Accounting and Finance Assignment
1 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. 2 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 incorrectly recorded in the cash book as £1,950. iv. The bank had incorrectly 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 reconciliation 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: Please turn over 3 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 boxes were acquired for £18 each. On 2 February, 18 boxes were sold for £21. This value has already been included correctly 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. (8 marks) (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 correct value of inventory and explain why the concept is relevant. (9 marks) 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 celebrities 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-current assets The opening balances for non-current assets at 1 February 2019 were as follows: Non-current asset Cost (£) Accumulated depreciation (£) Machinery 2,500,000 450,000 Vehicles 3,850,000 1,325,000 Please turn over 4 During the year to 31 January 2020, the following events have occurred. • The company sold a machine on 31 July 2019 for £73,000 which had cost £125,000 when purchased on 1 February 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 warranty 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 reduced to £68,000 per year. • GoGold advertises its products in Fab!, a monthly magazine. The bills for these advertisements are paid quarterly in arrears with bills occurring 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 arrears) 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. (21 marks) (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 refurbishment. 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 briefly about the advantages and disadvantages of two forms of business that may be suitable for them, partnerships or companies. (7 marks) (ii) Explain to Marge the key differences between the financial statements she produces as a sole trader and those required for a partnership. (5 marks) TOTAL (33 marks) Please turn over 5 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) b. 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 2015-2019 are 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) Please turn over 6 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 correctly 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 bracket. 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 Please turn over 7 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: