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Q

Mark

1
2
SCHOOL OF ACCOUNTING

ACCT 1511:

Accounting and Financial Management 1B

FINAL EXAMINATION
JUNE 2009
Time Allowed:
Reading Time:
Total Number of Questions:
Total Number of Pages

Total
(/40)

2 Hours
10 minutes
6
34

Answer ALL questions.

The questions are NOT of equal value.

Answers to Questions 1 to 5 must be written in ink on the lines or in boxes

provided in this Booklet.

Question 6 (multiple choice questions) must be answered on the separate

Generalised Answer Sheet provided using a 2B pencil.

This is a Closed Book examination.

Candidates may bring their own UNSW-approved calculator.

This paper is NOT to be retained by the candidate.

DO NOT OPEN THIS PAPER UNTIL INSTRUCTED BY THE EXAM

SUPERVISOR

QUESTION 1 (10 MARKS): CASH FLOW STATEMENT

The following information is extracted from the annual report of JNT Ltd.:
JNT Ltd.
Comparative Balance Sheet
As at 30 June
Cash
Accounts receivable
Allowance for doubtful debts
Inventory
Prepaid insurance
Long-term investments
Land
Buildings
Accumulated depreciation - buildings
Equipment
Accumulated depreciation - equipment
Total assets

2008
$183,000
520,000
(10,000)
175,000
11,000
214,000
231,000
184,000
(65,000)
46,000
(33,000)
$1,456,000

2007
$38,000
430,000
(21,000)
325,000
5,000
203,000
168,000
225,000
(81,000)
103,000
(67,000)
$1,328,000

Accounts payable
Accrued expenses
Interest payable
Income tax payable
Final dividends payable
Short-term loan
Bonds payable
Share capital
Asset revaluation reserve
General reserve
Retained earnings
Total liabilities & shareholders' equity

$287,000
26,000
19,000
30,000
18,000
12,000
100,000
403,000
42,000
120,000
399,000
$1,456,000

$302,000
28,000
19,000
32,000
15,000
20,000
165,000
416,000
39,000
25,000
267,000
$1,328,000

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QUESTION 1 (CONT.): CASH FLOW STATEMENT

JNT Ltd.
Income Statement
For Year Ended 30 June 2008
Sales
Gain on sale of equipment
Dividends received
Total income
COGS
Bad debt expense
Insurance expense
Interest expense
Other expenses
Income tax expense
Loss on disposal of buildings
Total expenses
Net profit

$1,485,000
16,000
3,000
$1,504,000
$(986,000)
(76,000)
(12,000)
(27,000)
(53,000)
(74,000)
(19,000)
(1,247,000)
$257,000

Additional information during the year:

a) Buildings with original cost of $74,000 and accumulated depreciation of $45,000
were sold.
b) A piece of equipment with an original cost of $57,000 and accumulated
depreciation of $43,000 was disposed of.
c) A parcel of land with unknown original cost was revalued upward by $38,000.
d) A bonus share issue of $35,000 was declared out of Asset Revaluation Reserve.
e) JNT conducted a share buy-back during the year. Information reveals that the
average price of the buy-back is the same as the original issue price of those shares.

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QUESTION 1 (CONT.):
1. Calculate the amount of depreciation expense that is included in the Other Expenses
account by using relevant T-accounts. (3 marks)

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QUESTION 1 (CONT.):
2. Prepare the operating cash flow section of the statement of cash flows for JNT Ltd.
for 2008 by using the indirect method. (7 marks)

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QUESTION 2 (8 MARKS): Note that some components of this

question may not be relevant in Session 2 2009
FINANCIAL STATEMENT ANALYSIS & ACCOUNTING POLICY CHOICE
The following information relate to JP Morgan Chase & Co (JPM).
JP Morgan Chase & Co.
Selected balance sheet data December 31 (in millions)
Assets
Cash and due from banks
Deposits with banks
Federal funds sold and securities purchased under resale
agreements
Securities borrowed
Trading assets:
Debt and equity instruments
Derivative receivables
Securities
Loans
Allowance for loan losses

Liabilities
Deposits
Federal funds purchased and securities loaned or sold under
repurchase agreements
Commercial paper and other borrowed funds
Trading liabilities:
Debt and equity instruments
Derivative payables
Accounts payable and other liabilities
Beneficial interests issued by consolidated VIEs
Long-term debt and trust preferred capital debt securities

40,144
11,466

203,115
124,000

170,897
84,184

347,357
162,626
205,943
744,898
(23,164)

414,273
77,136
85,450
519,374
(9,234)

721,734
60,987
48,027
14,984
121,245

510,140
24,823
45,270
14,731
83,633

$2,175,052 $1,562,147

$1,009,277 $ 740,728

Total liabilities
Stockholders equity

Total liabilities and stockholders equity

26,895 $
138,139

Loans, net of allowance for loan losses

Accrued interest and accounts receivable
Goodwill
Other intangible assets
Other assets
Total assets

2007

2008

192,546
170,245

154,398
78,431

45,274
121,604
187,978
10,561
270,683

89,162
68,705
94,476
14,016
199,010

2,008,168
166,884

1,438,926
123,221

$2,175,052 $1,562,147

(Extracted from JPMs Annual Report on 10-K filing with SEC)

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Note: Firm-wide Level 3 assets are expected to be approximately 6% of total firm assets at 12/31/08.
(Extracted from JPMs presentation to analysts for financial year ended 31 December 2008).

Level 3 assets, also known as mark to make believe, are those in which there are no clearly
definable market prices banks can define the prices based on unobservable inputs that reflect
managements own assumptions . (Tracy Alloway, ft.com 16 January 2009)

Accounting rulemakers now want banks to bring some of those (off-balance sheet) assets back
onto their books. They are trying to crack down on transactions that banks used to sidestep rules
inspired by the off-balance-sheet antics that led to Enron Corp.s collapse. In its annual filing,
JPMorgan said the rules change (SFAS140/FIN46R) might lead it to bring back about $160 billion
in assets. Citigroup estimated it may have to reclaim $179 billion. That would equal about 9
percent of year-end 2008 assets at Citigroup, and about 7 percent at JPMorgan. (David Reilly,
Bloomberg.com, 25 March 2009)

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QUESTION 2 (CONT.):

(Extracted from Office of Comptroller of Currency Quarterly Report on Bank Trading

and Derivatives Activities, Fourth Quarter 2008.)
Five of America's largest banks, most of which have received $145 billion in taxpayer
bailout dollars, still face potentially catastrophic losses from exotic investments if
economic conditions substantially worsen, their latest financial reports show. ...
Citibank, Bank of America , HSBC Bank USA , Wells Fargo Bank and J.P. Morgan
Chase reported that their "current" net loss risks from derivatives insurance-like bets
tied to a loan or other underlying asset surged to $587 billion as of Dec. 31 2008
J.P. Morgan is credited with launching the credit-default market and is one of the most
sophisticated players. It remains highly profitable, even after acquiring the remains of
failed investment banker dealer Bear Stearns , and says it has limited its exposure. The
New York -based bank, however, also has received $25 billion in federal bailout
money. (Greg Gordon and Kevin G. Hall, McClatchy Newspapers, news.yahoo.com,
9 March 2009)

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QUESTION 2 (CONT.):
Required:
(1) With reference to the information on JP Morgan Chase & Co (JPM) above, analyse
the balance sheet of JPM and discuss THREE (3) limitations of the balance sheet as
presented. (6 marks):
1.

2.

3.

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(2) As an investor analysing the information on JPM above, what could be your opinion
as to the possible going-concern (solvency) situation of JPM? (2 marks)

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Note: If required, please use the following formulae to calculate ratios for
Question 2.
Performance Ratios
Return on Equity (ROE) = Net Profit After Tax / Shareholders Equity
Return on Assets (ROA) = Earnings before Interest & Tax (EBIT) / Total Assets
Profit Margin = Net Profit After Tax / Sales Revenue
Gross Margin = Gross Profit / Sales Revenue
Activity Ratios
Asset Turnover = Sales Revenue / Total Assets
Inventory Turnover = COGS / Average Inventory
Days Inventory on Hand = 365 / Inventory Turnover
Debtors (receivables) Turnover = Credit Sales / Average Trade Debtors
Days in Debtors = 365 / Debtors turnover
Creditors Turnover = Purchases (or COGS) / Average Accounts Payable
Days in Creditors = 365 / Creditors Turnover
Cash Flow Cycle = Days in Inventory + Days in Receivables Days in Creditors
Liquidity and Financial Structure Ratios
Current Ratio = Current Assets / Current Liabilities
Quick Ratio = (Current Assets Inventories) / Current Liabilities
Interest Coverage = EBIT / Interest Expense (net)
Debt to Equity Ratio = Total Liabilities / Total Equity
Debt to Assets = Total Liabilities / Total Assets
Leverage = Total Assets / Shareholders Equity

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QUESTION 3 (6 MARKS): CORPORATE GOVERNANCE

The following table presents information from the 2006 Corporate Governance
Statement of Macquarie Bank.

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QUESTION 3 (CONT.):
Required:
With reference to the ASX Corporate Governance Principles and Recommendations
2007, discuss THREE (3) corporate governance issues regarding the positions
occupied by Mr David Clarke on the Board of Directors and any relevant Committees
(6 marks):
1.

2.

3.

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QUESTION 4 (6 MARKS): COSTING SYSTEMS

Kang Company provided the following data for the year 2008:
Labor:
Direct labour cost (25,000 hours)
Indirect labour
Materials:
Direct materials:
Inventory, January 1, 1998
Purchases on accoun
Direct materials issued
Indirect materials issued
Other factory overhead costs:
Depreciation
Maintenance
Miscellaneous
Work in Progress:
Beginning inventory
Ending inventory

$175,000
35,000

$25,000
t 200,000
190,000
10,000
55,000
25,000
15,500
110,000
80,250

The company uses a normal costing system with predetermined overhead rate based on
direct labour hours. The rate for 2008 was $5.20 per direct labour hour.

Required:

Prepare a statement of cost of goods manufactured.

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QUESTION 4 (CONT.): COSTING SYSTEMS

Statement of cost of goods sold (6 marks):

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QUESTION 5 (10 MARKS): BUDGETING FOR PLANNING AND

CONTROL
Echo Systems manufactures high-quality loudspeakers that are sold to manufacturers of
stereo equipment. Assume the following:
a) Budgeted sales for the first 4 months of the year are:
January
February
March
April

60,000 speakers
80,000 speakers
100,000 speakers
80,000 speakers

b) The company sells its loudspeakers for $70 per unit and expects one-half of
each months sales revenue to be received in the month of sale and the other
half to be received in the month following sale.
c) On 1 January, 15,000 speakers are in finished goods inventory. The company
wants the number of speakers in its beginning finished goods inventory each
month to equal 25% of the months budgeted sales (in units).
d) The Accounts Receivable account has a balance of $4,000,000 on 1 January.
e) Eight feet of expensive audio cable is used in the manufacture of each speaker.
On 1 January, the company has 104,000 feet of this cable in its raw materials
inventory. The amount of cable in inventory at the beginning of each month
should be 20% of the months usage requirement.
f) The company pays $.40 per foot for audio cable in the month following
purchase. Decembers purchases were 900,000 feet at $.40 per foot.
Required:
1. Prepare a sales budget for the first 4 months of the year.
2. Prepare a cash receipts budget for the first 4 months of the year.
3. Prepare a production budget for the first 3 months of the year.
4. Prepare a raw materials purchases budget for audio cable for the months of
January and February.

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QUESTION 5 (CONT.):
1. Sales budget (2 marks):

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QUESTION 5 (CONT.):
2. Cash receipts budget (2 marks):

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QUESTION 5 (CONT.):
3. Production budget (2 marks):

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QUESTION 5 (CONT.):
4. Raw materials purchases budget (4 marks):

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SOLUTION GUIDE TO FINAL EXAM, JUNE 2009

QUESTION 1
1.

Depreciation expense included in Other Expenses account

Accumulated depreciation - Buildings

Disposal

81,000

o/bal

29,000

Depn exp

65,000

c/bal

45,000

Accumulated depreciation - Equipment

Disposal

67,000

o/bal

9,000

Depn exp

33,000

c/bal

43,000

Total depreciation expense = 29,000 + 9,000 = 38,000

2. Operating cash flows for JNT Ltd. using indirect method
JNT Ltd.
Operating Cash Flows for Year Ended 30 June 2008
Net profit
+ Depreciation expense
+ Loss on disposal of buildings
Gain on sale of equipment
-

0.5
0.5
0.5
0.5

Adjustment for changes in operating assets and

liabilities:
Accounts receivable
Allowance for doubtful debts
+ Inventory
Prepaid insurance
Accounts payable
Accrued expenses
Income tax payable
-

0.5 (90,000 )
1 (11,000)
0.5 150,000
0.5 (6,000 )
0.5 (15,000)
0.5 (2,000 )
(2,000)
0.5

Cash from operations

257,000
38,000
19,000
(16,000)

41,000
298,000

24,000
322,000

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QUESTION 2
(1) Three issues
Level 3 assets are potentially misstated, and at 6% of total assets, if it is worth
nothing could almost wipe out shareholders equity.

The off-balance sheet assets of $160 billion, or 7% of total assets itself

approximates shareholders equity of $167 billion.

The total derivative exposure of 380% of risk based capital, exceeds

shareholders equity.

(2) Possible conclusion

There is significant risk of JPM insolvency as the losses from level 3 assets (6%
of total assets, i.e., almost value of shareholders equity), and possible losses
from derivatives (380% of shareholders equity) cumulatively exceed
shareholders equity.

QUESTION 3
Any three from below or any other reasonable answer (marker to document).
David Clarke is chairman of board despite being executive contrary to ASX
recommendation which requires an independent chairman

The position of Chairman and CEO is separate which is in compliance for a

split role

David Clarke is chairman of the nominations committee which is contrary to the

ASX recommendation for an independent chairman to prevent management
cronies from being appointed to the Board

David Clarke is a member of the remuneration committee which is in

compliance as he is not chairman of the remuneration committee and there is a
majority of independent members

David Clarke is not on the audit committee, which has 4 independent directors

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QUESTION 4
Kang Company
Statement of Cost of Goods Manufactured
For the Year Ended December 31, 2008
Direct materials
Beginning raw materials inventory
Purchases of raw materials
Total raw materials available
Ending raw materials
Raw materials used
Direct labour
Overhead
Indirect labour
Indirect materials
Depreciation
Maintenance
Miscellaneous
Less: Underapplied overhead
Overhead applied
Total manufacturing costs added
Add: Beginning work in process
Total manufacturing costs
Less: Ending work in process
Cost of goods manufactured

$ 25,000
200,000
$225,000
35,000
$190,000

175,000
$ 35,000

10,000
55,000
25,000
15,500
$140,500
(10,500)

Supporting calculation for under-applied overhead:

Applied ($5.20 x 25,000)
$130,000
Actual:
Indirect labour
$35,000
Indirect materials
10,000
Depreciation
55,000
Maintenance
25,000
Miscellaneous
15,500
140,500
$ 10,500

130,000
$495,000
110,000
$605,000
80,250
$524,750

Under-applied overhead

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QUESTION 5
Echo Systems
January
Sales Budget
Budgeted sales (units)
Budgeted selling price per unit
Budgeted sales revenue

Cash Receipts Budget

Budgeted cash receipts:
From December sales
From January sales
From February sales
From March sales
From April sales
Total budgeted cash receipts
Production Budget
Budgeted sales (units)
Add: Desired ending inventory of
finished units
Total units required
Less: Beginning inventory of finished
units
Budgeted production (units)
Raw Materials Purchases Budget
Budgeted production (speakers)
Expected usage of audio cable per
speaker (units)
Audio cable usage requirements
(units)
Add: Desired ending inventory of
audio cable (units)
Total audio cable requirements (units)
Less: Beginning inventory of audio
cable (units)
Purchase requirement for audio cable
(units)
Price per unit
Purchase cost of audio cable

February

March

April

60,000
70

80,000
70

100,000
70

80,000
70

4,200,000

5,600,000

7,000,000

5,600,000

4,000,000
2,100,000

2,100,000
2,800,000

2,800,000
3,500,000

6,100,000

4,900,000

6,300,000

60,000

80,000

100,000

20,000

25,000

20,000

80,000

105,000

120,000

(15,000)
65,000

(20,000)
85,000

(25,000)
95,000

65,000

85,000

95,000

520,000

680,000

760,000

136,000
656,000

152,000
832,000

(104,000)

(136,000)

552,000
0.4
220,800

696,000
0.4
278,400

3,500,000
2,800,000
6,300,000

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