acct1511 final version

SURNAME OF CANDIDATE:

FIRST NAME OF CANDIDATE:

STUDENT ID:

SIGNATURE:

SCHOOL OF ACCOUNTING

ACCT 1511: Accounting and Financial Management 1B

FINAL EXAMINATION

JUNE 2009

Time Allowed: 2 Hours Reading Time: 10 minutes Total Number of Questions: 6 Total Number of Pages 34

Answer ALL questions.

The questions are NOT of equal value.

Answers to Questions 1 to 5 must be written in ink on the lines or in boxes provided in this Booklet.

Question 6 (multiple choice questions) must be answered on the separate Generalised Answer Sheet provided using a 2B pencil.

This is a Closed Book examination.

Candidates may bring their own UNSW-approved calculator.

This paper is NOT to be retained by the candidate.

DO NOT OPEN THIS PAPER UNTIL INSTRUCTED BY THE EXAM SUPERVISOR

Official Use Only

Q Mark

1

2

3

4

5

Total (/40)

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QUESTION 1 (10 MARKS): CASH FLOW STATEMENT The following information is extracted from the annual report of JNT Ltd.:

JNT Ltd. Comparative Balance Sheet

As at 30 June 2008 Cash

2007 $183,000 $38,000

Accounts receivable 520,000 430,000 Allowance for doubtful debts (10,000) (21,000) Inventory 175,000 325,000 Prepaid insurance 11,000 5,000 Long-term investments 214,000 203,000 Land 231,000 168,000 Buildings 184,000 225,000 Accumulated depreciation - buildings (65,000) (81,000) Equipment 46,000 103,000 Accumulated depreciation - equipment (33,000) (67,000) Total assets $1,456,000 $1,328,000 Accounts payable $287,000 $302,000 Accrued expenses 26,000 28,000 Interest payable 19,000 19,000 Income tax payable 30,000 32,000 Final dividends payable 18,000 15,000 Short-term loan 12,000 20,000 Bonds payable 100,000 165,000 Share capital 403,000 416,000 Asset revaluation reserve 42,000 39,000 General reserve 120,000 25,000 Retained earnings 399,000 267,000 Total liabilities & shareholders' equity $1,456,000 $1,328,000

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QUESTION 1 (CONT.): CASH FLOW STATEMENT

JNT Ltd. Income Statement

For Year Ended 30 June 2008 Sales $1,485,000 Gain on sale of equipment 16,000 Dividends received 3,000 Total income $1,504,000 COGS $(986,000) Bad debt expense (76,000) Insurance expense (12,000) Interest expense (27,000) Other expenses (53,000) Income tax expense (74,000) Loss on disposal of buildings (19,000) Total expenses (1,247,000) Net profit $257,000

Additional information during the year:

a) Buildings with original cost of $74,000 and accumulated depreciation of $45,000 were sold.

b) A piece of equipment with an original cost of $57,000 and accumulated depreciation of $43,000 was disposed of.

c) A parcel of land with unknown original cost was revalued upward by $38,000.

d) A bonus share issue of $35,000 was declared out of Asset Revaluation Reserve.

e) JNT conducted a share buy-back during the year. Information reveals that the average price of the buy-back is the same as the original issue price of those shares.

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QUESTION 1 (CONT.): 1. Calculate the amount of depreciation expense that is included in the Other Expenses

account by using relevant T-accounts. (3 marks)

DO NOT WRITE OUTSIDE THE BOX

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QUESTION 1 (CONT.): 2. Prepare the operating cash flow section of the statement of cash flows for JNT Ltd.

for 2008 by using the indirect method. (7 marks)


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QUESTION 2 (8 MARKS): Note that some components of this question may not be relevant in Session 2 2009 FINANCIAL STATEMENT ANALYSIS & ACCOUNTING POLICY CHOICE The following information relate to JP Morgan Chase & Co (JPM).

JP Morgan Chase & Co. Selected balance sheet data December 31 (in millions) 2008 2007

Assets Cash and due from banks $ 26,895 $ 40,144 Deposits with banks 138,139 11,466 Federal funds sold and securities purchased under resale

agreements 203,115 170,897 Securities borrowed 124,000 84,184 Trading assets: Debt and equity instruments 347,357 414,273 Derivative receivables 162,626 77,136 Securities 205,943 85,450 Loans 744,898 519,374 Allowance for loan losses (23,164 ) (9,234 )

Loans, net of allowance for loan losses 721,734 510,140 Accrued interest and accounts receivable 60,987 24,823 Goodwill 48,027 45,270 Other intangible assets 14,984 14,731 Other assets 121,245 83,633

Total assets $ 2,175,052 $ 1,562,147

Liabilities Deposits $ 1,009,277 $ 740,728 Federal funds purchased and securities loaned or sold under

repurchase agreements 192,546 154,398 Commercial paper and other borrowed funds 170,245 78,431 Trading liabilities: Debt and equity instruments 45,274 89,162 Derivative payables 121,604 68,705 Accounts payable and other liabilities 187,978 94,476 Beneficial interests issued by consolidated VIEs 10,561 14,016 Long-term debt and trust preferred capital debt securities 270,683 199,010

Total liabilities 2,008,168 1,438,926 Stockholders equity 166,884 123,221

Total liabilities and stockholders equity $ 2,175,052 $ 1,562,147

(Extracted from JPMs Annual Report on 10-K filing with SEC)

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Note: Firm-wide Level 3 assets are expected to be approximately 6% of total firm assets at 12/31/08. (Extracted from JPMs presentation to analysts for financial year ended 31 December 2008). Level 3 assets, also known as mark to make believe, are those in which there are no clearly definable market prices banks can define the prices based on unobservable inputs that reflect managements own assumptions . (Tracy Alloway, ft.com 16 January 2009) Accounting rulemakers now want banks to bring some of those (off-balance sheet) assets back onto their books. They are trying to crack down on transactions that banks used to sidestep rules inspired by the off-balance-sheet antics that led to Enron Corp.s collapse. In its annual filing, JPMorgan said the rules change (SFAS140/FIN46R) might lead it to bring back about $160 billion in assets. Citigroup estimated it may have to reclaim $179 billion. That would equal about 9 percent of year-end 2008 assets at Citigroup, and about 7 percent at JPMorgan. (David Reilly, Bloomberg.com, 25 March 2009)

http://ftalphaville.ft.com/blog/2008/12/11/50329/mo-problem-assets-mo-problems/http://www.fasb.org/http://www.fasb.org/draft/ed_amend_fin46r.pdfhttp://www.bloomberg.com/apps/quote?ticker=ENRNQ%3AUS

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QUESTION 2 (CONT.):

(Extracted from Office of Comptroller of Currency Quarterly Report on Bank Trading and Derivatives Activities, Fourth Quarter 2008.) Five of America's largest banks, most of which have received $145 billion in taxpayer bailout dollars, still face potentially catastrophic losses from exotic investments if economic conditions substantially worsen, their latest financial reports show. ... Citibank, Bank of America , HSBC Bank USA , Wells Fargo Bank and J.P. Morgan Chase reported that their "current" net loss risks from derivatives insurance-like bets tied to a loan or other underlying asset surged to $587 billion as of Dec. 31 2008 J.P. Morgan is credited with launching the credit-default market and is one of the most sophisticated players. It remains highly profitable, even after acquiring the remains of failed investment banker dealer Bear Stearns , and says it has limited its exposure. The New York -based bank, however, also has received $25 billion in federal bailout money. (Greg Gordon and Kevin G. Hall, McClatchy Newspapers, news.yahoo.com, 9 March 2009)

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QUESTION 2 (CONT.): Required: (1) With reference to the information on JP Morgan Chase & Co (JPM) above, analyse the balance sheet of JPM and discuss THREE (3) limitations of the balance sheet as presented. (6 marks): 1. 2. 3.

DO NOT WRITE OUTSIDE THE BOX (2) As an investor analysing the information on JPM above, what could be your opinion as to the possible going-concern (solvency) situation of JPM? (2 marks)


Audit and Corporate Standing Committee Membership Compliance Governance Nominating Remuneration Risk

Executive Voting Directors

David Clarke AO Chairman Member Chairman

Allan Moss AO Member

Mark Johnson Member Member

Laurie Cox AO Member

Independent Directors

John Allpass Member* Member Member

Peter Kirby Member Member










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Note: If required, please use the following formulae to calculate ratios for Question 2. Performance Ratios Return on Equity (ROE) = Net Profit After Tax / Shareholders Equity Return on Assets (ROA) = Earnings before Interest & Tax (EBIT) / Total Assets Profit Margin = Net Profit After Tax / Sales Revenue Gross Margin = Gross Profit / Sales Revenue Activity Ratios Asset Turnover = Sales Revenue / Total Assets Inventory Turnover = COGS / Average Inventory Days Inventory on Hand = 365 / Inventory Turnover Debtors (receivables) Turnover = Credit Sales / Average Trade Debtors Days in Debtors = 365 / Debtors turnover Creditors Turnover = Purchases (or COGS) / Average Accounts Payable Days in Creditors = 365 / Creditors Turnover Cash Flow Cycle = Days in Inventory + Days in Receivables Days in Creditors Liquidity and Financial Structure Ratios Current Ratio = Current Assets / Current Liabilities Quick Ratio = (Current Assets Inventories) / Current Liabilities Interest Coverage = EBIT / Interest Expense (net) Debt to Equity Ratio = Total Liabilities / Total Equity Debt to Assets = Total Liabilities / Total Assets Leverage = Total Assets / Shareholders Equity

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QUESTION 3 (6 MARKS): CORPORATE GOVERNANCE The following table presents information from the 2006 Corporate Governance Statement of Macquarie Bank.

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QUESTION 3 (CONT.): Required: With reference to the ASX Corporate Governance Principles and Recommendations 2007, discuss THREE (3) corporate governance issues regarding the positions occupied by Mr David Clarke on the Board of Directors and any relevant Committees (6 marks): 1. 2. 3.




















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QUESTION 4 (6 MARKS): COSTING SYSTEMS Kang Company provided the following data for the year 2008: Labor: Direct labour cost (25,000 hours) $175,000 Indirect labour 35,000 Materials: Direct materials: Inventory, January 1, 1998 $25,000 Purchases on accoun t 200,000 Direct materials issued 190,000 Indirect materials issued 10,000 Other factory overhead costs: Depreciation 55,000 Maintenance 25,000 Miscellaneous 15,500 Work in Progress: Beginning inventory 110,000 Ending inventory 80,250 The company uses a normal costing system with predetermined overhead rate based on direct labour hours. The rate for 2008 was $5.20 per direct labour hour. Required: Prepare a statement of cost of goods manufactured.

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QUESTION 4 (CONT.): COSTING SYSTEMS Statement of cost of goods sold (6 marks):


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QUESTION 5 (10 MARKS): BUDGETING FOR PLANNING AND CONTROL Echo Systems manufactures high-quality loudspeakers that are sold to manufacturers of stereo equipment. Assume the following:

a) Budgeted sales for the first 4 months of the year are:

January 60,000 speakers February 80,000 speakers March 100,000 speakers April 80,000 speakers

b) The company sells its loudspeakers for $70 per unit and expects one-half of each months sales revenue to be received in the month of sale and the other half to be received in the month following sale.

c) On 1 January, 15,000 speakers are in finished goods inventory. The company wants the number of speakers in its beginning finished goods inventory each month to equal 25% of the months budgeted sales (in units).

d) The Accounts Receivable account has a balance of $4,000,000 on 1 January.

e) Eight feet of expensive audio cable is used in the manufacture of each speaker. On 1 January, the company has 104,000 feet of this cable in its raw materials inventory. The amount of cable in inventory at the beginning of each month should be 20% of the months usage requirement.

f) The company pays $.40 per foot for audio cable in the month following purchase. Decembers purchases were 900,000 feet at $.40 per foot.

Required:

1. Prepare a sales budget for the first 4 months of the year.

2. Prepare a cash receipts budget for the first 4 months of the year.

3. Prepare a production budget for the first 3 months of the year.

4. Prepare a raw materials purchases budget for audio cable for the months of January and February.

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QUESTION 5 (CONT.): 1. Sales budget (2 marks):


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QUESTION 5 (CONT.): 2. Cash receipts budget (2 marks):


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QUESTION 5 (CONT.): 3. Production budget (2 marks):


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QUESTION 5 (CONT.): 4. Raw materials purchases budget (4 marks):


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SOLUTION GUIDE TO FINAL EXAM, JUNE 2009 QUESTION 1 1. Depreciation expense included in Other Expenses account

Accumulated depreciation - Buildings

81,000 o/bal

Disposal

45,000

29,000 Depn exp

65,000 c/bal

Accumulated depreciation - Equipment

67,000 o/bal

Disposal

43,000

9,000 Depn exp

33,000 c/bal

Total depreciation expense = 29,000 + 9,000 = 38,000

2. Operating cash flows for JNT Ltd. using indirect method

JNT Ltd. Operating Cash Flows for Year Ended 30 June 2008

Net profit

0.5

257,000 + Depreciation expense

0.5 38,000

+ Loss on disposal of buildings 0.5 19,000 - Gain on sale of equipment 0.5 (16,000)

41,000

298,000

Adjustment for changes in operating assets and liabilities:

- Accounts receivable

0.5 (90,000 ) - Allowance for doubtful debts 1 (11,000) + Inventory

0.5 150,000

- Prepaid insurance

0.5 (6,000 ) - Accounts payable

0.5 (15,000)

- Accrued expenses

0.5 (2,000 ) - Income tax payable

0.5 (2,000)

24,000

Cash from operations

322,000

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QUESTION 2 (1) Three issues

Level 3 assets are potentially misstated, and at 6% of total assets, if it is worth nothing could almost wipe out shareholders equity.

The off-balance sheet assets of $160 billion, or 7% of total assets itself

approximates shareholders equity of $167 billion. The total derivative exposure of 380% of risk based capital, exceeds

shareholders equity. (2) Possible conclusion

There is significant risk of JPM insolvency as the losses from level 3 assets (6% of total assets, i.e., almost value of shareholders equity), and possible losses from derivatives (380% of shareholders equity) cumulatively exceed shareholders equity.

QUESTION 3 Any three from below or any other reasonable answer (marker to document). David Clarke is chairman of board despite being executive contrary to ASX recommendation which requires an independent chairman

The position of Chairman and CEO is separate which is in compliance for a

split role David Clarke is chairman of the nominations committee which is contrary to the

ASX recommendation for an independent chairman to prevent management cronies from being appointed to the Board

David Clarke is a member of the remuneration committee which is in

compliance as he is not chairman of the remuneration committee and there is a majority of independent members

David Clarke is not on the audit committee, which has 4 independent directors

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QUESTION 4

Kang Company Statement of Cost of Goods Manufactured For the Year Ended December 31, 2008

Direct materials Beginning raw materials inventory $ 25,000 Purchases of raw materials Total raw materials available $225,000

200,000

Ending raw materials Raw materials used $190,000

35,000

Direct labour 175,000 Overhead Indirect labour $ 35,000 Indirect materials 10,000 Depreciation 55,000 Maintenance 25,000 Miscellaneous $140,500

15,500

Less: Underapplied overhead (10,500) Overhead applied

Total manufacturing costs added $495,000 130,000

Add: Beginning work in process Total manufacturing costs $605,000

110,000

Less: Ending work in process Cost of goods manufactured $524,750

80,250

Supporting calculation for under-applied overhead: Applied ($5.20 x 25,000) $130,000 Actual: Indirect labour $35,000 Indirect materials 10,000 Depreciation 55,000 Maintenance 25,000 Miscellaneous 15,500 $ 10,500 Under-applied overhead

140,500

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QUESTION 5 Echo Systems

January

February

March

April Sales Budget

Budgeted sales (units) 60,000

80,000

100,000

80,000 Budgeted selling price per unit 70

70

70

70

Budgeted sales revenue 4,200,000

5,600,000

7,000,000

5,600,000

Cash Receipts Budget

Budgeted cash receipts:

From December sales 4,000,000

From January sales 2,100,000

2,100,000

From February sales

2,800,000

2,800,000

From March sales

3,500,000

3,500,000

From April sales

2,800,000

Total budgeted cash receipts 6,100,000

4,900,000

6,300,000

6,300,000

Production Budget Budgeted sales (units) 60,000

80,000

100,000

Add: Desired ending inventory of finished units 20,000

25,000

20,000

Total units required 80,000

105,000

120,000 Less: Beginning inventory of finished

units (15,000)

(20,000)

(25,000) Budgeted production (units) 65,000

85,000

95,000

Raw Materials Purchases Budget Budgeted production (speakers) 65,000

85,000

95,000

Expected usage of audio cable per speaker (units) 8

8

8

Audio cable usage requirements (units) 520,000

680,000

760,000

Add: Desired ending inventory of audio cable (units) 136,000

152,000

Total audio cable requirements (units) 656,000

832,000 Less: Beginning inventory of audio

cable (units) (104,000)

(136,000) Purchase requirement for audio cable

(units) 552,000

696,000 Price per unit 0.4

0.4

Purchase cost of audio cable 220,800

278,400

SCHOOL OF ACCOUNTING

acct1511 final version

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total income

total expenses

depreciation expense

box page

total assets

accounts payable

income tax payable

income tax expense