QUESTION 1 - ABC Packaging Ltd purchased equipment on 1 January 2015 for $66,000. The expected life of the equipment is 10 years, or 100,000 units of production, and its residual value is $6,000. The equipment produces 7,000 units and 9,000 units in years 2015 and 2016 respectively. Under three depreciation methods, the annual depreciation expense and the balance of accumulated depreciation at the end of 2015 and 2016 are as follows:
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Method A
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Method B
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Method C
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Year
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Annual depreciation expense
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Accumulated depreciation expense
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Annual depreciation expense
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Accumulated depreciation expense
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Annual depreciation expense
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Accumulated depreciation expense
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2015
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6,000
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6,000
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4,200
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4,200
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14,107
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14,107
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2016
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6,000
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12,000
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5,400
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9,600
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11,053
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25,160
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REQUIRED
(a) Identify the depreciation method used in each instance, and show how the annual depreciation has been calculated (Rounded to the nearest dollar/ showing full workings).
(b) Assume continued use of the same method in 2017. Determine the annual depreciation expense, accumulated depreciation and carrying amount of the equipment for 2015 to 2017 under each method, assuming 12,000 units of production in 2017.
(c) Depreciation is a concept used in accrual accounting. Of the depreciation methods above discuss the reasons for selecting one alternative method of depreciation over another as dictated by accrual accounting and the matching principle. (60 words limit)
(d) Depreciation allocates cash to eventually replace the asset once it has reached the end of its useful life. Discuss stating whether you agree or disagree with the statement and why? (40 words limit)
QUESTION 2 - Northern Star Company sets a hurdle rate of 14% per annum for evaluating investment proposals. Currently, it is considering three competing proposals and does believe that it will have sufficient finance to fund all three. Details of the proposals, all of which will cover a five year term, are given below:
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A
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B
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C
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Investment cost
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$400,000
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$750,000
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$600,000
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Estimated annual net cash inflow (per annum)
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$125,000
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$225,000
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$195,000
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REQUIRED -
(a) Calculate the Net Present Value (NPV) for the 3 investment proposals. Ignore tax implications.
Additional information:
The present value of $1, i.e., (1+r)-n, Where: r = discount rate; n = number of periods until payment.
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Discount rate (r) 14%
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Periods (n)
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1
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2
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3
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4
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5
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Present value of $1
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0.877
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0.769
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0.675
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0.592
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0.519
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(b) In your own words interpret the meaning of the net present value figures calculated above and rank the 3 investment proposals in order, nominating which investment/s you would accept or reject justifying your answer. (60 words limit)
(c) The factory manager at Northern Star says she has heard that the data used in NPV calculations can be unreliable, especially estimates of future cash flows, and that alternative methods of assessing a capital investment would be more reliable. Discuss in your own words the limitations and advantages of NPV analysis over other alternative capital evaluation techniques reviewed throughout the semester. (180 words limit)
QUESTION 3 -
The management of ABC Trading Ltd a retailer of electrical goods is extremely concerned at the accounting information presented below. Specifically that their Income Statement presented below, constructed under accrual accounting, highlights a profit of $785,000 yet the cash flow from operations (cash profit) shows a net cash OUTFLOW of $301,000
REQUIRED
(a) With reference to the statements below describe three reasons why ABC Trading Ltd made a profit of $785,000 for the year ending 31 December 2016 yet generated a negative cash flow from operations over the same period. (Hint: Review movements in current assets to explain Income Statement Figures to Cash Flow Figures) With each cause identified highlight the impact on Assets = Liabilities +Owners equity and profit versus its impact on cash flow.
(b) Given the above differences discuss which statement (Income Statement or Cash Flow from Operations) better reflects the financial performance / wealth creation for the period ending 31 December 2016. (Justify your answer with reference to accrual accounting) (80 word limit)
(c) Compare and contrast the major purpose of the balance sheet, income statement and cash flow statement in terms of its information content provided to interested end users. (80 words limit)
Financial Statements of ABC Trading Limited
Extract of the Income Statement (abstract) for the year ended 31 December 2016
$'000
Sales 1,700
Cost of sales (750)
Gross profit 950
Loss on sale of equipment (80)
Depreciation of equipment (45)
Salaries (22)
Other expenses (18)
Operating Profit 785
Extract of the Balance Sheets as at 31 December
2015 2016
$'000 $'000
Inventory 180 400
Accounts Receivable 285 700
Accounts Payable 600 100
Accrued expenses 100 20
Extract of the Cash Flow from 0pertions for the year ended 31 December 2016
Cash Flow from Operating Activities 2016
$'000
Cash Receipts from Customers (1700+285-700) $1285
Cash Paid to Suppliers (750-180+400+600-100) ($1470)
Cash Paid for Other Expenses (18+100-20) ($98)
Cash Paid for salaries ($18)
Net Cash Outflow ($301)
QUESTION 4 - Fresh Food Ltd is a food processing company whose main product is canola cooking oil. The CEO, Maggie, is contemplating expanding the business by selling its canola oil product into the growing Chinese market. She asks you, as the company's accountant, whether financial planning structures and processes within the company are set up to deal with this expansion of operations and greater financial complexity associated with export trading.
You know that the company has developed very detailed processes for preparing its production and cash budgets. But other areas of budgeting, especially financial, and capital budgets have not been formally established. You tell the CEO you will look into it and provide her with advice in next month's meeting.
The budget committee of the company has provided the following information:
- Cash sales are 70% of total sales.
- Debtors are expected to pay: 60% of in the month of sales; and 40% in the month following the sale.
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2017
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Sales
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April
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$500,000 Actual sales
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May
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$600,000 Actual sales
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June
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$800, 000 Estimated sales
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July
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$900,000 Estimated sales
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REQUIRED
(a) Prepare a schedule of expected receipts from debtors for June and July 2017. (show all workings as part of your answer).
(b) Distinguishes between the various types of budgets and their purpose that the company should put in place as part of the overall planning and control process. (90 words limit)
(c) Provide three examples of how the sales budget will impact budgets set in other related parts of the organization. (50 words limit)
(d) Discuss the steps that would be necessary to establish a fully integrated set of budgets that will enable effective planning and control for the company in the future, and gain positive co-ordination and behavioral change necessary to attain corporate objectives. (100 words limit)
(e) Working capital management is concerned with the effective management of the cash operating cycle. Discuss the meaning of the cash operating cycle and how a lengthening cash operating cycle due to a building up of excessive inventory can reduce profitability / increase costs (60 words limit)
Attachment:- Assignment.rar