteryworks revealed the following actual cost and operating data for all jobs worked on during the year: Department Moulding Painting Direct labour-hours 10,000 62,000 Machine-hours 65,000 9,000 Direct materials cost R430,000 R680,000 Direct labour cost 108,000 436,000 Manufacturing overhead cost 570,000 750,000 7 PBA4807 MAY/JUNE 2019 PORTFOLIO EXAMINATION [TURN OVER] What was the amount of under- or overapplied overhead in each department at the end of the year? Question 2 (24 marks) Motswatswa (Pty) Ltd manufactures a special make of lounge suite covers and has compiled the following data in order to put together their first quarter operating budget for 2020: January February March April Sales (units) 35,000 31,000 38,000 29,000 Additional information: Motswatswa sells each cover for R95. Company policy is to have 30% of next months sales (in units) in ending finished goods inventory. This policy was met in December. Company policy is to have 40% of next months production needs in ending raw materials inventory. The production needs for April is 95,500. This policy was met in December. It takes three meters of material to produce each cover and the cost is R2.75/meters. Required: A. Prepare a sales budget for the January, February and March and for the first quarter in total. (4) B. Prepare a production budget for January, February and March and for the first quarter in total. (8) C. Prepare a direct material purchases budget for January, February and March and for the first quarter in total. (12) 8 PBA4807 MAY/JUNE 2019 PORTFOLIO EXAMINATION [TURN OVER] Question 3 (6 marks) Mendel Allison Company adopted a standard cost system several years ago. The standard costs for the prime costs of its single product follow: Material: 10 kilograms @ R4.50 per kilogram R45.00 Labour: 6 hours @ R8.50 per hour R51.00 The following operating data were taken from the records for November: 1. Units completed: 5,800 units 2. Budgeted output: 6,000 units 3. Materials purchased: 60,000 kilograms 4. Total actual labour costs: R306,600 5. Actual hours of labour: 36,500 hours 6. Material usage variance: R2,250 U 7. Total material variance: R450 U Compute the following: A. Labour rate variance (1) B. Labour efficiency variance (1) C. Actual kilograms of material used in the production process (1) D. Actual cost paid per kilogram of material