Courses : Accounting 6011P0148 /6011P0150 Duration of the Exam : 3 hours, 09:00 12:00 Exam, date : 18 December 2014

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1 Courses : Accounting 6011P0148 /6011P0150 Duration of the Exam : 3 hours, 09:00 12:00 Exam, date : 18 December 2014 Covers the subjects of term : 1 st semester, 2 nd Block This exam consists of : 4 problems Worksheets : 4 sets The solutions of the exam will be posted on Blackboard. Exam review (tentamen inzage) time and place will be posted on Blackboard ( The results (disregarding unexpected circumstances) will be announced in three weeks at the usual website of the FEB. General Instructions for the Exam 1. Write your name, student number and test number (supplied by the invigilator) clearly on all your documents of the exam. 2. If asked you have to be able to identify yourself, so put your ID on your table. For ID you may use: passport, driving license, or University-of-Amsterdam registration card. 3. You have to report any incompleteness regarding the questions and problems during the test to the invigilators. 4. You must answer the problems on your own. You may answer in English or in Dutch. 5. The use of a calculator, as long as it is noiseless, and is working on batteries, is permitted. Graphical calculators are NOT allowed. You may also use an unmarked dictionary. 6. The use of paper not provided by the invigilators is prohibited. You can use the blank backsides of the paper on which the test is printed, or you can ask the invigilators for additional paper. 7. The set of questions and problems can be taken home. When you have finished the exam, you have to hand in all worksheets. 8. You can only leave your table if the invigilator allows you to. In case of any question you have to warn an invigilator. You have to remain seated for the first 30 minutes of the exam. 9. Always show your calculations. Answers without calculations will not receive any points. 10. If necessary, round your answers to two decimals. 11 In case of violation of the instructions the invigilator is allowed to take in your worksheets and remove you from the room. The invigilator reports the violation to the Examination Commission of the FEB.

2 Problem 1: Journal Entries (Max 25 points) The following are the transactions relating to the formation of Excellent Mowing Services, Inc. and its first month of operations. The firm uses a periodic system to account for supplies. Required: Write the journal entries for each of the transactions described below. When recording the transactions, you can use the following accounts (note: you do not have to use all accounts): Accounts payable Equipment Retained earnings Accounts receivable Loss on sale of supplies Service revenue Accumulated depreciation Marketing expenses Supplies expense Accumulated interest Notes payable Supplies inventory Cash Paid-in-Capital Wage expense Discount on short term debt Purchase discounts Wages payable a. Initial stockholders invested cash of $ 6,000. b. The company borrowed $ 9,000 on a straight basis from a relative of one of the initial stockholders; a short-term note payable was signed. The interest rate is 5%. c. Two lawn mowers costing $ 4,800 each and a professional trimmer costing $ 1,300 were purchased for cash. The original price of each mower was $ 6,100, but a discount was received because the seller was having a sale. d. Gasoline, oil, and several packages of trash bags were purchased for cash of $ 900. e. Advertising flyers announcing the formation of the business and a newspaper ad were purchased. The cost of these items, $ 1,700 will be paid in 30 days. f. Employees were paid $ 4,200 for their work during the first two weeks. g. More gasoline and oil were purchased, this time on credit. Total amount of the invoice is $ 1,000. The supplier has credit terms 2/10, n/30. The firm uses the net method to recognize cash discounts in its administration. h. During the first month of operations, 98 lawns were mowed. The total revenue for this work was $ 16,250 of which $ 8,400 was collected in cash. i. Employee wages for the last two weeks totaled $ 5,100; these will be paid during the first week of the next month. j. The invoice for gasoline and oil (from transaction g) was paid five days after the invoice date, taking the cash discount. k. It was determined that at the end of the month the cost of the gasoline, oil, and trash bags still on hand was $

3 Problem 2: Financial Statements of a manufacturing firm (Max 25 points) Below are the income statement for the year 2013 as well as the balance sheets at the end of 2012 and at the end of 2013 for RowdyBear BV. RowdyBear BV produces one single product: a toy bear that speaks and is controllable through a mobile phone app. RowdyBear BV uses a standard costing system. The standard cost of producing one bear is 10, and is calculated as shown below. In the year 2013 there were no direct costs variances or overhead variances. Also, there is no work-in-process at the beginning or at the ending of the year. Balance sheet Current Assets Cash 7,550 3,000 Accounts receivable 10,500 3,500 Raw materials inventory 8,500 5,000 Finished goods Inventory 5,500 5,500 Noncurrent Assets Office Equipment (net of depreciation) 15,750 17,500 Current Liabilities Accounts payable 3,500 1,750 Noncurrent Liabilities Long-term bank loan 10,000 10,000 Owners equity Paid-in capital (7,000 shares at 1 par) 7,000 7,000 Additional paid-in-capital 7,000 7,000 Retained earnings 20,300 8,750 Income statement 2013 Sales Revenue 70,000 Cost of Goods Sold 50,000 Interest expense (10%) 1,000 Income before tax 19,000 Income tax expense (30%) 5,700 Net income 13,300 3

4 Standard Cost calculation Direct materials 4 Direct labor 2 Allocated fixed overhead (including depreciation of office equipment) 4 Standard cost per unit 10 Required: a. Calculate working capital on and b. Calculate the acid test ratio on and c. Calculate accounts receivable turnover in d. Assume that RowdyBear paid out a cash dividend of 0.25 per share in Calculate the dividend payout ratio. e. How many units did RowdyBear BV need to sell in 2013 in order to break even in terms of income before taxes? f. How many units did RowdyBear BV need to sell in 2013 in order to arrive at a net income of 21,000 (assume taxable income is equal to income before tax). g. Explain in words what financial leverage is. Also explain whether the financial leverage of RowdyBear BV has changed over 2013, and, if so, how. h. Explain in words what operating leverage is. 4

5 Problem 3: Statement of Cash Flows (Max 25 points) Blue Spirit s balance sheets as of December 31, 2013 and 2012 and its income statement for the year ended December 31, 2013 are presented below (in ). Blue Spirit Balance sheets as of December 31, 2013 and ASSETS Current assets Cash 247,000 98,000 Accounts receivable 289, ,000 Accrued revenues 23,000 37,000 Inventories 285, ,000 Total current assets 801, ,000 Long-term assets Equipment 800, ,000 Buildings 509, ,000 Land 200, ,000 Total long-term assets 1,509,000 1,384,000 Total assets 2,300,000 1,932,000 LIABILITIES AND STOCKHOLDERS EQUITY Current liabilities Accounts payable 411, ,000 Income taxes payable 79,000 57,000 Accrued interest on liabilities 11,000 32,000 Accrued other expenses 80,000 86,000 Total current liabilities 581, ,000 Long-term liabilities Mortgage payable 117,000 - Bonds payable 250, ,000 Notes payable 191, ,000 Total long-term liabilities 505, ,000 Total liabilities 1,086, ,000 Stockholders equity Common stock 500, ,000 Additional paid-in capital 240, ,000 Retained earnings 474, ,000 Treasury stock - -40,000 Total stockholders equity 1,214, ,000 Total liabilities and stockholders equity 2,300,000 1,932,000 5

6 Blue Spirit Income Statement for the year ended December 31, 2013 Revenues Sales 3,285,000 Expenses Cost of goods sold 2,400,000 Depreciation of long-term assets 250,000 Other operating expenses 110,000 Interest expense 48,000 Total expenses 2,808,000 Loss on sale of equipment 4,000 Income before income taxes 477,000 Income taxes expense 118,000 Net income 359,000 Additional information about the company s transactions during 2013 During 2013 Blue Spirit entered into the following transactions: 1. Purchased buildings in exchange for a long-term mortgage in the amount of 130, Purchased equipment at 290,000 in cash. 3. Sold equipment that cost 114,000 with accumulated depreciation of 65,000 for 45,000 cash. 5. Declared and paid cash dividend in the amount of 150, Repaid 80,000 on a long-term note payable. 7. Sold all treasury stock at 50,000 cash. During 2013 no purchase of treasure stock has been made. Required Prepare a statement of cash flows, for the year ended at December 31, 2013, using the indirect method. 6

7 Problem 4: Variance Analysis (Max 25 points) LoLaLeather Ltd. is a company specializing in leather products. One of its business units manufactures and sells leather travel bags. It operates a standard costing system. For October 2014, the budgeted production and sales is 640 units. The standard cost price per travel bag is calculated as follows: Leather: 0.6 m² at 30 per m² Direct labor: 2 hours at 16 per hour Allocated variable overhead: 5 per labor hour Allocated fixed overhead: 15 per unit Standard unit costs The budgeted selling price is On November 17, the actual results over October 2014 are known. Actual production was 660 units. During the month, 488 m² of leather was used, for which a total of 13,664 was paid. Also, 1287 hours of labor were used at a cost of 21,879. Actual fixed overhead costs in October 2014 were 10,300, while actual variable overheads totaled 7,722. The actual sales were 660 units at an average price of per unit. Required: a. Calculate the budgeted and the actual profit in October b. Calculate the price and usage variance for direct materials. Indicate whether the variances are favorable or unfavorable. c. Calculate the rate and efficiency variance on direct labor. Indicate whether the variances are favorable or unfavorable. d. Calculate the spending and efficiency variance on variable overhead. Indicate whether the variances are favorable or unfavorable. e. Calculate the fixed-overhead budget variance and the fixed overhead volume variance. f. Explain the different options that firms have for accounting for standard cost variances in their accounting system. 7

8 ANSWERS & guide to grading Problem 1: Journal Entries (Max 25 points) (a) Cash 6000 Max 2 points Paid-in-Capital 6000 (b) Cash 9000 Max 2 points Notes payable 9000 (c) Equipment Max 2 points Cash (d) Supplies Inventory 900 Max 2 points Cash 900 (e) Marketing expenses 1700 Max 2 points Accounts payable 1700 (f) Wage expense 4200 Max 2 points Cash 4200 (g) Supplies Inventory 980 Max 3 points Accounts payable 980 (h) Cash 8400 Max 3 points Accounts receivable 7850 Service revenue (i) Wages expense 5100 Max 2 points Wages payable 5100 (j) Accounts payable 980 Max 2 points Cash 980 (k) Supplies expense 1580 Max 3 points Supplies inventory

9 Problem 2: Financial Statements of a manufacturing firm (Max 25 points) a. Calculate working capital on and (Max 2 points) : 15, : 28,550 b. Calculate the acid test ratio on and (Max 2 points) : : 5.16 c. Calculate accounts receivable turnover in (Max 2 points) 10 d. Assume that RowdyBear paid out a cash dividend of 0.25 per share in Calculate the dividend payout ratio. (Max 3 points) EPS = 1.90 Dividend payout ratio = 0.25/1.9 = 13.16% e. How many units did RowdyBear BV need to sell in 2013 in order to break even in terms of income before taxes? (Max 4 points) Units sold = / 10 = 5000 Sales price = 14 Fixed costs: 4 x = CM = 14-6 = 8 BE point = 2625 units f. How many units did RowdyBear BV need to sell in 2013 in order to achieve a net income of (assume taxable income is equal to income before tax). (Max 6 points) This means that 0.3% of income before tax goes to the tax authorities. So Income before tax = net income / net income requires income before tax = 6375 units g. Explain in words what financial leverage is. Also explain whether the financial leverage of RowdyBear BV has changed in 2013, and, if so, how. (Max 3 points) Financial leverage refers to the difference between ROI and ROE that arises if a firm uses fixed income securities (such as long term debt) to finance its assets. During the year equity has increased more than debt so financial leverage has decreased. h. Explain in words what operating leverage is. (Max 3 points) A business that has a higher proportion of fixed costs and a lower proportion of variable costs is said to have higher operating leverage. Firms with higher operating leverage experience higher variation in profits due to changes in sales levels than firms with lower operating leverage. 9

10 Problem 3: Statement of Cash Flows (Max 25 points) Net income 359,000 Depreciation of long-term assets 246,000 Loss on sale of long-term assets 4,000 Increase in accounts receivable -88,000 Decrease accrued revenue 14,000 Increase in inventories -73,000 Increase in accounts payable 130,000 Increase in income taxes payable 22,000 Decrease accrued interest -21,000 Decrease in accrued other expenses -6,000 Net cash flow from operating activities 587,000 Cash flows from investing activities Purchase of Equipment -290,000 Sales of equipment 45,000 Net cash flow from investing activities -245,000 Cash flows from financing activities Repayment of mortgage payable -13,000 Repayment of notes payable -80,000 Sales of treasury stock 50,000 Payment of dividends -150,000 Net cash flow from financing activities -193,000 Net cash flow 149,000 Cash at beginning of period Cash at end of period 247,000 10

11 Problem 4: Variance Analysis (Max 25 points) a. Calculate the budgeted and the actual profit in October (Max 3 points) Budgeted profit 15,360 Actual profit 11,115 b. Calculate the price and usage variance for direct materials. Indicate whether the variances are favorable or unfavorable. (Max 4 points) Direct materials Standard quantity 396 Actual quantity 488 Standard price 30 Actual price 28 Price variance 976 F Quantity variance U c. Calculate the rate and efficiency variance on direct labor. Indicate whether the variances are favorable or unfavorable. (Max 4 points) Direct labor Standard quantity 1320 Actual quantity 1287 Standard price 16 Actual price 17 price variance U Quantity variance 528 F d. Calculate the spending and efficiency variance on variable overhead. Indicate whether the variances are favorable or unfavorable. (Max 6 points) Variable overhead Actual costs 7722 Std units 1320 Actual units 1287 Actual units * std rate 6435 Std units * std rate 6600 Spending variance U Efficiency variance 165 F 11

12 e. Calculate the fixed-overhead budget variance and the fixed overhead volume variance. (Max 6 points) Fixed overhead Actual costs Applied 9900 Budgeted 9600 Volume variance 300 F Budget variance -700 U f. Explain the different options that firms have for accounting for standard cost variances in their accounting system. (Max 2 points) The variances can be included in the costs of goods sold or can be allocated to GOGS and the work in process and/or finished goods inventories. 12

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