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					                 Holborn College




                      MBA Wales
Module title:              Managerial Accounting and
                           Financial Reporting

Module code:               WAMB4004

Module leader:             Siddeek Yoosuf

Date:                      19th January 2009

Time:                      10:00

Time allowed:              2 hours 15 minutes


INSTRUCTIONS:

This paper has FOUR questions.

You are required to attempt question NUMBER ONE (1)
and any other TWO questions of your choice from questions 2 to
4.
Question 1 (compulsory question)

(a) Briefly discuss, where appropriate with examples, the qualitative
   characteristics of relevance, reliability and comparability identified in the
   IASB’s Framework for the preparation and presentation of financial
   statements. Your discussion should also include the advantages of using
   unpublished management accounting information in conjunction with
   historic data in analysing and understanding business performance.

                                                                (15 marks)

(b) You are given the following balances of Kalai Arasu, a UK public
    limited company, at 31 March 2008:

                                                             £million
          Land and buildings - at cost                         260
          Plant – at cost                                      175
          Investment properties – valuation at 1 April 2007     85
          Purchases                                             90
          Operating expenses                                    13
          Loan interest paid                                      2
          Dividends paid                                        14
          Inventory at 1 April 2007                             37
          Trade receivables                                     54
          Revenue                                              284
          Income from investment property                         4
          Equity shares of £1 each fully paid                  151
          Retained earnings at 1 April 2007                    105
          8% loan note                                          50
          Accumulated depreciation at 1 April 2007 – buildings 60
                                                    – plant     25
          Trade payables                                        33
          Deferred tax                                          13
          Bank (overdraft)                                        5

The following notes are relevant:

   (I)       The land and buildings were purchased on 1 April 1992. The cost of
             the land was £60 million. Kalai Arasu has purchased no land and
             buildings since that date. On 1 April 2007 Kalai Arasu had its land
             and buildings professionally valued at £85 million and £150 million
             respectively. These values have to be incorporated into the financial
             statements. The estimated life of the buildings was originally 50
             years and the remaining life has changed to 30 years as a result of
             the valuation. The land value remains at £85 million on 31 March
             2008.

   (II)      Investment properties of the type Kalai Arasu owned had increased
             in value by £6 million in the year to 31 March 2008.



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   (III)   Plant is depreciated at 20% per annum using the reducing balance
           method. Depreciation of buildings and plant is part of cost of sales.

   (IV)    The loan note was issued on 1 July 2007 with interest payable six
           monthly in arrears.

   (V)     The provision for income tax for the year to 31 March 2008 has
           been estimated at £25 million. The deferred tax provision at 31
           March 2008 is to be adjusted to a credit balance of £15 million.

   (VI)    The inventory at 31 March 2008 was valued at £44 million.

   Required:

  Prepare, in a form suitable for publication and in conformity with the

  requirements of the relevant international accounting standards, a

  statement of comprehensive income for the year ended 31 March 2008 and

  a statement of financial position as at 31 March 2008 for the company.

  Clearly show your workings.

                                                               (35 marks)

                                                        (Total 50 marks)

                                  SECTION B
Question 2

The following information relates to SFP, a financial services practice.
The business specialises in taxation work for architects. Many of the clients
are self-employed. The business was founded by and is wholly owned by
Rodney Wilson. He feels that promotion of new products to his clients would
be likely to upset the conservative nature of his architects, as a result, the
business has been managed with similar products year on year. You have
been provided with summary financial and non-financial information for two
years relating to the practice below:

                                                                  2008      2007
 Turnover (£000)                                                   945       900
 Net profit (£000)                                                 187       180
 Average cash balances (£000                                        21        20
 Average receivables days (industry average 30 days)                18        22
 Inflation rate (%)                                                  3         3
 Error rates in jobs done (%)                                       16        10
 Average job completion time (weeks)                                 7        10



                                        3
 Number of customers                                             1220       1500
 Average fee levels (£)                                           775        600
 Market Share (%)                                                  14         20
 Percentage of revenue from non-core work (%)                       4          5
 Industry average of the proportion of revenue from non-           30         25
 core work in financial services practices (%)
 Employee retention rate. (%)                                       60        80

Additional information:

   •   Error rates measure the number of jobs with mistakes made by staff as
       a proportion of the number of clients serviced
   •   Core work is defined as being taxation
   •   Non-core work is defined primarily as business consultancy
   •   Non- core work is traditionally high margin work

Required:

(a) Using the information given above briefly comment on the financial
    performance of the business ( consider growth, profitability, liquidity and
    credit management) and also discuss why non financial information, such
    as the type shown is likely to give a better indication of the likely future
    success of the business than the financial information.

                                                               (17 marks)

(b) Using the non-financial data given above comment on the performance
    of the business under the following four headings:

       (i)     Internal business processes,
       (ii)    Customer perspective,
       (iii)   Learning/growth and
       (iv)    Overall performance of the business.

                                                               (8 marks)

                                                          (Total 25 marks)

Question 3

(a) Briefly discuss the advantages claimed for using residual income (RI) over
    return on investment (ROI) to measure performance of divisional
    managers.

                                                               (4 marks)

(b) Regnis Ltd (RL) provides storage facilities to major food producers to
    preserve their products. The management of RL is currently evaluating
   two bids from alternative suppliers in respect of replacing the existing



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   cooling system at one of their cooling ‘houses’. The following information is
   available in respect of each bid:

   (1) Bid 1 is from suppliers A Ltd for system A. The system A has
       anticipated working life of 4 years with initial investment of £220,000.
       The system needs £60,000 working capital at the beginning of the year
       1.

      Bid 2 is from suppliers B Ltd for system B. The system B has
      anticipated working life of 6 years with initial investment of £345,000.
      The working capital requirement for the system B is £50,000 at the
      beginning of year 1 and £20,000 at the beginning of year 2.

   (2) The following net cash flows are forecast with each cooling system:

                    Year                       Net cash flows
                                             A                B
                                           (£000)            (£000)

                      1                    220                 250

                      2                    250                 270

                      3                    230                 300

                      4                    210                 300

                      5                    ---                 225

                      6                    ---                 175

  (3) The management has also information that B Ltd has recently
       entered the market and has received encouraging publicity from trade
      magazines regarding their technically complex cooling systems, of
      which the system B is a ‘trial product’. Therefore, the finance director of
      RL has suggested that an appropriate discount rate for the system B is
      12% per annum, which is 2% higher than her estimate of the
      appropriate discount rate for the system A.

   (4) Ignore taxation, capital allowances and inflation and assume all
       cash flows other than initial investment and working capital occur at the
       end of the relevant years unless otherwise stated and the company
       policy is to depreciate the investments on straight-line basis with zero
       residual value.

Required:

(i) Calculate payback period, average rate of return, net present value,
    internal rate of return and residual income for each of the cooling systems
    and recommend which of the cooling systems should be purchased. You


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   should justify your reasons, which must be supported by relevant
   calculations.
                                                            (16 marks)

(ii) Discuss the reasons why discounted cash flow methods are widely
     used by organisations in the process of evaluating financial viability of the
     capital investment projects.

                                                                  (5 marks)

                                                          (Total 25 marks)


Question 4

You are given the following accounts of Hally plc.

Draft Income Statement for the year ended 31 March 2008
                                             £000
       Revenue                              46,252
       Cost of sales                       (22,008)
       Gross profit                         24,244
       Distribution costs                    (1608)
       Administrative expenses              (3,528)
       Finance cost                           (608)
       Profit before tax                   18,500
       Taxation                             (6,124)
       Profit after tax                    12,376
       Dividends                            (2,800)
       Retained earnings                     9,576

Draft statement of financial position as at 31 March 2008 and statement
of financial position as at 31 March 2007:
                                                      2008         2007
                                                      £000         £000
       Non-current assets
       Leasehold premises (net)                     26,400       22,800
       Plant and machinery (net)                    20,160       15,120

       Current assets
       Investments at cost held as liquid resources        9,624           8,832
       Inventory                                          11,520           7,944
       Receivables                                        10,344           7,968
       Bank                                                  ----          2,304
                                                           -------        --------
                                                          78,048          64,968

       Equity and reserves
       Share capital (50p ordinary shares)                9,120           7,200
       Share premium                                      8,448           7,200


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      Retained earnings                             36,432          26,856

      Provision for deferred repairs                  4,808             4,064

      Non-current liabilities
      8% Loan notes                                   4,960             7,200

      Current liabilities
      Payables                                       4,104            2,808
      Overdraft                                        888             ----
      Taxation                                       7,728            8,704
      Proposed dividends                             1,560              936
                                                    78,048           64,968

You are also given the following relevant data for the year ended 31 March
2008:

   1. The 8% loan notes were redeemed at par during the year.
   2. Plant with a written down value of £1,104,000 was sold for £672,000
      during the year. New plant was purchased for £10,000,000.
   3. Leasehold premises costing £5,200,000 were acquired during the year.

Required:

(a) Prepare the cash flow statement for the year ended 31 March 2008 in
   compliance with the requirements of the relevant International Accounting
   Standards, and
                                                              (18 marks)

(b) Comment upon the financial position and liquidity of the company.

                                                              (7 marks)

                                                       (Total 25 marks)




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PRESENT VALUE TABLE

Present value of 1, that is 1/(1 + r)" where r = discount rate and n = number of periods until payment.

                                                          Discount rates (r)
Periods
  (n)       1%          2%          3%        4%           5%          6%        7%          8%            9%     10%

   1       0.990       0.980      0.971       0.962       0.952       0.943     0.935      0.926          0.917   0.909
   2       0.980       0.961      0.943       0.925       0.907       0.890     0.873      0.857          0.842   0.826
   3       0.971       0.942      0.915       0.889       0.864       0.840     0.816      0.794          0.772   0.751
   4       0.961       0.924      0.888       0.855       0.823       0.792     0.763      0.735          0.708   0.683
   5       0.951       0.906      0.863       0.822       0.784       0.747     0.713      0.681          0.650   0.621
   6       0.942       0.888      0.837       0.790       0.746       0.705     0.666      0.630          0.596   0.564
   7       0.933       0.871      0.813       0.760       0.711       0.665     0.623      0.583          0.547   0.513
   8       0.923       0.853      0.789       0.731       0.677       0.627     0.582      0.540          0.502   0.467
   9       0.914       0.837      0.766       0.703       0.645       0.592     0.544      0.500          0.460   0.424
  10       0.905       0.820      0.744       0.676       0.614       0.558     0.508      0.463          0.422   0,386
  11       0.896       0.804      0.722       0.650       0.585       0.527     0.475      0.429          0.388   0.350
  12       0.887       0.788      0.702       0.625       0.557       0.497     0.444      0.397          0.356   0.319
  13       0.879       0.773      0.681       0.601       0.530       0.469     0.415      0.368          0.326   0.290
  14       0.870       0.758      0.661       0.577       0.505       0.442     0.388      0.340          0.299   0.263
  15       0.861       0.743      0.642       0.555       0.481       0.417     0.362      0.315          0.275   0.239

                                                          Discount rates (r)
Periods
  (n)       11%        12%         13%        14%          15%        16%       17%         18%           19%     20%

   1       0.901       0.893      0.885       0.877       0.870       0.862     0.855      0.847          0.840   0.833
   2       0.812       0.797      0.783       0.769       0.756       0.743     0.731      0.718          0.706   0.694
   3       0.731       0.712      0.693       0.675       0.658       0.641     0.624      0.609          0.593   0.579
   4       0.659       0.636      0.613       0.592       0.572       0.552     0.534      0.516          0.499   0.482
   5       0.593       0.567      0.543       0.519       0.497       0.476     0.456      0.437          0.419   0.402
  6        0.535       0.507      0.480       0.456       0.432       0.410     0.390      0.370          0.352   0.335
  7        0.482       0.452      0.425       0.400       0.376       0.354     0.333      0.314          0.296   0.279
  8        0.434       0.404      0.376       0.351       0.327       0.305     0.285      0.266          0.249   0.233
  9        0.391       0.361      0.333       0.308       0.284       0.263     0.243      0.225          0.209   0.194
  10       0.352       0.322      0.295       0.270       0.247       0.227     0.208      0.191          0.176   0.162
  11       0.317       0.287      0.261       0.237       0.215       0.195     0.178      0.162          0.148   0.135
  12       0.286       0.257      0.231       0.208       0.187       0.168     0.152      0.137          0.124   0.112
  13       0.258       0.229      0.204       0.182       0.163       0.145     0.130      0.1)6          0.104   0.093
  14       0.232       0.205      0.181       0.160       0.141       0.125     0.111      0.099          0.088   0.078
  15       0.209       0.183      0.160       0.140       0.123       0.108     0.095      0.084          0.074   0.065




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