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PART I
ACCOUNTING AND FINANCE
AcF 100 INTRODUCTION TO ACCOUNTING AND FINANCE
Answer ONE question each from both Sections A and B. Answer TWO
questions from Section C and then ONE question from Section D. All questions
in Sections A and B are worth 33 marks each. Sections C and D are worth 17
marks each.
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SECTION A – FINANCIAL ACCOUNTING
ANSWER ONE QUESTION FROM THIS SECTION (EITHER QUESTION 1 OR
QUESTION 2) AND SHOW ALL YOUR WORKINGS
Question 1
(a) You are the accountant for Dimanche Ltd and you find that the cash balance in the
cash book at 30 April 2020 is £15,550. The cash balance in the bank statement for the
same date is recording an overdraft of £4,300. When you investigate the difference,
you find the following information:
i. Cheque payments of £8,100 and receipts of £15,220 had not yet been
presented at the bank.
ii. A customer had paid for their receivable of £2,450 directly into the bank.
iii. A cheque payment for £1,590 had been inco
ectly recorded in the cash book
as £1,950.
iv. The bank had inco
ectly deducted a payment of £2,940 from Dimanche Ltd’s
account instead of from another customer’s account.
v. A cheque receipt of £12,250 had been dishonoured by the customer’s bank so
the bank has returned it to Dimanche Ltd but no adjustment has yet been made
in the cash book.
vi. Bank charges for April amounted to £350 and these have not been recorded in
the cash book.
Required
(i) Briefly explain why bank reconciliations are useful as an internal control.
(2 marks)
(ii) Show what adjustments you would make to the cash book and prepare a bank
econciliation statement as at 30 April 2020.
(10 marks)
(iii) Dishonoured cheques arise from customers who don’t have sufficient money in
their bank account to meet their bills. This can cause problems for companies which
allow customers to buy on credit. Briefly discuss two actions a company can take to
avoid bad debts arising from customers who can’t pay their bills.
(4 marks)
(b) You are the accountant for Samedi Ltd, which produces scented candles and you
are producing the financial statements for the year ended 30 April 2020. The inventory
count at 30 April has resulted in a valuation for closing inventory of £350,000.
However, you have discovered the following information from the accounting records:
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I.Samedi has a low-cost line of inventory consisting of identical “Parsifal” candles.
At 1 May 2019, there were 60 boxes of these candles, with each box costing £20.
On 20 August, 32 boxes were sold for £35 each. On 10 November, a further 15
oxes were acquired for £18 each. On 2 Fe
uary, 18 boxes were sold for £21.
This value has already been included co
ectly in closing inventory.
II. Some of the candles in inventory at a value of £9,000 have been stored in warm
temperatures and have partly melted. These will only be saleable for £2,000 after
£400 is spent on repairing their packaging.
III.Inventory costing £22,000 was received on 30 April 2020, but its value wasn’t
included in closing inventory as the invoice and delivery were stored in a cupboard
and not noticed until 3 May 2020.
Required
(i) Explain what a cost flow assumption is and why a cost flow assumption would be
used for the Parsifal candles, and calculate the value of these candles in closing
inventory under the AVCO cost flow assumption.
XXXXXXXXXXmarks)
(ii) Recalculate the cost of closing inventory taking account of the information in (II)
and (III) above. For each adjustment you make, identify the accounting concept or rule
that you are applying to calculate the co
ect value of inventory and explain why the
concept is relevant.
XXXXXXXXXXmarks)
TOTAL (33 marks)
OR
Question 2
(a) You are the accountant for GoGold plc, a company which produces luxury make-
up and accessories. It uses cele
ities to publicise its products. You are preparing the
financial statements for the year ended 31 January 2020 and you have collected the
information below.
Non-cu
ent assets
The opening balances for non-cu
ent assets at 1 Fe
uary 2019 were as follows:
Non-cu
ent asset Cost (£) Accumulated
depreciation (£)
Machinery 2,500,000 450,000
Vehicles 3,850,000 1,325,000
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During the year to 31 January 2020, the following events have occu
ed.
• The company sold a machine on 31 July 2019 for £73,000 which had cost
£125,000 when purchased on 1 Fe
uary 2017.
• The company purchased a new limousine on 1 April 2019 at a cost of £225,000.
An additional £8,000 was spent on road tax, £2,500 on delivery of the vehicle
and £14,000 on an extended wa
anty for the limousine.
Further information:
• Depreciation for machinery is 15% per year on a straight-line basis.
• Depreciation for vehicles is 25% per year on a reducing balance basis.
• Depreciation is charged on a proportionate basis from the date of acquisition to
the date of disposal. Assume residual values are zero.
Expenses
• GoGold rents a storage warehouse in London and rental is payable six monthly
in advance on 1 November and 1 May. Rental was £72,000 per year for until 1
November 2019 when difficult rental market conditions meant that the rent was
educed to £68,000 per year.
• GoGold advertises its products in Fab!, a monthly magazine. The bills for these
advertisements are paid quarterly in a
ears with bills occu
ing on 31 March,
30 June, 30 September and 31 December. Quarterly bills were £24,000 but as
Fab! Magazine has been very successful, it has increased its charges to
GoGold to £28,000 per quarter (in a
ears) from 31 December 2019.
Required:
(i) Show extracts from the income statement and balance sheet for 31 January 2020
in relation to the above information. Use appropriate headings and show your
workings.
XXXXXXXXXXmarks)
(b) Marge Dawson runs a business consultancy as a sole trader, advising hotels about
how to improve their visitor experience. Her friend, Zara Blyth, is an expert in interior
design and refu
ishment. They are considering working together to produce a full
hotel development service and as an accountant, they have asked your advice about
setting up their new business.
Required:
(i) Advise Marge and Zara
iefly about the advantages and disadvantages of two
forms of business that may be suitable for them, partnerships or companies.
XXXXXXXXXXmarks)
(ii) Explain to Marge the key differences between the financial statements she
produces as a sole trader and those required for a partnership.
XXXXXXXXXXmarks)
TOTAL (33 marks)
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SECTION B - MANAGERIAL FINANCE
ANSWER ONE QUESTION FROM THIS SECTION (EITHER QUESTION 3 OR
QUESTION 4) AND SHOW ALL YOUR WORKINGS
Question 3 - ANSWER ALL PARTS OF THIS QUESTION
a. You have been offered a 6-month loan of £3,000. Interest will be charged on
the loan at the rate of 2 percent a month.
Required:
(i) Calculate the annual percentage rate (APR) you will be paying on the
loan.
(1 mark)
(ii) Calculate the loan’s effective annual rate (EAR).
(2 marks)
(iii) If inflation is running at 10 percent a year, what is the real EAR?
(3 marks)
. This morning, you bought an 18-year £100 bond priced at par value. The bond
has a 4 percent coupon payable once a year. This afternoon, the market rate
on such bonds fell to 2.5 percent. How much has your investment changed in
value?
(4 marks)
c. Goldman Stanley plc published financial statements showing that the company
had made a loss during the past financial year. However, the company’s
management also reported that it had decided to continue to pay the same
amount of dividend next year. Provide examples of how the firm might be able
to pay dividends despite making a loss.
(4 marks)
d. The annual returns on a stock for XXXXXXXXXXare as follows: 2.7%, -8.2%, 7.8%,
4.4% and 14.5%.
Required:
(i) Calculate the risk of this stock.
(4 marks)
(ii) Calculate the geometric average return for this period.
(2 marks)
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e. The risk-free rate is 1.2 percent and the expected return on the market is 8.3
percent. Stock has a beta of 1.3 and an expected return of 10 percent. Is this
stock co
ectly priced? Provide a short explanation.
(5 marks)
f. Complexity plc is a utility company. Suppose that its cost of equity is 13 percent
and cost of debt is 6 percent. The company is in the 20 percent corporate tax
acket.
Required:
(i) If the company has an after-tax WACC of 10 percent, what is the target
debt-to-firm value ratio?
(3 marks)
(ii) Suppose that the company plans to expand its business to artificial
intelligence. Briefly describe how the company can use the “pure play
approach” to estimate a reasonable appropriate return for the new
project.
(5 marks)
TOTAL 33 MARKS
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Question 4 - ANSWER ALL PARTS OF THIS QUESTION
a. You bought an investment that pays £1,400 each year for 12 years, starting in
year 5. The interest rate for investments of this type was 6 percent.
Required: