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Accounting for Managers (ACC00724) S2, 2019 Assessment 2 (20 Marks) QUESTION 1 (10 Marks) The following financial statements were prepared for the management of Morgan Ltd. The statements contain some information that will be disclosed in note form in the general purpose external financial statements to be issued to the investors. Morgan Ltd Income Statement For the year ended 30 June 2018 Revenues (Note 2)$850,500 Expenses, excluding finance costs (Note 4) 686,700 Finance costs 6,300 ------------- Profit before income tax 157,500 Income tax expense 63,000 ------------- Profit $ 94,500 ======== Morgan Ltd Statement of Financial Position As at 30 June 2018 Current assets Cash and cash equivalents$ 37,800 Accounts receivables$299,250 Less: Allowance for doubtful debts 18,900 -------------- 280,350 Inventories252,000 _______ Total current assets570,150 _______ Non-current assets Land63,000 Building$189,000 Less: Accumulated Depreciation 37,800 _________151,200 Store equipment47,250 Less: Accumulated Depreciation22,050 _________ 25,200 _______ Total Non-current assets239,400 _______ Total assets809,550 ======= Current liabilities Accounts payables270,900 Preference dividends payable 3,780 Ordinary dividends payable 25,200 Other current liabilities 12,600 _______ Total current liabilities312,480 _______ Non-current liabilities Long-term borrowings (Note 5)63,000 _______ Total Non-current liabilities63,000 _______ Total liabilities375,480 _______ Net assets434,070 ======= Equity Share capital$315,000 Retained earnings 119,070 _______ Total equity 434,070 ======= Morgan Ltd Statement of Changes in Equity For the year ended 30 June 2018 Share capital Ordinary: Balance at start of period$252,000 ________ Balance at end of period 252,000 ________ Preference (Note 6): Balance at start of period 63,000 _______ Balance at end of period 63,000 ________ Total share capital$315,000 ======== Retained earnings Balance at start of period $53,550 Total profit for the period 94,500 Dividends – preferences (3,780) Dividends – ordinary (25,200) ________ Balance at end of period$119,070 ======== Notes to the financial statements Note 2: Revenue Sales$850,500 Note 4: Expenses Cost of sales567,000 Selling and distribution expenses 89,000 Administration expenses 30,700 Note 5: Long-term borrowings 10% mortgage payable 63,000 Note 6: Preference shares 6% preference shares 63,000 Additional information: 1. The balance of certain accounts at the beginning of the year are: Accounts receivables$315,000 Allowance for doubtful debts (26,350) Inventories220,500 2. Total assets and total equity at the beginning of the year were $756,000 and $368,550 respectfully. REQUIRED: A. Name the ratios that a financial analyst might calculate to give some indication of the following cases: (2 Marks) 1. A company’s earning power 2. The extent to which internal resources have been used to finance acquisition of assets 3. Rapidity with which accounts receivables are collected 4. The ability of the entity’s earnings to cover its interest commitments 5. The length of time taken by the business to sell its inventories B. Calculate and briefly discuss the suitability of the ratios mentioned for each of the above cases. (6 Marks) C. Given the above financial statements, comment on the company’s profitability and liquidity. (2 Marks) QUESTION 2 (5 Marks) Koala Bear Day-care provides day-care for children from Mondays through Fridays. Its monthly variable costs per child are: Lunch$100 Educational supplies 75 Other supplies (paper products, toiletries, etc.) 25 ____________ Total$200 ============ Monthly fixed costs consist of: Rent$2,000 Utilities (electricity, water, telephone expenses) 300 Insurance 300 Salaries 2,500 Miscellaneous 500 _________ Total$5,600 ========= Koala Bear charges each parent $600 per child. REQUIRED: A. Calculate the break-even point. (1 Marks) B. Koala Bear’s target profit is $10,400 per month, calculate the number of children who must be enrolled to achieve the target profit (1 Marks) C. Koala Bear lost its lease and had to move to another building. Monthly rent for the new building is $3,000. At the suggestion of parents, Koala Bear plans to take children on field trips. Monthly costs of the field trips are $1,000. By how much should Koala Bear increase fees per child to meet the target profit of $10,400, assuming the same number of children as in requirement B? (1 Marks) D. How can a company with multiple products calculate its break-even point? Discuss and support your discussion by readings and research. (2 Marks) QUESTION 3 (5 Marks) Lennox Company uses a job costing system. The company uses predetermined overhead rates in applying manufacturing overhead costs to individual jobs. The predetermined overhead rate in Department A is based on machine-hours, and the rate in Department B is based on direct labour cost. At the beginning of 2018, the company’s management has made the following estimates for the year: Department ADepartment B Direct labour-hours15,00030,000 Machine-hours50,00012,000 Direct labour cost$80,000$172,000 Manufacturing overhead162,500 215,000 Job 145 was initiated into production on August 1 and completed on September 15. The company’s cost records show the following information on the job: Department ADepartment B Direct labour-hours2240 Machine-hours8020 Direct material used$450$250 Direct labour cost120180 REQUIRED: A. Calculate the predetermined overhead rates that should be used during 2014 in Department A and B. (1 Marks) B. Calculate the total overhead cost applied to job 145. (1 Marks) C. What would be the total cost of job 145? If the job contained 10 units, what would be the cost per unit? (1 Marks) D. What factors should be considered in selecting a base to be used in calculating the overhead absorption or recovery rates? Discuss. Your discussion should be supported by readings and research. (2 Marks)