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MODULE ASSESSMENT Main Examination

COLLEGE: Lincoln International Business School

SCHOOL: Accountancy, Finance and Economics

MODULE: Finance and Accounting

MODULE CODE: ACC9011M

LEVEL: Postgraduate

CO-ORDINATOR: Geeta Lakshmi

DATE: January 2019

TIME ALLOWED: 1 hour 15 minutes

==========================================================

INSTRUCTIONS TO STUDENTS:

QUESTIONS TO ANSWER: Question 1 is compulsory from Section A. Answer any TWO out of THREE questions from Section B.

MARKING SCHEME: Question 1 (Section A) is worth 50 marks. Questions 2, 3 and 4 (Section B) are worth 25 marks each. Total marks are 100.

MATERIALS PROVIDED: None

MATERIALS PERMITTED: Non programmable calculator.

Candidates whose first language is not English are permitted an unmarked translation dictionary into the examination.

One unannotated text book permitted.

NOTES TO STUDENTS: Show all workings. Present-Value tables and are provided on page 7 and ratio-formulas are provided on page 8

SECTION A (Compulsory)

QUESTION 1

  1. What is the accounting equation and discuss how it impacts on the operations of a business? (10 marks)
  1. Why is liquidity critical for a business and how might this affect decision making?

(10 marks)

  1. Why is investment appraisal important to a business? Use exles to support your reasons.

(10 marks)

  1. What is meant by relevant costs and critically explain their role in decision making.

(10 marks)

  1. Discuss the benefits of the information contained in the Income Statement/Profit and Loss Account.

(10 marks)

TOTAL 50 MARKS

SECTION B (Attempt any TWO questions out of THREE)

QUESTION 2

Lincoln Gardening Company sells garden pots at 15 per pot and each pot costs 10 to produce. The Lincoln Gardening Company has annual fixed costs of 10,000 and a further 2,000 of additional costs of selling and distributing the goods.

Required:

a) Calculate the level of profit or loss the business will earn if it produces and sells 2,500 pots per year.

(5 marks)

b) What is the degree of operational leverage if sales go up by 20% based on requirement (a)?

(5 marks)

c) Calculate the break-even point in terms of i) the number of items and ii) the sales figures.

(5 marks)

d) What are the weaknesses and limitations of break-even analysis?

(5 marks)

e) Calculate the number of pots that would need to be sold if the company wishes to achieve a margin of safety of 20%.

(5 marks)

TOTAL 25 MARKS

QUESTION 3

Nottingham Cars Plc is planning to manufacture a new electric car. The new car, which has a product design life of 5 years, will require installation of a conveyor belt which will cost 100,000. At the end of its life, the machine can be sold for 10,000. Demand for the new vehicles is expected to be 12,000 units in year 1 and 15,000 units in each of years 2 to 4. In the final year, it is estimated that only 8,000 units will be sold as new technology will overtake the design. The sale price will be 12,000 per unit; direct labour, direct material and variable overheads will cost 6,000 per unit and additional fixed expenses of 50,000 per annum will be incurred. Ignore depreciation and taxes. A discount rate of 12% should be applied to the project.

Required:

  1. Using the Net Present Value (NPV) method, recommend to the company whether it should undertake the investment. Show all workings.

(14 marks)

  1. What are the advantages and disadvantages of the Accounting Rate of Return method?

(6 marks)

  1. Critically explain the concept of “payback period”.

(5 marks)

TOTAL 25 MARKS

QUESTION 4

Here is the data to the statement of financial position for Hearty Foods Plc.

STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2018
2018
Non-current assets
Property plant and equipment 180,000
Current assets
Inventories 25,000
Trade receivables 55,000
Cash #038; cash equivalents 5,000
Total assets 265,000
Non-current liabilities
3% Notes payable 20,000
Current liabilities
Trade payables 45,000
Equity and Reserves
Share capital (1 per share) 100,000
Retained earnings 100,000
Total Equity and Liabilities 265,000

Required:

  1. Calculate the leverage and liquidity ratios of Hearty Foods Plc and comment on the financial health of the company based on your calculations

(13 marks)

  1. If dividends are declared of 50,000 and market price is 3 per share, calculate the dividend per share and price earnings ratios.

(6 marks)

Question 4 is continued on the next page

Question 4 (Continued)

  1. “While too much debt can be dangerous for a company, it also has certain advantages for the firm.” Discuss any three advantages of debt.

(6 marks)

TOTAL 25 MARKS

————————————————————————————————————

You have now reached the end of the examination. You should have answered the ALL questions in Section A and TWO questions from Section B

Tables

PRESENT VALUES OF 1
YEAR 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% YEAR
1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.9009 0.8929 0.8850 0.8772 0.8696 0.8621 0.8547 0.8475 0.8403 0.8333 1
2 0.9803 0.9612 0.9426 0.9246 0.9070 0.8900 0.8734 0.8573 0.8417 0.8264 0.8116 0.7972 0.7831 0.7695 0.7561 0.7432 0.7305 0.7182 0.7062 0.6944 2
3 0.9706 0.9423 0.9151 0.8890 0.8638 0.8396 0.8163 0.7938 0.7722 0.7513 0.7312 0.7118 0.6931 0.6750 0.6575 0.6407 0.6244 0.6086 0.5934 0.5787 3
4 0.9610 0.9238 0.8885 0.8548 0.8227 0.7921 0.7629 0.7350 0.7084 0.6830 0.6587 0.6355 0.6133 0.5921 0.5718 0.5523 0.5337 0.5158 0.4987 0.4823 4
5 0.9515 0.9057 0.8626 0.8219 0.7835 0.7473 0.7130 0.6806 0.6499 0.6209 0.5935 0.5674 0.5428 0.5194 0.4972 0.4761 0.4561 0.4371 0.4190 0.4019 5
6 0.9420 0.8880 0.8375 0.7903 0.7462 0.7050 0.6663 0.6302 0.5963 0.5645 0.5346 0.5066 0.4803 0.4556 0.4323 0.4104 0.3898 0.3704 0.3521 0.3349 6
7 0.9327 0.8706 0.8131 0.7599 0.7107 0.6651 0.6227 0.5835 0.5470 0.5132 0.4817 0.4523 0.4251 0.3996 0.3759 0.3538 0.3332 0.3139 0.2959 0.2791 7
8 0.9235 0.8535 0.7894 0.7307 0.6768 0.6274 0.5820 0.5403 0.5019 0.4665 0.4339 0.4039 0.3762 0.3506 0.3269 0.3050 0.2848 0.2660 0.2487 0.2326 8
9 0.9143 0.8368 0.7664 0.7026 0.6446 0.5919 0.5439 0.5002 0.4604 0.4241 0.3909 0.3606 0.3329 0.3075 0.2843 0.2630 0.2434 0.2255 0.2090 0.1938 9
10 0.9053 0.8203 0.7441 0.6756 0.6139 0.5584 0.5083 0.4632 0.4224 0.3855 0.3522 0.3220 0.2946 0.2697 0.2472 0.2267 0.2080 0.1911 0.1756 0.1615 10
11 0.8963 0.8043 0.7224 0.6496 0.5847 0.5268 0.4751 0.4289 0.3875 0.3505 0.3173 0.2875 0.2607 0.2366 0.2149 0.1954 0.1778 0.1619 0.1476 0.1346 11
12 0.8874 0.7885 0.7014 0.6246 0.5568 0.4970 0.4440 0.3971 0.3555 0.3186 0.2858 0.2567 0.2307 0.2076 0.1869 0.1685 0.1520 0.1372 0.1240 0.1122 12
13 0.8787 0.7730 0.6810 0.6006 0.5303 0.4688 0.4150 0.3677 0.3262 0.2897 0.2575 0.2292 0.2042 0.1821 0.1625 0.1452 0.1299 0.1163 0.1042 0.0935 13
14 0.8700 0.7579 0.6611 0.5775 0.5051 0.4423 0.3878 0.3405 0.2992 0.2633 0.2320 0.2046 0.1807 0.1597 0.1413 0.1252 0.1110 0.0985 0.0876 0.0779 14
15 0.8613 0.7430 0.6419 0.5553 0.4810 0.4173 0.3624 0.3152 0.2745 0.2394 0.2090 0.1827 0.1599 0.1401 0.1229 0.1079 0.0949 0.0835 0.0736 0.0649 15
CUMULATIVE PRESENT VALUES OF 1
YEAR 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% YEAR
1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.9009 0.8929 0.8850 0.8772 0.8696 0.8621 0.8547 0.8475 0.8403 0.8333 1
2 1.9704 1.9416 1.9135 1.8861 1.8594 1.8334 1.8080 1.7832 1.7591 1.7355 1.7125 1.6901 1.6681 1.6467 1.6257 1.6053 1.5852 1.5657 1.5465 1.5277 2
3 2.9410 2.8839 2.8286 2.7751 2.7232 2.6730 2.6243 2.5770 2.5313 2.4868 2.4437 2.4019 2.3612 2.3217 2.2832 2.2460 2.2096 2.1743 2.1399 2.1064 3
4 3.9020 3.8077 3.7171 3.6299 3.5459 3.4651 3.3872 3.3120 3.2397 3.1698 3.1024 3.0374 2.9745 2.9138 2.8550 2.7983 2.7433 2.6901 2.6386 2.5887 4
5 4.8535 4.7134 4.5797 4.4518 4.3294 4.2124 4.1002 3.9926 3.8896 3.7907 3.6959 3.6048 3.5173 3.4332 3.3522 3.2744 3.1994 3.1272 3.0576 2.9906 5
6 5.7955 5.6014 5.4172 5.2421 5.0756 4.9174 4.7665 4.6228 4.4859 4.3552 4.2305 4.1114 3.9976 3.8888 3.7845 3.6848 3.5892 3.4976 3.4097 3.3255 6
7 6.7282 6.4720 6.2303 6.0020 5.7863 5.5825 5.3892 5.2063 5.0329 4.8684 4.7122 4.5637 4.4227 4.2884 4.1604 4.0386 3.9224 3.8115 3.7056 3.6046 7
8 7.6517 7.3255 7.0197 6.7327 6.4631 6.2099 5.9712 5.7466 5.5348 5.3349 5.1461 4.9676 4.7989 4.6390 4.4873 4.3436 4.2072 4.0775 3.9543 3.8372 8
9 8.5660 8.1623 7.7861 7.4353 7.1077 6.8018 6.5151 6.2468 5.9952 5.7590 5.5370 5.3282 5.1318 4.9465 4.7716 4.6066 4.4506 4.3030 4.1633 4.0310 9
10 9.4713 8.9826 8.5302 8.1109 7.7216 7.3602 7.0234 6.7100 6.4176 6.1445 5.8892 5.6502 5.4264 5.2162 5.0188 4.8333 4.6586 4.4941 4.3389 4.1925 10
11 10.3676 9.7869 9.2526 8.7605 8.3063 7.8870 7.4985 7.1389 6.8051 6.4950 6.2065 5.9377 5.6871 5.4528 5.2337 5.0287 4.8364 4.6560 4.4865 4.3271 11
12 11.2550 10.5754 9.9540 9.3851 8.8631 8.3840 7.9425 7.5360 7.1606 6.8136 6.4923 6.1944 5.9178 5.6604 5.4206 5.1972 4.9884 4.7932 4.6105 4.4393 12
13 12.1337 11.3484 10.6350 9.9857 9.3934 8.8528 8.3575 7.9037 7.4868 7.1033 6.7498 6.4236 6.1220 5.8425 5.5831 5.3424 5.1183 4.9095 4.7147 4.5328 13
14 13.0037 12.1063 11.2961 10.5632 9.8985 9.2951 8.7453 8.2442 7.7860 7.3666 6.9818 6.6282 6.3027 6.0022 5.7244 5.4676 5.2293 5.0080 4.8023 4.6107 14

Formulae for Ratios

– Gross profit margin = Gross profit / Turnover

– Operating profit margin = Operating profit/ Turnover

– ROCE = Operating profit / (Debt + Equity)

– Gearing = Debt / (Debt + Equity)

– Interest cover = Operating Profit / Interest Expense

– Current ratio = Current Assets / Current Liabilities

– Quick Ratio = (Current Assets – Inventory) / Current Liabilities

– Sales to Capital Employed = Turnover / (Debt + Equity)

– Sales to Fixed Assets = Turnover / Non-Current Assets

– Inventory days = 365 x (Inventory / Cost of Sales)

– Receivables days = 365 x (Trade Receivables / Turnover)

– Payables days = 365 x (Trade Payables / Cost of Sales)

– EPS = Profit after Interest and Tax / Number of Shares

– P/E = Share Price / EPS

– Dividend per share = Dividends / Number of Shares

– Dividend yield = Dividend per Share / Share Price

– Dividend cover = EPS / Dividend per share, or = Earnings / Dividends

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