2016 May Solution 4SSMN135 to MAIN Management Accounting Part
Main exam question
QUESTION 1 - Alpha Football Club Ltd
(a)
FIFO
Units Available for Sale = 320,055
Units Sold = 281,677
Units in Ending Inventory = 38,378
FIFO
Sales From August 100,055 £21 £2,101,155
Sales From September 70,000 £18.6 £1,302,000
Sales From October 10,000 £13.2 £132,000
Sales From November 60,000 £10.8 £648,000
Sales From December 41,622 £7.1 £295,516.20
Cost of Sale 281,677 £4,478,671.20
(2 mark)
Closing Inventories 38,378 £7.1 £272,483.80
(2 mark)
LIFO
Sales From December 80,000 £7.1 £568,000
Sales From November 60,000 £10.8 £648.000
Sales From October 10,000 £13.2 £132,000
Sales From September 70,000 £18.6 £1,302,000
Sales From August 61,677 £21 £1,295,217
Cost of Sale 281,677 £3,945,217
(2 mark)
Closing Inventories 38,378 £21 £805,938
(2 mark)
AVCO
Sales From December 100,055 £21.00 £2,101,155
Sales From November 70,000 £18.60 £648.000
Sales From October 10,000 £13.20 £132,000
Sales From September 60,000 £10.80 £1,302,000
Sales From August 80,000 £7.10 £2,101,155
Cost of Sale 282,677 £14.8448079 £4,196,285.77
(2 mark)
Closing Inventories 38,378 £14.8448079 £569,714.04
(2 mark)
(b)
FIFO
Revenue = £281,677 x 50 = £14,083,850
Cost of sale = £4,478,671 20
Gross Profit = £9,605,178.80 (1.5 mark)
LIFO
Revenue = £281,677 x 50 = £14,083,850
Cost of sale = £3,945,217
Gross Profit = £10,138,663 (1.5 mark)
AVCO
Revenue = £281,677 x 50 = 14,083,850
Cost of sale = £4,196,285.77
Gross Profit = £9,887,564.23 (1.5 mark)
QUESTION 2 - Bravo Rentals Ltd
(a)
The task of accounting for depreciation is based upon a process of cost allocation rather than asset valuation. This is
because depreciation is not calculated as an estimation of the decline in the fair market value of an asset. The loss of
value of an asset is an expense to a business; the process of accounting for depreciation is to adopt a systematic
approach to allocate this expense into the various financial periods. (2.5 mark)
(b)
Year 1 Year 2 Year 3 Year 4 Year 5
Opening balance 40,000 32,250 24,500 16,750 9000
Depreciation 7,750 7,750 7,750 7,750 7,750
Closing Balance 16,750 9,000
32,250, 24,500 1,250
(1 mark) (1 mark) (1 mark) (1 mark) (1 mark)
(c)
Opening balance 40,000 20,000 10,000 5,000 2,500
Depreciation 20,000 10,000 5,000 2,500 1,250
Closing Balance 5,000 2.500
20,000 10,000 1,250
(1 mark) (1 mark) (1 mark) (1 mark) (1 mark)
(d)
Straight-line method
• Income statement will show operating expense of £7,750. (1 mark)
• Balance sheet will show the car valued at £32,250. (1 mark)
Reducing balance method
• Income statement will show an operating expense of £20,000. (1 mark)
• Balance sheet will show the car valued at 20,000. (1 mark)
QUESTION 3 – Charlie Ltd
(a)
In addition to share capital, a company has reserves that can either be defined as either revenue or capital which
collectively make up a company’s ownership equity.
A capital reserve arises from an accumulated capital surplus (not revenue surplus) of an organisation, such as by an
upward revaluation of its assets to reflect their current market value after appreciation or issuing shares above their
nominal value. Allocating such sums to capital reserve means they are permanently invested and will not be paid as
dividends.
Revenue reserve is an amount of money received from sales that a company’s management has decided to keep
back for future needs which has been agreed with shareholder. It is common practice for a business to retain
earnings to as a source of funds which the business can easily access.
The most important distinction between a capital reserve and a revenue reserve is on the latter can be paid out to
shareholders in the form of a dividend.
(4.5 mark)
A rights issue is a form of equity capital raising where a company offers its existing shareholders the opportunity to
purchase further shares.
The company will set a time limit for the shareholder to buy the new shares. The shares are often offered at a
discounted price to encourage existing shareholders to take the company up on their offer.
If a shareholder does not take the company up on their rights issue then they have the option to sell their rights on the
stock market just as they would sell ordinary shares, however their shareholding in the company will weaken as a
result.
(2 mark)
New Share Capital = Previous Share Capital (Number of shares x Nominal Price x (Fraction of new
shares to old shares being issued))
£ 10,000,000 = £8,000,000 + (8,000,000 x £1 x (1/4))
New Share Premium = Previous Share Premium Account + (Number of shares x (Issue Price - Nominal
Price ) x (Fraction of new shares to old new shares being issued))
£ 1,600,000 = £0 + (8,000,000 x 0.80 x (1/4))
Statement of financial position as at 31st December
ASSETS
Non-current assets 16,500,000
Inventories 1,500,000
Trade receivables 4,450,000
Bank 50,00 + 1,600,000 + 2,000,000 3,650,000 (2 mark)
Total assets 26,100,000
EQUITY AND LIABILITIES
Current liabilities 1,500,000
Long term liabilities 8,000,000
Share capital (£1 ordinary shares) 10,000,000 (4 mark)
Share Premium 1,600,000 (4 mark)
Retained Earnings 5,000,000
Total equity and liabilities 26,100,000
(10 mark)
QUESTION 4 – Delta Ltd
Profitability Ratio
Gross Profit Margin (2 mark)
Gross Profit
Gross Profit margin = x 100
Sales Revenue
1,500,000
30% = x 100
5,000,0000
One mark to be given for relevant comment (1 mark)
Operating Profit Margin (2 mark)
Operating Profit
Operating Profit margin = x 100
Sales Revenue
1,000,000
20% = x 100
5,000,0000
One mark to be given for relevant comment (1 mark)
Return On Capital Employed (2 mark)
Operating Profit
Return On Capital Employed = x 100
(Share Capital + Reserves + Non-current liabilities)
1,000,000
5.88% = x 100
8,000,000 + 8,000,000 + 1,000,000
One mark to be given for relevant comment (1 mark)
Liquidity Ratio
Current Ratio (2 mark)
Current Assets
Current Ratio =
Current Liabilities
50,000 + 4,450,000 + 2,500,000 + 1,500,000
5.67 =
1,500,000
One mark to be given for relevant comment (1 mark)
Acid Ratio (2 mark)
Current Assets (excluding inventories)
Current Ratio =
Current Liabilities
50,000 + 4,450,000 + 2,500,000
4.67% =
1,500,000
One mark to be given for relevant comment (1 mark)
Efficiency Ratio
Sales Revenue To Capital Efficiency (2 mark)
Sales revenue
Sales Revenue To Capital Efficiency = x 100
(Share capital + reserves + Long-term (non current) liabilities)
5,000,000
29.41% = x 100
(8,000,000 + 1,000,000 + 8,000,000)
One mark to be given for relevant comment (1 mark)
Leverage
Gearing Ratio (2 mark)
Long-term (non current) liabilities
Gearing ratio = x 100
(Share capital + reserves + Long-term (non current) liabilities)
8,000,000
41.07% = x 100
(8,000,000 + 1,000,000 + 8,000,000)
One mark to be given for relevant comment (1 mark)
