HERIOT-WATT MANAGEMENT PROGRAMME

ACCOUNTING STAGE 1
For Official Use Only

December 2006
Name . No A ! Ma"r#c$%a"#o& No . Sea" No' (if applicable): . Co$r(e .. Da"e .. Declaration I certify that I have read the Examination Regulations (see back cover) and understand that I am re uired to abide by them! "tudent#s "ignature$%%%%%%%%%%%%%%%%%%%%! C D Mark

INSTRUCTIONS TO CANDIDATES 1. At the start of the exam ensure that you have written all the details required above. 2. $. ead the instructions on pa!e 2. ou!h wor%in!s should be confined to the left hand pa!es.
P)EASE READ THE E*AMINATION REGU)ATIONS ON THE !AC+ CO,ER

". #tart each question on a new pa!e. &. 'his boo% must be handed in entire and unfolded.

PART I

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Accountin! #ta!e 1 *eb, -ecember 2../

E*AMINATION INSTRUCTIONS
'he duration of the examination is - .o$r(. 'he mar%s value of each section is shown below. 0ou may allocate your time as you see fit. 1n the multiple choice questions2 no mar%s are deducted for wron! answers. 'he paper is in four sections #34'156 A: $. mar%s #34'156 7: 2. mar%s #34'156 4: 2. mar%s #34'156 -: 2. mar%s A&(/er A)) (ec"#o&(' #34'156 A: is a multiple choice section and you should indicate your response on the answer !rid provided in 8art 11. 6o mar%s are deducted for wron! answers. Answer A99 questions in this section. #34'156 7: Answer EITHER :uestion 71 OR :uestion 72. #34'156 4: Answer EITHER :uestion 41 OR :uestion 42. #34'156 -: Answer EITHER :uestion -1 OR :uestion -2 P)EASE NOTE THIS E*AMINATION DOCUMENT IS IN TWO PARTS' Par" I is the question boo%let. Par" II is the answer boo%let2 which also contains the A6#*3 ; 1- for the multiple choice questions and the *5 <#(33'# for :uestion 712 42(a)2 -1(a) and :uestion -2(d). 8lease ensure that !OTH PARTS are returned at the end of this examination.

(eriot)*att +niversity

Accountin! #ta!e 1 *eb, -ecember 2../

SECTION A 010 mark(2 "ection & contains multi'le choice uestions( )hich are not made available to students!

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Accountin! #ta!e 1 *eb, -ecember 2../

SECTION ! 020 mark(2 A&(/er EITHER 3$e("#o& !1 OR 3$e("#o& !2'

3$e("#o& !1 'he 'rial 7alance at "1 -ecember 2../ of #noopy #weets 9td2 a company ma%in! and sellin! confectionary2 showed the followin!: -ebit 4redit =>... =>... 7uildin!s ) cost 7uildin!s ) a!!re!ate depreciation 8lant and equipment ) cost 8lant and equipment ) a!!re!ate depreciation -elivery vehicles ) cost -elivery vehicles ) a!!re!ate depreciation #toc% at "1 -ecember 2../ -ebtors 8rovision for doubtful debts at "1 -ecember 2..& 7an% and cash 4reditors and accruals 9on! term loan #hare capital etained profits at "1 -ecember 2..& #ales 4ost of sales #ellin! and distribution expenses Administrative expenses 9oan interest ?&. @. 12... $.A 1A. ?2 2?. 2"$ 2? 1& 1A@ "&. &&. ?2 221?. @.. 2?. 2@1 1A "2@2A 'he followin! matters require attention: 1. 6o depreciation has yet been provided for the year.

"2@2A

7uildin!s are depreciated at 2B on cost. 'he buildin!s are used 2C" for production and 1C" for administration.

'he policy is to char!e 2&B of cost per year on the strai!ht)line method for plant and equipment and delivery vehicles. 8lant and equipment is used A.B for production and 2.B for administration.

2.

'he lon!)term loan is repayable in ei!ht years> time and carries interest at AB per year.

(eriot)*att +niversity

Accountin! #ta!e 1 *eb, -ecember 2../

".

A customer>s lon! outstandin! debt of =1.2... is to be treated as irrecoverable2 and fully written off. 'he provision for doubtful debts is to be increased to ="?2... at "1 -ecember 2../. +npaid !as and electricity char!es for the final quarter of the year to "1 -ecember 2../ are estimated to be =1&2.... 'hese char!es are apportioned: /.B to production 2.B to sellin! and distribution 2.B to administration.

$.

&. /. ?.

-urin! the year2 a buildin!s insurance premium of =122... was paid for the year endin! ". Dune 2..?. 'he directors propose to pay a first and final dividend of =&.2... for the year. 'he company>s corporation tax liability for the year is estimated at =12?2....

Re4$#re5 T.e /ork(.ee"( #& PART II o6 ".e e7am#&a"#o& a&(/er book (.o$%5 be $(e5 /.e& a&(/er#&8 ".#( 4$e("#o& a&5 9o$ (.o$%5 (.o/ c%ear /ork#&8 &o"e( o& a (e:ara"e :a8e #& ".e e7am#&a"#o& a&(/er book' (a) 8repare a 8rofit and 9oss Account for the year endin! "1 -ecember 2../. (1. mar%s) (b) 8repare a 7alance #heet as at "1 -ecember 2../. (1. mar%s) 'otal 2. mar%s

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Accountin! #ta!e 1 *eb, -ecember 2../

3$e("#o& !2 #uitable #tylin! 9td is a clothin! manufacturin! business. 1t ma%es all its products in)house and prides itself on maintainin! !ood relations with its wor%force2 no member of which has ever been made redundant. #uitable #tylin! 9td has recently approached its ban%2 ;las3din 7an% plc2 see%in! an additional lon!)term loan of =2&.2... to continue its expansion pro!ramme. ;las3din 7an% is concerned with #uitable #tylin! 9td>s decline in profitability and has approached you2 an independent investi!ative accountant. 0ou are to investi!ate #uitable #tylin! 9td>s performance in order to report on the reasons for the decline and to su!!est how the decline could be dealt with. 0ou are also required to advise ;las3din 7an% whether or not the additional =2&.2... loan should be made. #uitable #tylin! 9td>s most recent financial statements (coverin! the last three years and reproduced below) have been provided by ;las3din 7an% as a basis for your analysis. S$#"ab%e S"9%#&8 )"5 Pro6#" a&5 %o(( acco$&" 6or ".e 9ear e&5e5 -1 December 2001 =... 'urnover 4ost of sales ;ross profit 5ther operatin! expenses 5peratin! profit 1nterest 1?. 8re)tax profit 'axation 8ost)tax profit -ividend etained profit for year ('urnover in 2.." was =12/@.2...) 200; =... 2006 =...

12?@. 12A$. 12@1. A$. @$. @$. @&. @.. @?. $&. $$. $?. &.. $/. &.. @. 12. $1. A. "". 12. 21. "$. ?. 2?. 1". 1$. "". ?. 2/. 1/. 1..

(eriot)*att +niversity

Accountin! #ta!e 1 *eb, -ecember 2../

!a%a&ce (.ee"( a( a" -1 December 2001 =... Eixed assets 4urrent assets: #toc% -ebtors 7an% 4urrent liabilities 'rade creditors 5verdraft 6et current assetsCliabilities Eixed assets less net current liabilities 9on!)term loan 6et assets Re4$#re5 (a) +sin! ratio analysis techniques2 analyse the underlyin! reasons for the declinin! profitability of #uitable #tylin! 9td. 0ou should limit the number of ratios that you use to a maximum of /. (1& mar%s) (b) 7ased on your analysis2 su!!est how the mana!ement of #uitable #tylin! 9td should act to improve the situation. (" mar%s) (c) 7riefly discuss whether or not ;las3din 7an% plc should ma%e the proposed loan to #uitable #tylin! 9td. (2 mar%s) 'otal 2. mar%s 200; =... 2006 =...

22/2. "2.2. "2&@. @. $@. ) &A. 12. /.. ) ?2. 1$. //. ) A..

2&. 21. 1?. $A. A2. 1"1. ?". 12.". 12$A. (1&.) ("1.) (/A.) 22$?. 22?1. 22@1. &.. /.. ?.. 12@?. 2211. 2221.

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Accountin! #ta!e 1 *eb, -ecember 2../

SECTION C 020 mark(2 A&(/er EITHER 3$e("#o& C1 OR 3$e("#o& C2'

3$e("#o& C1 5< 5a% 9td manufactures and sells a sin!le product2 oa% wood dinin! room tables. 3xtracts from the company>s accounts for the year ended "1 -ecember 2../ reveals the followin! information: <=000 #ales (122... tables at =2$. each) 4ost of !oods manufactured: -irect material -irect labour Eactory overhead ;ross profit Administration expenses #ellin! expenses 6et profit "?/ 2A. /&/ ".$ A$. @/. 12. 12@2. @/. <=000 22AA.

Additional information: 1. 2. ". $. Faterials and labour costs are variable. Eactory overheads are fixed apart from a =$ per unit variable element. Administration expenses are all fixed. #ellin! expenses are fixed apart from sales commission of =1. per unit.

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Accountin! #ta!e 1 *eb, -ecember 2../

Re4$#re5 (a) 4alculate 5< 5a% 9td>s brea%)even volume in units for 2../. (& mar%s) (b) 4alculate the number of units the company must sell in 2..?2 if it is to earn a profit of =$&/2...2 assumin! that costs and price remain unchan!ed. ($ mar%s) (c) 4alculate the number of units the company must sell in 2..?2 if it is to earn a profit of 1&B of sales2 assumin! that costs and price remain unchan!ed. ($ mar%s) (d) 4alculate 5< 5a% 9td>s mar!in of safety in units for 2../. (2 mar%s) (e) 4ost)volume)profit analysis is based on assumptions about the behaviour of revenue2 costs and volume. 5utline & such assumptions which limit the reliability of cost) volume)profit analysis. (& mar%s) 'otal 2. mar%s

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Accountin! #ta!e 1 *eb, -ecember 2../

3$e("#o& C2 Alison 9td produces and sells a sin!le product. Dean2 the accountant2 has prepared the followin! bud!eted 8rofit and 9oss Account for the six months April to #eptember 2../: April = #ales 4ost of sales: -irect materials -irect labour (eat and li!ht 5ffice expenses -epreciation 'otal costs 8rofit "22... 1@2&.. $2... 22$.. ?$. 122.. 2?2A$. $21/. Fay = "&2... 212"&. $2$.. 222.. //. 122.. 2@2A1. &21@. Dune = $22... 2/2... $22.. 12$&. ?2. 22... "$2"?. ?2/". Duly = $12... 2$21.. &2".. 12&.. A". 22... ""2?". ?22?. Au!ust = &"2... "22".. /2$.. 12$.. @&. 22... $"2.&. @2@&. #eptember = /"2... "@2... ?2&&. 22?.. 12./. 22... &22"1. 1.2/@.

Dean also provides the followin! additional information: 1. 2. 'he cash balance at 1 April 2../ is expected to be =$2... on hand. All sales are made on credit. 3xperience in the past has shown that /.B of debtors pay in the month after sales have been made and $.B pay in the second month followin! the sale. #ales in the months of Eebruary 2../ and Farch 2../ are expected to be =2A2... and =".2&.. respectively. Faterial purchases are made on creditG creditors allow one month>s credit. 8urchases for the month of Farch 2../ are expected to total =1@2.... *a!es and office expenses are paid in the month in which they are incurred. Alison 9td will be replacin! a piece of machinery in Fay 2../. 'he new machine costs =12.2... and the old machinery will be sold for a scrap value of =&2... in Fay 2../. 8ayment for the new machine is to be made in two equal instalments in Duly and Au!ust 2../. (eat and li!ht is paid quarterly2 in arrears2 on ".th Dune and ".th #eptember 2../. 'ax will have to be paid in #eptember 2../ amountin! to =$22...

". $. &.

/. ?.

1.

(eriot)*att +niversity

Accountin! #ta!e 1 *eb, -ecember 2../

Re4$#re5 T.e /ork(.ee"( #& PART II o6 ".e e7am#&a"#o& a&(/er book (.o$%5 be $(e5 /.e& a&(/er#&8 :ar" 0a2 o6 ".#( 4$e("#o& a&5 9o$ (.o$%5 (.o/ c%ear /ork#&8 &o"e( o& a (e:ara"e :a8e #& ".e e7am#&a"#o& a&(/er book' (a) 8repare a monthly cash bud!et for the six month period2 April to #eptember 2../. (12 mar%s) (b) 7riefly explain the importance of preparin! cash bud!ets and advice Alison 9td on any concerns you have on the monthly cash bud!et prepared in (a) indicatin! any actions you would ta%e to improve the cash position. (A mar%s) 'otal 2. mar%s

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(eriot)*att +niversity

Accountin! #ta!e 1 *eb, -ecember 2../

SECTION D 020 mark(2 A&(/er EITHER 3$e("#o& D1 OR 3$e("#o& D2'

3$e("#o& D1 (oldco2 a holdin! company2 acquired A.B of a subsidiary #ubco by !ivin! #ubco shareholders 1 share in (oldco in exchan!e for 1 share in #ubco. 'he followin! are summarised balance sheets for (oldco and #ubco at ". Dune 2../ immediately prior to the acquisition: (oldco #ubco =H... =H... Eixed assets "2... 221.. 4urrent assets 4urrent liabilities ?&. 2&. &.. "2&.. 5rdinary shares of =1 each etained profits "2... &.. "2&.. $&. &. $.. 22&.. 22... &.. 22&..

5n ". Dune 2../2 the net assets of #ubco had a mar%et value of ="2...2...2 due to an increase in property valuation. 'he balance sheet value of (oldco is considered to be a fair value at the date of acquisition. At the same time a =1 nominal value ordinary share in (oldco was sellin! on the stoc% exchan!e for =2 Re4$#re5 T.e /ork(.ee"( #& PART II o6 ".e e7am#&a"#o& a&(/er book (.o$%5 be $(e5 /.e& a&(/er#&8 ".#( 4$e("#o& a&5 9o$ (.o$%5 (.o/ c%ear /ork#&8 &o"e( o& a (e:ara"e :a8e #& ".e e7am#&a"#o& a&(/er book' (a) 8repare the 4onsolidated 7alance #heet for the two companies immediately after the acquisition usin! the acquisition method. (1. mar%s) (b) 8repare a wor%in! paper to show: (i) (ow you calculated each fi!ure in the 4onsolidated 7alance #heetG and2 (ii) *hy you calculated each fi!ure in this way . (1. mar%s) 'otal 2. mar%s
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Accountin! #ta!e 1 *eb, -ecember 2../

3$e("#o& D2 *hat is meant by: (a) An offer for sale at a fixed priceI ($ mar%s) (b) A i!hts issueI ($ mar%s) (c) A #crip issueI ($ mar%s) (d) 'he followin! is a summarised balance sheet of 7ubbles 9imited: =H... 4ash 5ther assets less liabilities &. A.. A&. 2&. 1.. &.. A&.

5rdinary share capital (&..2... of &. pence each) #hare premium eserves of retained profit

'he company is considerin! two possible chan!es to its capital structure: either to issue additional shares or ma%e a ri!hts issue. Eor each of the followin!2 show the impact of each chan!e on the balance sheet of the company: (i) 1ssue for cash 1..2... additional shares at =1 per share2 fully paidG ($ mar%s) (ii) Fa%e a 1 for 1. ri!hts issue at =1 per share ($ mar%s) T.e /ork(.ee"( #& PART II o6 ".e e7am#&a"#o& a&(/er book (.o$%5 be $(e5 /.e& a&(/er#&8 :ar" 052 o6 ".#( 4$e("#o& a&5 9o$ (.o$%5 (.o/ c%ear /ork#&8 &o"e( o& a (e:ara"e :a8e #& ".e e7am#&a"#o& a&(/er book' 'otal 2. mar%s

END O> PAPER

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Accountin! #ta!e 1 *eb, -ecember 2../

E*AMINATION REGU)ATIONS
4andidates are subJect to the re!ulations !overnin! examinations which are published by the +niversity. 'he main points are summarised below. 1' A candidate shall not brin! written2 printed or any other material into the examination room except such as may be authorised by the examiners. 7riefcases and other similar containers2 the main purpose of which is to carry papers2 shall not be brou!ht into the examination room. 2' A candidate shall not communicate with2 receive assistance from or copy from the paper of another candidate durin! an examination. -' A candidate shall not leave the examination room less than half an hour after the start of an examination2 except with the permission of the invi!ilator and shall not leave the examination room durin! the last fifteen minutes of an examination. 1' At the end of the examination a candidate must return the answer boo% or boo%s to the invi!ilator to!ether with any other material on which heCshe has written or drawn durin! the examination. +nder no circumstances should a candidate remove an answer boo%2 used or unused2 from the examination room.

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