Professional Documents
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SCHOOL OF ACCOUNTING
ACCT 1511:
Accounting and
Financial Management 1B
6
7
FINAL EXAMINATION
Semester 1, 2008
8
Total
(/75)
Time Allowed:
Reading Time:
Total Number of Questions:
Total Number of Pages
3 Hours
10 minutes
9
33
Page 1 of 27
Redrum Ltd. purchased a desktop computer for business use. The purchase price was
$3,000. The company has a policy of depreciating all computers over their useful life
of 3 years using the straight-line method with no residual value.
Required:
(a) Construct a three year-end schedule of the historical cost, depreciation expense,
accumulated depreciation and carrying value of the desktop computer. (3 marks)
Year
Historical cost
Depreciation
expense
Accumulated
depreciation
Carrying
value
1
2
3
DO NOT WRITE OUTSIDE THE BOX PROVIDED
(b) How do the concepts of cost, asset and expense relate to the desktop
computer? (3 marks).
Page 2 of 27
2200
30
20
40
1400
3690
1410
490
920
Page 3 of 27
30 June 2006
($000)
Current Assets
Cash
Accounts receivable
Allowance for doubtful debts
Inventory
Prepaid insurance
193
400
(50)
420
30
240
470
(47)
380
40
Non-Current Assets
Land
Buildings
Accum. depn. buildings
Trucks
Accum. depn. trucks
Office equipment
Accum. depn. office equipment
Net goodwill
Total Assets
605
1205
(390)
215
(80)
610
(220)
170
3108
620
840
(310)
215
(40)
400
(210)
190
2788
Current Liabilities
Accounts payable
Accrued expenses
Interest payable
Income tax payable
Final dividend payable
210
120
40
510
270
290
140
40
480
200
Non-Current Liabilities
Borrowings
Total Liabilities
770
1920
1100
2250
Shareholders' Equity
Share capital
Asset revaluation reserve
General reserve
Retained earnings
Total Shareholders' Equity
400
60
110
618
1188
300
10
50
178
538
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Item
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Amount
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Summary data:
US$
Fiscal Year Ends
Price as at 17 April 2008
Market Cap
Trailing P/E
Forward P/E (fye 31-Dec-09)
PEG Ratio (5 yr expected)
Price/Sales
Price/Book
Profit Margin
Return on Assets
Return on Equity
Citigroup (C)
31 Dec 2007
24.03
125.11B
33.51
7.35
2.07
1.9
1.03
5.63%
0.18%
3.10%
Income Statement
Revenue:
Net Income Available to shareholders:
Diluted EPS:
Balance Sheet
Total Asset
Total Liability
Shareholders Equity
Cash Flow Statement
Operating Cash Flow
Investing Cash Flow
Financing Cash Flow
JP Morgan (JPM)
31 Dec 2007
45.12
153.25B
10.3
10.62
1.77
2.37
1.23
23.82%
1.06%
12.86%
159.23B
3.58B
0.72
116.35B
15.37B
4.38
2,187.63B
2,074.03B
113.6B
1,562.15B
1,438.93B
123.22B
-71.43B
-62.38B
144.49B
-110.56B
-73.12B
182.99B
Page 11 of 27
You are an equity investment analyst reviewing the information provided in the charts
and the summary data provided in the previous pages.
Required:
(a) Choose one of the above two companies, Citigroup (C) or JP Morgan (JPM).
What would be your stock recommendation with respect to your choice relative to the
other, and what would be your price target? (2 marks)
Stock recommendation:
Price target:
(b) Using financial statement analysis, valuation analysis and a visual inspection of
the price charts, give FIVE (5) reasons in support of the above stock recommendation.
You may calculate other ratios to support your recommendation. (2 marks for each
reason):
1.
2.
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4.
5.
Page 13 of 27
(b) Assuming that the analysis of Citigroup in part (a) is correct and using the
information on Citigroup from Question 3, calculate Citigroups leverage before and
after the impact of possible VIE losses. (2 marks)
Leverage before the impact of possible VIE losses:
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Page 15 of 27
Required:
(a) How much total sales revenue must be generated to earn a profit equal to 20
percent of sales? Please round up your figures to two decimal points in every step of
the calculations. (2 marks)
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Page 17 of 27
Direct materials
Direct labour
Applied manufacturing overhead
Mixing
$17,000
$5,000
$10,000
Bottling
$5,000
$1,000
$2,000
In October the output of the Mixing Department was 1,250 litres, and the output for
the Bottling Department was 5000 bottles. At the end of the month there were no
inventories, i.e., everything produced was sold.
Required:
(a) What is the cost per bottle of syrup for October? (3 marks)
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Sales are expected to be $54,000 for November 2007, and $40,000 for December
2007.
Collections are expected to be 70% in the month of sale and 30% in the month
following the sale.
The gross margin is budgeted at 30% of sales (i.e. cost of goods sold amounts to
70% of sales revenue).
Merchandise is purchased on credit and is payable in the following month.
70% of merchandise is purchased in the month prior to the month of sale, and
30% is purchased in the month of sale.
Depreciation on shop fixtures and fittings is budgeted at $3,000 per month.
Other monthly expenses are budgeted at $4,500.
$4,400
15,200
26,400
174,000
$220,000
$20,000
200,000
$220,000
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2.
3.
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4.
5.
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Page 25 of 27
SOLUTION GUIDELINES
QUESTION 1 (6 MARKS)
(a)
Year
Historical cost
1
2
3
$3,000
$3,000
$3,000
Depreciation
expense
$1,000
$1,000
$1,000
Accumulated
depreciation
$1,000
$2,000
$3,000
Carrying value
$2,000
$1,000
$0
(b)
QUESTION 2
(a)
+
+
+
+
-
150
80
40
20
(180)
(120)
(b)
Cash flows from investing activities:*
Purchase buildings
Proceeds from sale of land
Purchase land
Proceeds from sale of office equipment
Purchase office equipment
Net cash outflows
(c)
Dr
Dr
Dr
Borrowings
Cr
330
Cash
330
200
Cash
100
Cr
Dr
(365)
380
(135)
280
(510)
(350)
200
Share capital
100
150
150
Page 26 of 27
QUESTION 5 (5 MARKS)
(a)
ProfitBT
0.20R
0.20R
0.50R
R
= R VC FC
= R VC FC
= R 0.30R 32,000
= $32,000
= $64,000
ProfitAT
0.20 (10x)
0.20 (10x)
ProfitBT
ProfitBT
3.08x
3.92x
x
x
= R VC FC
= 10x 3x 32,000
= 32,000
= 8,163.27
= 8,164 units
(b)
QUESTION 6
Direct materials
Direct labour
Manufacturing OH
Total production cost
Units produced
Cost per bottle
Mixing Dept.
17000
5000
10000
32000
1250 litres
Bottling Dept.
5000
1000
2000
8000
5000 bottles
$8 (40000/5000)
(b)
Dr Overhead control 3000
Cr COGS
3000
QUESTION 7
Opening balance
Credit purchases:
Nov (30% x 37800)
Dec (70% x 28000)
Payments from a/c Pay Oct
Total Cost
22000
6000
12000
40000
$20,000
$11,340
$19,600
$50,940
$20,000
$30,940
Page 27 of 27