Chapter 1

ACTIVITY 1
FINANCIAL STATEMENTS
1 Students’ own answer.

ACTIVITY 2
CORPORATION TAX
1 Students’ own answer.

ACTIVITY 3
KOSTAS CERAMICS PLC
1
Kostas Ceramics plc: Statement of profit or loss and other
comprehensive income for the year ended 30 November 2019
£ £
Revenue 810,400
Cost of sales 458,860
Gross profit 351,540

Distribution costs 166,900

Administration costs 122,100
Financial costs 30,000 319,000
Profit on ordinary activities before tax 32,540
Corporation tax 4,800
Profit on ordinary activities after tax 27,740

Notes

Cost of sales £
Direct materials 348,560
Inventory of materials – 1 December 2018 9,000
Inventory of materials – 30 November 2019 (12,000)
Power 40,200
Depreciation – premises 7,000
Wages – factory staff 57,000
Depreciation – machinery 25,000
Inventory – finished goods 1 December 2018 4,700
Inventory – finished goods 31 December 2019 (20,600)
458,860

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Distribution costs £
Depreciation – motor vehicles 45,300
Depreciation – premises 20,000
Distribution expenses 47,000
Power 20,000
Wages 34,600
166,900

Administration costs £
Administration expenses 43,800
Audit fees 32,000
Depreciation – premises 1,000
Power 6,700
Wages 37,400
122,100

Financial costs £
Debenture interest 30,000

ACTIVITY 4
LARNACA PLC
1
Larnaca plc: Statement of profit or loss and other comprehensive income
for year ended 31 March 2016
Turnover 900,000

Cost of sales 560,751

Gross profit 339,249
Administrative expenses (W1) 145,100
Selling and distribution costs 68,000 213,100
126,149
Interest payable (W2) 2,800
Profit on ordinary activities before tax 123,349
Corporation tax 11,000
Profit on ordinary activities after tax 112,349
Dividends 10,000
Retained profit for the year 102,349

Retained earnings brought forward 19,000

Retained earnings for the year 102,349
Retained earnings carried forward 121,349

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Workings
W1
Administrative expenses
Audit fees 800
Directors’ fees 32,000
Office expenses 74,800
Depreciation on premises 12,000
Depreciation on machinery 25,500
145,100

W2
Interest payable
Interest on loan stock 800
Interest on debentures 2,000
2,800

ACTIVITY 5
FINANCIAL STATEMENT HEADING
1(a) Assets without a physical substance that have a monetary value, such as
goodwill and patents.
(b) Funds provided by the shareholder in the form of shares and reserves, ordinary
share capital.
(c) Expenses directly associated with the production of the product/service,
e.g. direct materials.
(d) Expenses incurred in the transfer of the product from production to the final user,
the customer, e.g. warehouse rent.

ACTIVITY 6
LATCHI PLC
1
Latchi plc: Statement of profit or loss and other comprehensive income
for the year ended 31 October 2019
£000 £000
Revenue 1,835
Cost of sales 965
Gross profit 870

Distribution costs 436

Administration costs 304 740

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Profit on ordinary activities before tax 130
Corporation tax 20
Profit on ordinary activities after tax 110

Cost of sales £000

Opening inventory 120
Purchases 950
Depreciation 45
Closing inventory (150)
965

Distribution costs £000

Distribution costs 400
Depreciation 36
436

Administration costs £
Administration expenses 295
Depreciation 9
304

2
Latchi plc: Statement of financial position for the year ended
31 October 2019
£000 £000
Assets
Non-current assets
Property, plant and equipment 460
460
Current assets
Inventory 150
Trade and other receivables 455
Cash and cash equivalents 45
650
Total assets 1110
Equity and liabilities
Equity
Share capital:
Ordinary shares of £1 505
Share premium 115
Retained earnings 260
Total equity 880
Current liabilities
Trade payables and other payables
Trade payables 190
Other payables 20
Corporation tax payable 20

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 230
Total equity and liabilities 1110

ACTIVITY 7
ALLIED HOLDINGS PLC
1
Allied Holdings plc: Statement of profit or loss account for the year ended
31 December 2019
Sales 503,000
Less cost of sales
Stock 43,000
Add purchases 191,000 234,000
Less stock 18,900 215,100
Gross profit 287,900
Less expenses
Audit fees 3,500
Directors’ remuneration 48,000
Motor expenses 6,300
Salaries 93,600
Provision for bad debts 2,730
Bad debts 12,100
Depreciation – plant and equipment 14,300
Depreciation – motor vehicles 3,140
Depreciation – fixtures and fittings 1,200 184,870
Net profit for the year 103,030
Less appropriations
Dividend preference shares 4,800
Dividend ordinary shares – interim 12,000
Dividend ordinary shares – final 20,000 36,800
66,230
Add balance at 01/01/09 62,000
Balance of undistributed profit at 31/12/09 128,230

Allied Holdings plc: Statement of financial position at 31 December 2019

Cost Accumulated Book value
depreciation
Fixed assets
Land and buildings 1,950,000 1,950,000
Plant and equipment 143,000 28,300 114,700
Motor vehicle 25,000 12,440 12,560
Fixtures and fittings 12,000 2,300 9,700
2,130,000 43,040 2,086,960

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Current assets
Stock 18,900
Debtors 34,470
Cash in bank 11,100 64,470
Less current liabilities
Creditors 19,600
Proposed dividends 24,800 44,400
Working capital 20,070
2,107,030
Long-term liability
Debentures 78,800
2,028,230
Financed by:
Authorised share capital
800,000 6% preference shares of 800,000
£1 each
4,400,000 Ordinary shares of 2,200,000
50p each
3,000,000
Issued share capital
800,000 6% Preference shares of 800,000
£1 each, fully paid
2,000,000 Ordinary shares of 1,000,000
50p each, fully paid
Add reserves
Share premium account 100,000
Profit and loss account balance 128,230
Shareholders’ funds 2,028,230

ACTIVITY 8
ADOPTIT PLC
1
Adoptit plc: Statement of changes in equity for the year ended
31 March 2020
Ordinary share Retained Total
capital £ earnings £ equity £
Balance at 1 December 2018 300,000 171,590 471,590
Profit* 76,390 76.390
Dividends paid (43,500) (43,500
Balance at 30 November 2019 300,000 204,480 504,480

Profit = £89,890 - £13,500 = £76,390

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ACTIVITY 9
WHILL PLC
1
Whill plc: Statement of changes in equity for the year ended
31 October 2019
Ordinary Share Retained Revaluation General Total
share premium £ earnings £ reserve £ reserve £ equity £
capital £
Balance 1 400,000 100,000 75,000 575,000
November
2018
Revaluation 175,000 175,000
(W1)
Profit 32,000 32,000
(W2)
Dividends (21,000) (21,000)
Transfer to (10,000) 10,000 NIL
General
reserve
Balance 31 400,000 100,000 76,000 175,000 10,000 761,000
October 2019

W1 – New value less old value = £425,000 - £250,000 = £175,000

W2 – Profit for the year = Profit before tax less taxation - £47,000 - £15,000 =
£32,000

ACTIVITY 10
COMPANY REPORT RESEARCH
1 Students’ own answer.

ACTIVITY 11
COMPANY REPORT RESEARCH
1 Students’ own answer.
2 Students’ own answer.

EXAM PRACTICE
1(a)

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Ventalight plc: Statement of profit or loss and other comprehensive
income for the year ended 30 April 2020
£ £
Revenue 9,060,000
Cost of sales 4,810,000
Gross profit 4,250,000

Distribution costs 1,750,000

Administration costs 480,000
Financial costs 138,000 2,368,000
Profit on ordinary activities before tax 1,882,000
Corporation tax 152,000
Profit on ordinary activities after tax 1,730,000

Workings

Cost of sales £
Inventory of materials – 1 May 2019 300,000
Direct materials 4,200,000
Depreciation – factory 60,000
Wages – factory staff 600,000
Inventory – 30 April 2020 (350,000)
4,810,000

Distribution costs £
Marketing 750,000
Depreciation – motor vehicles 30,000
Rent 180,000
Shipping expenses 490,000
Wages 300,000
1,750,000

Administration costs £
Office expenses 180,000
Wages 300,000
480,000

Financial costs £
Bank loan interest 30,000
Debenture interest 108,000
138,000

(b)
Dalia plc: Statement of financial position for the year ended
30 November 2019
£ £
Assets
Non-current assets

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 Intangible assets – goodwill 800,000

Property, plant and equipment 5,890,000 W1

Motor vehicles 70,000 W2
6,760,000
Current assets
Inventory 350,000
Trade and other receivables 615,000 W3
Cash and cash equivalents 160,000
1,125,000
Total assets 7,885,000
Equity and liabilities
Equity
Share capital:
Ordinary shares of £1 2,500,000
Revaluation reserve 100,000
Retained earnings 2,388,000 W4 OF
Total equity 4 988 000
Non-current liabilities
6% debenture 2029 1,800,000
Bank loan 400,000
2,200,000
Current liabilities
Trade payables and other payables 545,000 W5
Corporation tax payable 152,000
697,000
Total equity and liabilities 7,885,000

W1 Property, plant and equipment

Cost Depreciation NBV
Land 3,000,000 3,000,000
Factory 3,000,000 50,000 + 60 000 2,890,000
5,890,000

W2 Motor vehicles
Cost Depreciation NBV
Motor vehicles 150,000 50,000 + 30,000 70,000

W3 Trade and other receivables

Trade receivables + Pre-paid rent £595,000 + £20,000 = £615,000

W4 Retained earnings
Balance b/f + Profit for the year £658,000 + £1,730,000 (OF) = £2,388,000

W5 Trade and other payables

Trade payables + Interest owing £525,000 + £20,000 = £545,000

2
Points in favour

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 • Allows users of financial information to compare the performance of a
business on a like-for-like basis.
• By identifying discontinued activities, potential investors can see the impact
this has had on the revenues and profits of the company.
• Ensures that financial statements comply with IAS guidelines and will provide
a true and fair view of the company.
Points against

• It may be difficult to identify accurately the exact revenues and costs

associated with discontinued operations.
• It may present the company in a poor light and deter potential investors if
discontinued activities have a significant impact.
• Cost implications in terms of time and the expertise required to accurately
identify the revenues and costs involved.
Decision
Must be based on candidate’s response.

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 Chapter 2
ACTIVITY 1
ALUMINIUM PACKAGING PRODUCTS PLC
1
£1 Ordinary Share Retained General Foreign Revaluation Total equity
share capital premium earnings £ reserve £ exchange reserve £ £
£ £ reserve £
Balance 1,200,000 180,000 125,750 11,400 1,517,150
1 December
2018
Dividends (96,000) (96,000)
paid
Transfer 11,400 (11,400)

Revaluation 335,000 335,000

Transfer (37,000) 37,000

Profit 922,250 922,250

Balance 1,200,000 180,000 926,400 37,000 335,000 2,678,400

30 November
2019

Dividends - number of shares = £1,200,000 x 4 = 4,800,000, value = 4,800,00 x £0.02

= £96,000

ACTIVITY 2
CROWN PHARMACEUTICALS
1

Dr £ Cr £
Bank 161,200
Application and allotment 161,200

Dr £ Cr £
Application and allotment 161,200
£0.50 Ordinary share capital 124,000
Share premium account 37,200

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ACTIVITY 3
UNDER SUBSCRIPTION
1

Dr £ Cr £
Bank 400,000
Application and allotment 400,000

Application and allotment 400,000

£0.50 Ordinary share capital 400,000

Ledger accounts

Bank
Details £ Details £
Allocation and allotment 400,000

Allocation and allotment

Details £ Details £
£1 Ordinary share capital 400,000 Bank 400,000

400,000 400,000

Ordinary share capital

Details £ Details £
Allocation and allotment 250,000

ACTIVITY 4
BEE CO. PLC
1

Issued share capital

Details £ Details £

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Balance c/d 400,000 Balance b/d 200,000
Application and allotment 200,000
400,000 400,000
Balance b/d 400,000

Share premium account

Details £ Details £
Balance c/d 200,000 Balance b/d 80,000
Application and allotment 120,000
200,000 200,000
Balance b/d 200,000

Application and allotment account

Details £ Details £
Refunds 270,000 Bank 450,000
Share capital 200,000 Bank 140,000
Share premium 120,000
590,000 590,000

ACTIVITY 5
EXPLOR PLC
1

Ordinary share capital

Date Details £ Date Details £
31 Dec 2019 Bal c/d 950,000 3 Jan 2019 Bank 500,000
31 Jan 2019 App & 315,000
allotment
30 Jun 2019 Call account 135,000
950,000 950,000
31 Dec 2020 Balance c/d 1,662,000 1 Jan 2020 Balance b/d* 950,000
18 Jan 2020 Application 380,000
and allotment

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 15 Mar 2020 Bonus – ex 332,000
premium

1,662,000 1,662,000
Balance b/d 1,662,000
* Opening balance at 1 January 2019 is made up of original offer of 500,000
shares plus offer on 11 January of 450,000 = Total of 950,000.

Share premium
Date Details £ Date Details £
31 Dec 2019 Bal c/d 420,000 3 Jan 2019 Bank 150,000
31 Jan 2019 Application 90,000
and allotment
30 Jun 2019 Call account 180,000
420,000 420,000
15 Mar 2020 Bonus shares** 332,000 1 Jan 2020 Balance b/d* 420,000
31 Dec 2020 Balance c/d 240,000 18 Jan 2020 Application 152,000
and allotment
572,000 572,000
31 Dec 2020 Balance b/d 240,000
* Opening balance at 1 January 2020 is made up of 30p premium on original offer
of 500,000 shares plus 60p premium on offer on 11 January of 450,000.
** Bonus shares are calculated on basis of 1,330,000 shares in issue.

Application and allotment

Date Details £ Date Details £
31 Jan 2019 Share capital 315,000 15 Jan 2019 Bank 210,000
31 Jan 2019 Share premium 90,000 31 Jan 2019 Bank 195,000
405,000 405,000
18 Jan 2020 Share capital 380,000 18 Jan 2020 Bank* 532,000
Share premium 152,000
532,000 532,000
* The rights offer is based on issued capital of 950,000 shares. Two shares are
issued for every 5 held = 380,000 shares.

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ACTIVITY 6
ROSS PRINTERS PLC
1
Ordinary share capital
Details £ Details £
Balance c/d 900,000 Balance b/d 300,000
Share premium 100,000
Retained earnings 500,000
900,000 900,000
Balance b/d 900,000

Share premium account

Details £ Details £
Ordinary share capital 100,000 Balance b/d 100,000
100,000 100,000

Retained earnings
Details £ Details £
Ordinary share capital 500,000 Balance b/d 950,000
Balance c/d 450,000
950,000 950,000
Balance b/d 450,000

ACTIVITY 7
JESSORE CONSUMER ELECTRONICS
1
Bonus issue
Dr £ Cr £
Share premium account 50,000
Ordinary share capital 50,000
Revaluation reserve 70,000
Ordinary share capital 70,000
General reserve 35,000
Ordinary share capital 35,000
Retained earnings 45,000
Ordinary share capital 45,000

Rights issue
480,000 shares at £0.50 = £240,000

Dr £ Cr £
Bank 240,000
Ordinary share capital 240,000

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Ordinary share capital
Details £ Details £
Balance c/d 640,000 Balance b/d 200,000
Share premium 50,000
70,000
35,000
Retained earnings 45,000
Bank 240,000
640,000 640,000
Balance b/d 640,000

Share premium
Details £ Details £
Ordinary share capital 50,000 Balance b/d 50,000
50,000 50,000

Revaluation reserve
Details £ Details £
Ordinary share capital 70,000 Balance b/d 70,000
70,000 70,000

General reserve
Details £ Details £
Ordinary share capital 35,000 Balance b/d 35,000
35,000 35,000

Retained earnings
Details £ Details £
Ordinary share capital 45,000 Balance b/d 200,000
Balance c/d 155,000
200,000 200,000
Balance b/d 155,000

2
Extract Statement of financial position
£
Non-current assets 600,000
Current assets 320,000
920,000
Equity
£0.50 Ordinary share capital 640,000
Retained earnings 155,000
795,000

ACTIVITY 8

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 GREEN PLC
1
(a) (b)
Profit for the year 25,000 100,000
Less debenture interest 18,000 18,000
Profit before tax 7,000 82,000
Less tax 2,100 24,600
Profit after tax 4,900 57,400
Less preference dividends 3,600 3,600
Profit available to ordinary shareholders 1,300 53,800
Return to equity = 1,300 = 0.26% 53,800 = 10.76%
500,000 500,000

2 Preference shareholders receive their dividends before ordinary shareholders. In

the case of cumulative preference shares, if the dividend cannot be paid because of
a lack of funds or a loss made by the company, it must still be paid in later years
before the ordinary shares receive their dividend.

EXAM PRACTICE
1
Marshill Foods plc: Statement of changes in equity for the year ended 31 January 2020

£1 Share Retained General Capital Foreign Capital Total

Ordinary premium earnings reserve replacement exchange redemption equity
share £m £m £m reserve reserve reserve £m
capital £m £m £m
£m
Balance 650 70 50 12 16 798
1 Feb 2019
Dividends (6.5) (6.5)
paid
Issue of 130 26 156
shares
Transfer 16 (16)
Transfer (5.95) 5.95
Capital (10) (10) (20) 20 (20)
redemption
Interim (19.25) (19.25)
dividend

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Profit 2.85 2.85
Balance 770 86 17.15 12 20 5.95 911.1
31 Jan
2020

2
Advantages include:

• Utilises excess cash and cash equivalents balances, which would otherwise
be idle funds.
• Increases the market value of the shares as fewer shares are on the market.
• Reduces future dividend payments.
Disadvantages include:

• Reduces the liquid assets of the company and therefore liquidity ratios may
appear to have worsened.
• Gearing ratio will increase and the company may become highly geared.
• The statement of financial position will show a smaller equity value, which
might affect the image of the business.

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Chapter 3
ACTIVITY 1
NGONG INTERNATIONAL PLC AND MERU TRADING PLC
1 Number of shares in Meru Trading plc = 20,000,000 / 0.50 = 40,000,000 shares
Shares 40,000,000 x £0.60 = £24,000,000
Cash £1,000,000
Purchase price £25,000,000

2 Goodwill = Purchase price less fair value = £1,620,000

£000
Assets
Non-current assets 26,000
Current assets 2,120
Less cash and cash equivalents (240)
Non-current liabilities (3,000)
Current liabilities (1,500)
Value 23,380
Goodwill (balancing figure) 1,620
Purchase price 25,000

ACTIVITY 2
MERGER OF HIGHWAY CONNECTIONS LTD AND WESSEX
QUARRIES LTD
1(a)
Calculation of purchase price for Wessex Quarries Limited
Buildings 160
Machinery 380
Furniture 37
Vehicles 145
Stock 25
Debtors 22
Bank 12
Cash 2
Goodwill 30
Creditors (172)
Purchase price 741

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(b) Purchase price £741,000 / £1.50 = 494,000 shares

2(a)
Highway Connections – Realisation account
Details £ Details £
Buildings 200 Creditors 46
Machinery 950
Furniture 70 Roadworks 2,202
Vehicles 550 (Purchase Consideration)
Stock 58
Debtors 22
Bank 36
Cash 21
Sundry Shareholders
(Profit on Realisation) 341
2,248 2,248
(b)
Highway Connections – Sundry shareholders account
Details £ Details £
Roadworks 2,202 Share capital 800
(Purchase consideration Share premium 200
1,468 shares at £1.50 each)
Profit and loss account 861
Realisation account
(Profit on realisation) 341
2,202 2,202

ACTIVITY 3
MERGER BETWEEN SUN LTD AND LAND LTD
1(a)
Sun Ltd: Realisation account
Details £ Details £
1 Jan Buildings 70,000 Creditors 4,600

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Machinery 20,000 SunLand Ltd (PP) 148,000
Stock 2,300
Debtors 1,500
Bank 18,800
Sundry shareholders 40,000
152,600 152,600

(b)
Sun Ltd: Sundry shareholders account
Details £ Details £
1 Jan SunLand Ltd 148,000 Share capital 100,000
Profit/loss 8,000
Realisation (Profit) 40,000
148,000 148,000

2
Sun Ltd Land Ltd
Goodwill 20,000 14,000
Buildings 90,000
Machinery 20,000 80,000
Vehicles (£40,000 - £3,800) 36,200
Stock 2,300 21,000
Debtors 1,500 14,050
Bank (£12,000 + £3,000) 18,800 15,000
152,600 180,250
Less creditors 4,600 3,450
Purchase price 148,000 176,800
Shares issued at 50p each 296,000 353,600

Total shares = 649,600

ACTIVITY 4
KANDY AND ELLA

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1 The first thing to do is to calculate the total value of the assets acquired: £35,800 -
£4,000 = £31,800. Company A pays £30,000 in shares and £1,800 in cash.

Acquisition account
Details £ Details £
Motor vehicles 11,000 Trade payables 1,300
Office equipment 4,000 Purchase price
Computer equipment 12,000 Ordinary shares 30,000
Inventory 3,200 Cash 1,800
Trade receivables 2,900
33,100 33,100

ACTIVITY 5
SUNRISE PUBLISHING
1 We are provided with the purchase consideration using a combination of shares
and cash. The first step is to calculate the number of shares in SunRise Publishing
plc:
Value of shares is £10,000,000 at £1 per share, therefore the number of shares is
10,000,000.
New shares are issued in the ratio of two new shares for every existing share,
therefore the number of new shares in SunRise Publishing issued will be 2 x
10,000,000 = 20,000,000 shares.
The value of the shares will be 20,000,000 x £1.12 (market value) = £22,400,000
The second step is to calculate the cash payment. This is:
Number of shares x cash offered = 20,000,000 x £0.02 = £400,000
Therefore, the purchase price is £22,400,000 + £400,000 = £22,800,000

2 Goodwill = Purchase price - fair value of assets and liabilities purchased.

The purchase price has been calculated, therefore we now calculate the value of the
assets and liabilities purchased after the revaluation has taken place.

£000
Value of assets purchased
Property: 16,000 + 2,000 18,000
Equipment: 7,000 - 500 6,500
Inventory: 500 - 200 300
Trade receivables 2,750
Total asset value (A) 27,550

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 Value of liabilities purchased
Bank loan 5,000
Trade payables 1,010
Other payables: 200 x 50% 100
Total liabilities value (B) (6,110)
Value of assets purchased (A - B) 21,440

Goodwill = £22,800,000 - £21,440,000 = £1,360,000

3(a)
Labright Printers plc: Realisation account
Details £000 Details £000
Property 16,000 Bank loan 5,000
Equipment 7,000 Trade payables 1,010
Inventory 500 Other payables 200
Trade receivables 2,750 SunRise Publishers 25,000
(purchase consideration)
Cash and cash equivalents 150
Realisation (profit) 4,810
31,210 31,210

(b)
Labright Printers plc: Sundry shareholders account
Details £ Details £
SunRise Publishers 25,000 Ordinary share capital 10,000
(purchase consideration)
Share premium 10,000
Retained earnings 190
Realisation account 4,810
25,000 25,000

4
SunRise Publishing: Acquisition account
Details £000 Details £000
Property 18,000 Bank loan 5,000
Equipment 6,500 Trade payables 1,010
Inventory 300 Other payables 100
Trade receivables 2,750 £1 Ordinary share capital 20,000
Goodwill 1,360 Share premium 2,400
Cash 400
28,910 28,910

5
SunRise Publishing plc: Statement of financial position at
1 January 2020
£000 £000
Assets
Non-current assets
Property 38,000

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 Equipment 15,300
Motor vehicles 2,400
Goodwill 1,360
57,060
Current assets
Inventory 700
Trade receivables 5,750
Cash and cash equivalents 430
6,880
Total assets 63,940

Equity and liabilities

Equity
£1 Ordinary shares 40,000
Share premium 10,400
Retained earnings 2,280
52,680
Non-current liabilities
Bank loan 9,000
9,000
Current liabilities
Trade payables 1,960
Other payables 300
2,260
Total equity and liabilities 63,940

ACTIVITY 6
BELA RECYCLING PLC
1 At carrying value, Net assets = Assets - Liabilities

£
Assets
Non-current assets 25,000
Current assets 10,100
Less bank (4,000)
Total assets 31,100
Liabilities
Current liabilities 1,400
Net assets 29,700
Purchase price 29,700

Purchase consideration
28,000 £1 Ordinary shares at par = £28,000 plus balance in cash £1,700

Acquisition account

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 Motor vehicles 10,000 Trade payables 1,400
Equipment 5,000 Purchase price
Computer equipment 10,000 Ordinary shares 28,000
Inventory 3,200 Cash 1,700
Trade receivables 2,900
31,100 31,100

2
Statement of financial position of Bela Recycling plc at 1 January 2020
£ £
Plant and machinery 43,000
Motor vehicles 26,000
Equipment 6,500
Computer equipment 10,000
85,500
Current assets
Inventory 9,200
Trade receivables 11,300
Bank (11,700-1700) 10,000 30,500
Total assets 116,000
Equity
Share capital (46,000 + 28,000) 74,000
Retained earnings 38,000
112,000
Current liabilities
Trade payables 4,000
Total equity and liabilities 116,000

ACTIVITY 7
RED PLC AND STAR PLC
1 In this question Red plc acquires the assets (not net assets) so we must ignore the
creditors in the calculation. Total assets acquired are £22,100 and the purchase
price is £46,000. Goodwill therefore amounts to £23,900. Payment is made by the
issue of 20,000 shares for a consideration of £30,000. The balance of £16,000 is
paid in cash. The combined balance sheet will be as follows:

RedStar plc: Statement of financial position

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Plant and machinery 42,000
Motor vehicles 22,000
Office equipment 5,500
Computer equipment 8,000
Goodwill 23,900
101,400
Current assets
Stock 8,000
Debtors 10,500
18,500
Creditors 2,600
Bank overdraft 4,300
6,900 11,600
113,000
Share capital 65,000
Share premium 10,000
Profit and loss account 38,000

113,000

ACTIVITY 8
MERGER OF HIGHWAY CONNECTIONS LTD AND WESSEX
QUARRIES LTD – REVISITED
1
Roadworks Limited: Statement of financial position at 1 April 2019
Buildings 440
Machinery 1,330
Furniture 97
Vehicles 695
Goodwill 304
Fixed assets total 2,866
Stock 80
Debtors 44
Bank 48
Cash 23
Current assets total 195
Creditors 118
Working capital 77
Net assets 2,943
Ordinary shares of £1 each 1,962
Share premium at 50p per share 981
Capital employed 2,943

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2
For merger

• Shareholders in Highway Connections ‘receive a profit’ on realisation of

£341,000. Also Goodwill valuation of £274,000.
• New company should enjoy benefits of vertical integration as they are in the
same line of business.
• New company could enjoy economies of scale, e.g. bulk buying of machinery,
or managerial economies of scale or marketing economies of scale. Larger
company could enjoy financial benefits, e.g. easier to get bank loans at a
lower interest rate.
Against merger

• Dilution of ownership and voting power.

• Wessex Quarries does not appear to be in a healthy financial state, e.g.
negative profit and loss reserve.
• Original Wessex balance sheet appears to have many assets overvalued,
e.g. machinery overvalued by £100,000.
• Also liquidity position of Wessex is worrying as the company appears to have
low working capital ratio/negative working capital.
• Wessex may be a drain on the liquid resources of the new company,
especially with the large amount of creditors to pay.

ACTIVITY 9
REAL WORLD MERGERS
1 Students’ own answer.

2 Students’ own answer.

EXAM PRACTICE
1
Assets and liabilities taken over £m
PPE 28 + 2 - 1 29
Inventories 10 10
Trade receivable 6 - 0.5 5.5
Cash and cash equivalents 4 4
Mortgage (8) (8)
Trade payables (4) (4)

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 Goodwill paid 1.5
Purchase price 38

2 £38m / £2 = 19m shares

3(a)
Atoll Facilities Management: Realisation account
Details £m Details £m
Property, plant and equipment 28 Bank loan 8
Inventory 10 Trade payables 4
Trade receivables 6 Plc (purchase consideration) 38
Cash and cash equivalents 4
Sundry shareholders (profit) 2
50 50

(b)
Atoll Facilities Management: Sundry shareholders account
Details £m Details £000s
Plc (purchase consideration) 38 Ordinary share capital 16
Share premium 8
Retained earnings 12
Realisation account 2
38 38

4
Ocean Hotel Service and Facilities: Statement of financial position at
1 January 2020
£m £m
Assets
Non-current assets
Property, plant and equipment 61
Goodwill 4.5 65.5

Current assets
Inventory 22
Trade receivables 9.5
Cash and cash equivalents 2
33.5
Total assets 99

Equity and liabilities

Equity
£1 Ordinary shares 41
Share premium 41
82

Non-current liabilities
Mortgage 8
Bank loan 3

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 11
Current liabilities
Trade payables 6
6

Total equity and liabilities 99

5 Goodwill is the difference between the value of the business (net assets) and the
fair value of those assets. The fair value is calculated after the revaluation of assets
and liabilities at the time of purchase or merger.
The correct treatment of goodwill is to record it in the books as an intangible asset in
the non-current assets of the statement of financial position and then to amortise the
goodwill over its useful economic life.
Advantages of this treatment

• The buyer of the company will derive the benefits over a number of years, so
spreading the costs complies with the matching concept and gives a fair view
of the accounts. This approach is in line with IAS 38.
• It will ensure profit in the first year is not understated.
Disadvantages of this treatment

• If goodwill is written off immediately it would comply with the prudence

concept, as an accurate valuation of goodwill in the new company would be
difficult to calculate.
• In addition, it is difficult to estimate accurately the number of years that the
goodwill will be of value to the company, therefore the amortisation charge in
the accounts may be unrealistic.
Decision/conclusion
Should be based on your own arguments.

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Chapter 4
ACTIVITY 1
RATIOS FOR PROFITABILITY, LIQUIDITY AND USE OF ASSETS
1
Profitability ratios
Gross profit as a percentage of revenue

Gross profit
Revenue x 100

Percentage Mark-up

Gross profit
Cost of sales x 100

Profit for the year as a percentage of revenue

Profit for the year

Revenue x 100

Return on capital employed

Profit before interest (PBI)

Capital employed x 100

Liquidity ratios
Current (working capital) ratio

Current assets
Current liabilities

Liquid ratio (acid test)

Current assets – inventory

Current liabilities

Rate of Inventory Turnover

Cost of Sales (Times per Accounting Period)

Average Inventory

Trade Payables Payment Period

Trade Payables
Credit Purchases x 365

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Trade Receivables Collection Period

Trade Receivables
Credit Sales x 365

Use of assets ratio

Ratio of non-current assets to revenue

Revenue
Non-current assets

ACTIVITY 2
CALCULATOR PLC (1)
1
Profitability ratios 2018 2019
(a) Gross profit 8,900  44,800  100 11,180  52,620  100 = 21.25%
margin = 19.86%
(b) Net profit 4,345 + 480  44,800  100 5,464 + 130  52,620  100
margin = 10.77% = 10.63%
(c) ROCE 4,345 + 480  16,400  100 5,464 + 130  17,000  100
= 29.42% = 32.91%

ACTIVITY 3
CALCULATOR PLC (2)
1
Gearing ratios 2018 2019
Gearing 6,000  16,400  100 = 36.59% 1,200  17,000  100 = 7.06%
Interest cover 4,345 + 480  480 = 10.05 times 5,464 + 130  130 = 43.03 times

ACTIVITY 4
CALCULATOR PLC (3)
1
Investment ratios 2018 2019
(a) EPS 4,224  11,400 = 0.37p 5,312  12,056 = 0.44p

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(b) PE ratio 2.50  0.37 = 6.76 times 3.50  0.44 = 7.95 times
(c) Dividend payout 180  4,224  100 = 4.26% 240  5,312  100 = 4.52%
(d) Dividend cover 24.66 times 23.16 times

ACTIVITY 5
REKON PLC
1(a)
Net profit before tax 11,107
Plus interest payable 3,058
PBIT 14,165
Capital employed = 45,031 + 19,082 = 64,113
Note that short-term liabilities can also be included. In this case an additional
£16,290 will be added.
Gross profit margin = 43,192  312,524  100 = 13.82%
Mark-up = gross profit on cost of sales = 43,192  269,332  100 = 16.04%
(b) Net profit margin = PBIT/turnover = 14,165  312,524  100 = 4.53%
Note the difference between mark-up and margin.
(c) Return on capital = PBIT/capital employed = 14,165  64,113  100 = 22.09%

ACTIVITY 6
FEI MEDIA AND MARKETING PLC
1(a) Return on capital employed % = Net profit before interest (NPBI) x 100
Capital employed
= (8+2) + 1.8 + 0.8 x 100 = 11.78%
67 + 40
(b) Gearing % = Fixed cost capital x 100
Capital employed
= 40 x 100 = 37.38%
107
(c) Dividend per share = Total ordinary dividend paid
Number of issued ordinary shares
= 1.8m = 2.25 pence

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 80m
(d) Dividend yield % = Dividend paid per share x 100
Market price of share
= 2.25 x 100 = 1.88%
120
(e) Dividend cover = Profit for the year after tax - preference share dividend
Total ordinary dividend paid
= 8m = 4.44 times
1,8m
(f) EPS = Net profit for the year after tax - Preference share dividend
Number of issued ordinary shares
= 8m = 10 pence
80m
(g) Price–earnings ratio Market price per share
Earnings per share
= 120 = 12 times
10
2
Strengths

• ROCE is high (11.78%). This could be higher than many other companies.
• Gearing is very stable. It is below 50%. Should be able to obtain additional
funds if required.
• EPS is good, as is the P/E ratio. The market would appear to have
confidence in the company.
• Dividend cover is high, so the company is cautious in its approach to giving
dividends.
Weaknesses

• Dividend yield is very low at below 2%.

• Dividend cover is high. Teturns to shareholders may be low, a disadvantage
to shareholders looking for a regular return/income from the investment.
Conclusion
On balance, the company looks to be a good potential investment, despite not
having previous years’ figure to compare to.

ACTIVITY 7
INVESTOR RESEARCH

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1 Students’ own answer.
2 Students’ own answer.
3 Students’ own answer.
4 Students’ own answer.

EXAM PRACTICE
1(a) 200,000 + 500,000 = 2.5 pence per share
28,000,000
(b) 1,400,000 - (200,000 + 80,000) = 4 pence per share
28,000,000
(c) 2.5 x 100 = 4.17%
60
(d) 60 = 15 times
4
(e) 1,120,000 = 1.6 times
700,000
(f) 1,400,000 x 100 = 7%
20,000,000

2
For Tao Textiles plc

• The P/E ratio is higher by 5 times (15 v 10), which would indicate the market
has confidence in the company.
• The dividend per share is higher by 0.5 pence.
• The dividend cover is lower 1.6 times compared to 2.2 times, which could
indicate Tao Textiles plc is willing to pay out larger dividends.
For Wei Management Services plc

• The return on capital employed is slightly better by 0.5%.

• The earnings per share is greater, but only marginally.
• The dividend yield is greater by over 1%, which is significant.
• The dividend cover is greater, which means Wei Management Services plc
has a more risk averse policy with regard to dividend policy.
Recommendation
With the information provided, Wei Management plc might be considered the best
investment given the dividend yield is higher, as is the ROCE.

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Chapter 5
ACTIVITY 1
PROFIT OR CASH
1
Transaction Effect on profit Effect on cash flow
Issue of new shares No effect Increase
Bad debt written off Decrease No effect
Goods bought for cash No effect Decrease
Bonus share issue No effect No effect
Dividend paid to shareholders No effect Decrease
Goods purchased for credit No effect No effect
Delivery van purchased for cash No effect Decrease

ACTIVITY 2
PROFIT FROM OPERATIONS
1
£
Profit after tax 2,058,000
Add debenture interest 640,000
Add bank loan interest 4,000
Subtract investment income (5,000)
Profit from operations 2,697,000

ACTIVITY 3
CALCULATION OF DEPRECIATION AND PROFIT/LOSS ON
DISPOSAL
1
£
Closing depreciation 365,000
Less opening depreciation (330,000)
Add depreciation on disposal 100,000
Depreciation 135,000

2
Carrying value = £250,000 - £100,000 = £150,000.

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Profit/loss = Sales proceeds - carrying value = £115,000 - £150,000 = £35,000

ACTIVITY 4
ZELEAH MINING
1
Zeleah Mining: Statement of cash flows for the year ended
31 December 2019
£ £
Cash flows from operating activities
Profit from operations 13,500,000
Add depreciation on non-current assets 1,100,000
Add loss on sale of non-current assets 50,000
Operating cash flow before working capital changes 14,650,000
Decrease in inventories 250,000
Decrease in other receivables 120,000
Increase in trade receivables (90,000)
Increase in trade and other payables 105,000
Cash generated from operations 15,035,000
Add interest received: Bank loan 11,000
Less interest paid: Debenture (70,000)
Less tax paid (3,325,000)
Net cash from operating activities 11,651,000

ACTIVITY 5
MISSING FIGURES
1
A B C
Change in stock +2 -50 +70
Change in debtors +30 -15 -10
Change in creditors +5 +55 -18
Depreciation 15 20 25
Operating profit (after depreciation) +100 -80 +40
Cash – opening balance +200 -160 -23
Cash – closing balance +288 -100 -10

ACTIVITY 6

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REVENUE AND CASH CALCULATIONS
1
Increase in trade receivables 4,250
Revenue 23,751
Irrecoverable debts written off 170
Cash received 19,331
Increase in trade payables 3,320
Purchases 17,192
Cash paid 13,872

ACTIVITY 7
JJ MOTORS
1
Net cash flow from operating activities
Net profit 30,600
Depreciation 720
Increase in creditors 720
Increase in stock (10,080)
Decrease in debtors 1,800 (6,840)
Net cash inflow 23,760

JJ Motors: Cash flow statement for the year ended 31 December 2019
Net cash inflow 23,760
Returns on investment and servicing of finance
Payment for fixed assets (10,800)
Financing
Share capital repaid (21,600)
Decrease (outflow) in cash (8,640)

Changes in cash during the year

Opening bank balance 5,400
Net cash outflow during the year (8,640)
Overdraft at year end (3,240)

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The cash flow statement shows that although the company earned a profit of
£30,600 during the year, cash resources were depleted by carrying a higher stock,
purchasing additional fixed assets and repaying £21,600 of share capital.

ACTIVITY 8
MAXWELL & CO. LTD
1
Maxwell & Co. Ltd: Cash flow statement for the year ended
31 December 2019
Net cash flow from operating activities
Net profit 63,325
Depreciation 1,490
Increase in creditors 1,490
Increase in stock -20,860
Decrease in debtors 3,725 -14,155
Net cash flow from operating activities 49,170

Net cash flow from operating activities 49,170

Returns on investment and servicing of finance
Payment for fixed assets -22,350
Financing
Share capital repaid -44,700
Decrease (outflow) in cash -17,880

Changes in cash during the year

Opening balance 11,175
Net cash outflow -17,880
Balance (overdraft) at year end -6,705

ACTIVITY 9
PAUL PLC
1
Paul plc: Cash flow statement for the year ended 30 June 2019
Operating profit 68
Add back:
Depreciation 36
Loss on sale 2 38
106
Decrease in stock 2
Increase in debtors (26)

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Increase in creditors 16 (8)
Cash flow from operating activities 98

Net cash flow from operating activities 98

Returns on investment and servicing of finance
Interest paid (8)
Interest received 4 (4)
Taxation (W1)
Corporation tax paid (30)
Capital expenditure and financial investment
Purchase of fixed assets (W2) (50)
Receipts from sale of fixed assets (W3) 8 (42)
Equity dividends paid (W4) (24)
Management of liquid resources (investments) (30)
Cash outflow before financing (32)
Financing
Issue of debentures 40
Increase in cash 8

Workings
W1
Taxation ledger account
Cash 30 01/07/18 Balance b/d 30
30/06/19 Balance c/d 24 30/06/19 Profit and loss 24
54 54

W2
Fixed assets at year end (260 + 160) 420
Add cost of assets sold in year 30 450
Less cost at beginning of year 400

Assets purchased during year £50

W3
Asset sold – at cost (per note) 30
Accumulated depreciation 20 10
Cash received on sale 8
Loss on sale 2

W4

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Dividend ledger account
Cash 24 01/07/18 Balance b/d 24
30/06/19 Balance c/d 28 30/06/19 Profit and loss 28
52 52

ACTIVITY 10
INTEREST RECEIVABLE
1 Interest receivable = 70,000 + 180,000 - 84,000 = £166,000

ACTIVITY 11
NON-CURRENT ASSETS CASH FLOW
1
Plant at cost
01/01/19 Balance b/d 274,000 01/01/19 Disposal a/c 46,000
31/12/19 Purchases 96,000 31/12/19 Balance c/d 324,000
370,000 370,000

Accumulated depreciation – plant

01/01/19 Disposal account 28,000 01/01/19 Balance b/d 48,800
31/12/19 Balance c/d 52,300 31/12/19 P&L 31,500
80,300 80,300

Disposal account
01/01/19 Plant – cost 46,000 01/01/19 Depreciation 28,000
01/01/19 Sale 11,000
01/01/19 Loss on sale 7,000
46,000 46,000

Motor vehicles at cost

01/01/19 Balance b/d 31,200 01/01/19 Sale 12,000
31/12/19 Purchases 34,000 31/12/19 Balance c/d 53,200
65,200 65,200

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Accumulated depreciation – motor vehicles
01/01/19 Disposal 7,500 01/01/19 Balance b/d 9,100
31/12/19 Balance c/d 14,300 31/12/19 P&L 12,700
21,800 21,800

Disposal account
01/01/19 Motor vehicle 12,000 01/01/19 Depreciation 7,500
31/12/19 Profit on sale 2,500 01/01/19 Cash 7,000
14,500 14,500

Operating activities
Depreciation for the year
Plant 31,500
Motor vehicles 12,700 44,200
Loss on sale 7,000
Less profit on sale 2,500 4,500
Investing activities
Purchase plant -96,000
Purchase motor vehicles -34,000
Sale of fixed assets (11,000 + 12,000) 23,000 -107,000
Note: The £230,000 increase in the premises is not because of a further purchase
but rather because of a revaluation. This can be seen from the asset revaluation
account of £230,000. As such, it does not appear in the cash flow statement.

EXAM PRACTICE
1
Pierides Shipping Management plc: Statement of cash flows for the
year ended 31 January 2020
£000 £000
Cash flows from operating activities
Profit from operations 7.8
Add depreciation on non-current assets 50
Add loss on sale of non-current assets 2
Operating cash flow before working capital changes 59.8
Increase in inventories (3)
Decrease in trade and other receivables 18
Increase trade and other payables 3

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 Cash generated from operations 77.8
Less interest paid (2.8)
Less tax paid (7)
Net cash from operating activities 68
Cash flows from investing activities
Less payments to purchase non-current assets (52)
Add proceeds from disposal of non-current assets 38
Net cash used in investing activities (14)
Cash flows from financing activities
Add proceeds from share issues
Ordinary share capital 60
Share premium 12
Less final dividend paid (27)
Less interim dividend paid (12)
Less repayment of loans and debentures (70)
Net cash used in financing activities (37)
Net increase in cash and cash equivalents 17
Cash and cash equivalents at the beginning of the year 6
Cash and cash equivalents at the end of the year 23

Workings
Profit from operations = Profit before tax plus interest = £5,000 + £2,800

Depreciation
Provision for depreciation – Non-current assets
Details £000 Details £000
Disposal 60 Balance b/d 130
Balance c/d 120 Depreciation 50
180 180
Balance b/d 120

Loss on sale
Carrying value less sales proceeds = £40,000 - £38,000 = £2,000

Final dividend
180,000 shares at 15 pence per share = £27,000

Share issue
60,000 ordinary shares at £1 = £60,000 ordinary share capital, plus 60,000 shares at
a premium of 20 pence per share = £12,000.

Interim dividend
240,000 shares at 5 pence per share = £12,000

2
Points for being useful
• Helps the user understand where the business has generated its cash and
how it is utilised. Pierides Shipping Management plc has relied on cash from
operating activities.

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 • Users can assess the quality of sales – whether trade receivables are paying
and cash is being generated. Trade and other receivables have decreased,
which is a positive sign.
• Can be used by investors and other analysts to see if there is a difference
between the SOFP and the statement of cash flows. The figures agree, which
is a positive sign.
Points against being useful
• It does not assess the liquidity of a company, it merely states the position –
ratio analysis is required to assess the liquidity. The cash and cash
equivalents may have increased but users would need to calculate liquidity
ratios using the statement of financial position in order to assess the liquidity
position of the company.
• It is based on historical data and so it is difficult to predict the future cash
situation from this.
• The cash position could be manipulated by managers by delaying payment to
trade and other payables or delaying investment in non-current assets. The
cost and carrying value of non-current assets has declined over the year. This
may indicate the company is delaying the purchase of new non-current
assets.

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Chapter 6
ACTIVITY 1
ADJ SKATES
1
March April May June July August
Sales:
400 440 484 484 484 363
units

2
March April May June July August
Sales:
4,800 5,280 5,808 5,808 6,292 4,719
£

ACTIVITY 2
ETHEN EDWARD PRODUCTION BUDGET
1
Units February March April
Revenue (sales
32,000 28,000 18,000
units)
Opening inventory (10,000) (16,000) (14,000)
Closing inventory 16,000 14,000 9,000
Additional
production - 975 26,667 685
rejects
Production 38,975 26,667 13,685

Workings: using mark-up, in February (38,000 units / 97.5) x 100 = 38,975 units
required to be manufactured to have 38,000 saleable football shirts.

ACTIVITY 3
JOLLY MOTOR OILS
1
Month 1 Month 2 Month 3 Month 4
Production units units units units
budget
Revenue budget 400 600 680 590
Opening inventory (100) (120) (130) (118)
Closing inventory 120 130 118 120

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Production 420 610 668 592

2
Month 1 Month 2 Month 3 Month 4
Purchases litres litres litres litres
budget
Production 630 915 1,002 888
Opening inventory (200) (91.5) (100.2) (88.8)
Closing inventory 91.5 100.2 88.8 60
Purchases 521.50 923.70 980.60 859.20
Purchases (£) 312.90 554.22 588.36 515.52

ACTIVITY 4
SUN POWER PRODUCTS PLC
1
Capital budget £m
Ordinary share capital 24
Retained earnings 26
Debenture 18
Bank loan 12
Total capital 80

ACTIVITY 5
JETSET LTD
1
Cash budget for the three months ending 30 June 2021
April May June
Cash receipts/inflows
Cash sales 124,000 120,000 96,000
Credit sales 60,000 64,000 58,000
Tax rebate 50,000
Total cash inflows 184,000 184,000 204,000
Less cash payments/outflows
Purchases 76,000 86,000 90,000

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Wages 24,000 24,000 24,000
Overheads 36,000 36,000 36,000
Loan 70,000
Loan 23,000
Total
Cash outflows 206,000 169,000 150,000
Net cash surplus/deficit (22,000) 15,000 54,000
Opening cash balance 15,000 (7,000) 8,000
Closing cash balance (7,000) 8,000 62,000

2 A deficit in cash could be overcome by increasing the capital of the company or by

arranging overdraft facilities or by another form of loan.
There are ways in which a deficit can be prevented. These include:

• Negotiate better credit terms with suppliers.

• Reduce the time allowed and taken by debtors to pay for credit sales.
• Hold lower stocks, which allows for a reduction in monthly purchases.
• Encourage cash sales by offering special discounts.
• Reduce monthly expenditure wherever possible.

ACTIVITY 6
OUTDOOR SHOPPING
1
2021 budget (£000)
Cash inflows March April May June July Aug
Cash sales 10 8 8 12 10 8
60% credit 48 24 19.2 19.2 28.8 24
40% credit 25.6 32 16 12.8 12.8 19.2
83.6 64 43.2 44 51.6 51.2

Cash outflows March April May June July Aug

Purchases 40 10 60 10 30 20
Wages 10 14 18 18 14 10
Rent 2.8 2.8 2.8 2.8 2.8 2.8
Loan interest 12 12

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Office equip 14
52.8 38.8 94.8 30.8 58.8 32.8

Net surplus March April May June July Aug

(deficit) 30.8 25.2 (51.6) 13.2 (7.2) 18.4
Opening balance 5.9 36.7 61.9 10.3 23.5 16.3
Closing balance 36.7 61.9 10.3 23.5 16.3 34.7

ACTIVITY 7
ROSE FASHIONS LTD
1
Cash inflows Jul Aug Sept
Cash sales 70,000 45,000 80,000
Credit sales 65,000 75,000 70,000
135,000 120,000 150,000

Cash outflows Jul Aug Sept

Purchases 65,000 50,000 90,000
Overheads 10,000 7,000 11,000
Wages 35,000 35,000 35,000
Rent 18,000
Taxation 10,000
Computer 50,000
128,000 152,000 136,000

Net surplus Jul Aug Sept

Opening balance 5,000 12,000 (20,000)
Surplus/deficit 7,000 (32,000) 14,000
Closing balance 12,000 (20,000) (6,000)

ACTIVITY 8
RAINBOW LIMITED

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1
Flexible budget
Production 6,600
Direct materials 21,120
Direct labour 54,780
Fixed overheads 2,300
Total cost of production 78,200

ACTIVITY 9
DANIEL
1
(a) Revenue budget
Tables Chairs Total
Units Value Units Value Units Value
Sales 40 £20,000 100 £14,000 140 £34,000

(b) Production budget

Tables Units Chairs Units
Sales 40 100
Less opening stock (20) (40)
Plus closing stock* 6 15
Units required 26 75
* You calculate the closing stock by taking 1 5 % of the number of units sold in April.
Once you know that then the difference equals the number of units that Daniel is
required to manufacture in April.

(c) Materials usage budget

Units Material kg Price per kg Total £
Tables 26 312 £14 4,368
Chairs 75 375 £14 5,250
Total material cost £9,618

(d) Budgeted profit and loss

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 Tables Chairs Total
Sales 20,000 14,000 34,000
Material cost 4,368 5,250 9,618
Labour cost 2,574 4,050 6,624
Contribution 13,058 4,700 17,758
Administration, selling and distribution 350 550 900
overheads**
Profit £12,708 £4,150 £16,858
** The administration, selling and distribution costs are apportioned on the basis of
hours taken in production.

ACTIVITY 10
JACK LTD
1
Inventory budget:
Month January February March April
Opening stock 46 84 112 128
Production* 232 238 296 352
278 322 408 480
Less sales 194 210 280 320
Closing stock 84 112 128 160

Raw materials budget:

Month January February March
Opening stock 140 214 266
Purchases of raw material* 422 409 494
562 623 760
Less production usage 348 357 444
Closing stock 214 266 316
* Note that these figures are the balancing figures.

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ACTIVITY 11
ONE-ONE LTD
1
Receipts Sep Oct Nov Total
Cash 21,609 12,965 17,287 51,861
Debtors 32,340 26,950 16,170 75,460
53,949 39,915 33,457 127,321
Payments
Credit purchases 8,400 11,200 15,400 35,000
Labour 9,000 5,400 7,200 21,600
Other variable 6,000 3,600 4,800 14,400
Fixed costs 5,850 5,850 5,850 17,550
29,250 26,050 33,250 88,550
Net surplus/deficit 24,699 13,865 207 38,771
Opening balance 11,800 36,499 50,364 11,800
Closing balance £36,499 £50,364 £50,571 £50,571

ACTIVITY 12
WOOD PRODUCTS LTD
1
Revenue budget for July–December 2020
July Aug Sept Oct Nov Dec Total
UK 700 700 700 700 700 700 4,200
USA 300 300 300 500 500 575 2,475
Totals 1,000 1,000 1,000 1,200 1,200 1,275 6,675

2 Budgets are prepared in the following order:

(a) Sales – this is the key budget for all the others.
(b) Stock – this ensures sufficient quantity of raw material at all times.
(c) Production – prepared to meet sales and stock levels.
(d) Cash – the budget is derived from production and sales budgets.

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ACTIVITY 13
FRESH TO FRIDGE
1
Receipts (£) September October November
Month of sale 24,000 29,600 28,800
Less discount (480) (592) (576)
Month after sale 21,400 36,000 44,400
Irrecoverable debts (214) (360) (444)
Total 44,706 64,648 72,180

ACTIVITY 14
MOOSA HALEEM
1
Cash budget for period January–March 2021
Jan Feb March
Cash in
Capital 350,000
Bank loan 120,000
Sales - cash 90,000 94,500 112,500
- credit 210,000 220,500

Total 560,000 304,500 333,000

Cash out
Motor vehicle 120,000
Wages 50,000 50,000 50,000
Other expenses 20,000 20,000
Drawings 10,000 10,000 10,000
Purchases 126,000 234,000
Initial inventory 250,000
Interest 600 600 600
Marketing 60,000
Total 490,600 206,600 314,600
Net cash flow 69,400 97,900 18,400
Opening balance 0 69,400 167,300
Closing balance 69,400 167,300 185,700

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Budgeted statement of profit or loss and other comprehensive income
for the three months ending March 2021
£ £
Revenue 990,000
Cost of sales
Opening inventory 250,000
Purchases 690,000
Closing inventory 280,000
660,000
Gross profit 330,000
Less expenses
Marketing 20,000
Wages 150,000
OE 60,000
Depreciation 6,000
Interest 1,800 237,800
Profit 92,200

3
Budgeted statement of financial position at 31 March 2021
£ £ £
Non-current assets
Motor vehicles 120,000 6,000 114,000
Current assets
Inventory 280,000
Trade receivables 262,500
Prepaid marketing expenses 40,000
Cash 185,700
768,200
Total assets 882,200

Capital and equity

Capital 350,000
Profit 92,200
Drawings 30,000
412,200
Non-current liabilities
Bank loan 120,000

Current liabilities
Trade payables 330,000
Accrued expenses 20,000 350,000

Total Equity and liabilities 882,200

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EXAM PRACTICE
1
£ May June July August
Inflows
Kayaking and canoeing 3,200 3,200 3,200 3,200
Shop 2,800 3,360 2,800
Online sales 1,200 1,200 1.200
Disposal of equipment 1,000
Total inflows 3,200 7,200 7,760 8,200
Outflows
Wages 840 840 840
Shop expenses 280 280 280
Utilities 60 60 60 60
Insurance 400 400 400 400
Sundry expenses 40 40 40 40
Purchases – shop 1,680 2,016 1,680
Purchases – online 800 800
Drawings 1,600 1,600 1,600 1,600
Total outflows 3,780 5,236 5,700 4,020
Net cash Flow (580) 1,964 2,060 4,180
Balance b/f (500) (1,080) 884 2,944
Balance c/f (1,080) 884 2,944 7,124

2
For increasing drawings

• It would provide more tangible rewards for the partners for their efforts.
• The business appears to have sufficient cash over the trading period to
support the decision.
Against increasing drawings

• The increase is equivalent to £200 per week from £200, which is a large
increase. It would result in an extra £6,400 outflow of cash, leaving little for

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 investment or emergencies.
For investment

• New equipment might increase demand for the product and might allow them
to increase their prices, so increasing the revenue.
• Old equipment is being sold, so some replacement will be necessary as the
equipment is depreciating, probably through wear and tear.
• The business is generating sufficient cash over the whole trading period.
Against investment

• The business would not have sufficient cash in July to pay for the equipment.
A loan would be required, which might increase costs.
Evaluation
They cannot do both. Drawings would improve the quality of life, while investment
might bring future rewards.

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Chapter 7

ACTIVITY 1
LARNACA FOUNDRY
1
Materials: 4 x £3.50 = £14 per unit
Labour: (2 x £15.50) + (1.5 x £9.70) = £45.55
Overhead: 10,200 / 200 = £51.00
Standard cost per unit: £110.55
Standard cost per 200 units: £22,110

ACTIVITY 2
VARIANCE ANALYSIS
1 Efficiency analysis – material usage variance, labour hours efficiency.
2 Price variance – material price variance, labour rate variance.
3
Efficiency analysis
Name Formula Meaning When adverse?
When favourable?
Materials usage (standard This means whether Actual < Budget =
variance quantity - actual the change in Favourable
quantity) x quantity of material
standard price used affects the Actual > Budget =
difference between Adverse
budgeted material
cost and actual
material cost.
Labour (Standard hours This measures
efficiency - actual hours) x whether the change
variance standard rate in labour hours
affects the difference
between budgeted
labour cost and
actual labour cost.

4
Price variance
Name Formula Meaning When adverse?
When favourable?

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 Materials price (Standard price - This means whether Actual < Budget =
variance actual price) x the change in price Favourable
actual quantity of material used
affects the difference Actual > Budget =
between budgeted Adverse
material cost and
actual material cost.
Labour rate (Standard rate - This measures
variance actual rate) x whether the change
actual hours in labour wage rate
affects the difference
between budgeted
labour cost and
actual labour cost

ACTIVITY 3
HARBOUR ROPES
1 (1740 x £5.25) - (1680 x £5.65) = £9,135 - £9492 = £357 Adverse
2 1680 x (£5.25 - £5.65) = £672 Adverse
3 £5.25 x (1740 - 1680) = £315 Favourable
4 Adverse price variance – more expensive supplier used, no trade discounts.
Favourable usage variance – better quality of material, more skilled workforce.
Total materials variance – better quality material but at a higher price.

ACTIVITY 4
RAVI & CO.
1 We need to flex the budget, which will show the effect on profit and the output
volume differences. We cannot compare budget and actual cost where the output
does not coincide. In this example, we increase the budget to a 1,900 unit output.

Flexed budget 1,600 units 1,900 units

Sales 32,000 38,000
Direct materials: Plastic £25/kg 6,000 7,125
Colourants 8,000 9,500
£10/litre
Direct labour Skilled £2.5 per 2,000 2,375
hour

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 Unskilled £2 per 5,000 5,938
hour
Fixed overheads 6,000 27,000 6,000 30,938
Budgeted profit 5,000 7,062

Usage for 1,600 units Usage for 1,900 units Actual usage/cost
Material usage 240 kg Material usage 285 kg Material usage 155 kg
Price £25/kg £25/kg £49/kg
Colourants 800 litre Colourants 950 litre Colourants 460 litre
£10/litre £10/litre £20/litre
Skilled 800 hour Skilled 950 hour Skilled 845 hour
£2.5 per hour £2.5 per hour £2.6 per hour
Unskilled 2,500 hour Unskilled 2,969 hour Unskilled 2,375 hour
£2 per hour £2 per hour £2.2 per hour
Fixed costs £6,000 £5,980

Sales variance = Budgeted selling price - Actual selling price = £1,500 (A)

Material usage (Actual - Standard usage)  Standard price = 130 kg @ 25 = 3,250 (F)

Material price (Actual - Standard price)  Actual usage = (49 - 25)  155 kg = 3,720 (A)
Colourant usage = (460 - 950) = 490 litres @ 10 = 4,900 (F)

Colourant price (20 - 10)  460 litres = 4,600 (A)

Skilled labour hours (Actual hours - Standard hours)  Standard rate = (845 - 950) 
£2.50 = 105 hours  £2.50 = £262.50 (F)

Skilled labour rate (Actual rate - Standard rate)  Actual hours = (£2.60 - £2.50) 
845 = £84.50 (A)

Unskilled labour hours (2,375 - 2,969)  £2 = 594 hours @ 2 = 1,188 (F)

Unskilled labour rate (£2 - £2.20)  2,375 hours = £475 (A)

Fixed costs usage = Actual overhead expenditure - Budgeted overhead expenditure
= £5,980 - £6,000 = £20 (F)

Variances F A
Sales 1,500
Materials 3,250 3,720
Colourants 4,900 4,600
Skilled labour 262.50 84.50
Unskilled 1,188 475
Fixed overheads 20
Totals 9,620.50 10,379.50

Difference between flexed budget and actual results = £7,062 - £6,303 = £759 (A)

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Actual profit and loss account
Sales 36,500
Direct materials: Plastic 7,595
Colourants 9,200
Direct labour Skilled 2,197
Unskilled 5,225
Fixed overheads 5,980 30,197
Actual profit 6,303

The difference between the favourable and unfavourable variances = £759. This is
the difference between the budgeted and actual results.

ACTIVITY 5
MERVYN & CO.
1
Budget Flexed budget Actual
Number of units 2,200 2,300 2,300
Direct material 88,000 92,000 92,600
Direct labour 44,000 46,000 46,400
Fixed overheads 40,000 40,000 38,600
Profit 48,000 52,000 49,400
Sales 220,000 230,000 227,000
Material used 88,000 kg 92,000 kg 92,600 kg
Labour 5,500 hours 5,750 hours 5,920 hours

Original profit minus flexed profit = 48,000 - 52,000 = £4,000 (F)

This is favourable because we sold more than in the original budget. You must note
that this is the only time that we use any information from the original budget for
comparison.
All the remaining variances are calculations between the actual results and the
flexed budget.
Sales price variance:
£230,000 - £227,000 = £3,000 (A)
Material usage variance:
We take the excess in kg used at the budget price = 600  £1 = £600 (A)
Material price variance:
92,600 - (92,600  £1) = 0. There is no variance here as the cost price paid for the
actual usage was the same price as per the budget.

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Labour efficiency variance:
5,920 - 5,750 = £170 additional hours taken for the production. This amount is then
multiplied by the budgeted hourly rate of £8 to achieve an amount of £1,360 (A).
Labour rate variance:
(5,920  8) - 46,400 = £960 (F)
Fixed overhead variance:
40,000 - 38,600 = £1,400 (F)
Reconciliation
Profit per original budget 48,000
Add favourable variances:
Sales volume 4,000
Labour rate 960
Overhead 1,400 6,360
54,360
Less adverse variances:
Sales price 3,000
Material usage 600
Labour efficiency 1,360 4,960
Actual profit 49,400

ACTIVITY 6
FRANCIS & CO.
1 (a) Material usage variance:
2,000 metres extra at £1 per metre = £2,000 (A)
Sales price variance:
£4,000 (F)
Material price variance:
We take the actual metres used at the budget price = 74,000  £1 = 74,000.
From this we deduct the actual amount paid of £73,800. This results in a £200 (F)
variance.
(b) Labour efficiency variance:
4,300 hours - 4,500 actual hours  £8 = £1,600 (F)
Labour rate variance:
4,300 hours  £8 = 34,400 - 35,000 = £600 (A)
(c) Fixed overhead variance:
More was spent than allowed in the budget: £1,400 (A)
Reconciliation
Profit per original budget 40,000
Add favourable variances:

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Sales price 4,000
Material price 200
Labour efficiency 1,600 5,800
45,800
Less adverse variances:
Sales volume 8,000
Material usage 2,000
Labour rate 600
Fixed overheads 1,400 12,000
Actual profit 33,800

ACTIVITY 7
MARCEL LTD
1(a) Material usage = 3,672 - 3,400 = 272  52 = 14,144 (A)

Material price = 264,384 - (3,672  52) = 73,440 (A)

(b) Labour rate = 136,000 - (5,440  61/3) = 25,386 (A)

Labour efficiency = 5,440 - 5,100 = 340  61/3 - 6,914 (A)

(c) Overheads = 18,000 - 12,600 = 5,400 (A)

Original Flexed Actual

budget budget
Units 1,400 1,700 1,700
Material usage 2,800 3,400 3,672
Material price £145,600 £176,800 £264,384
Labour hours 4,200 5,100 5,440
Labour rate £85,400 £103,700 £136,000
Fixed £12,600 £12,600 £18,000
overheads
Sales £366,800 £445,400 £579,020
Profit £123,200 £152,300 £160,636

Original profit 123,200

Add favourable variances:
Sales volume 29,100
Sales price 133,620 162,720
285,920
Less adverse variances:
Material usage 14,144
Material price 73,440
Labour rate 25,386
Labour efficiency 6,914

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Overheads 5,400 125,284
Actual profit 160,636

Exam practice
1
Budget Actual Variance
£ £ £
Revenue 48,500 47,000 1,500 Adv
Less
Material costs 3,675 3,705 30 Adv
Labour costs 12,220 12,400 180 Adv
Variable overheads 2,150 2,250 100 Adv
= Cost of sales 18,045 18,355 310 Adv
Gross profit 30,455 28,645 1,810 Adv
Less fixed overheads 22,300 21,570 730 Fav
Profit for the year 8,155 7,075 1,080 Adv

2
(a) (£0.98 - £0.95) x 1,500 = £45 x 3900/1500 = £117 Fav
(b) (1500 x 2.5) - (4000 - 100) x £0.98 = £147 Adv
(c) £117 Fav + £147 Adv = £30 Adv

3
Favourable material price variance

• Lower price charged by the supplier.

• Bulk purchasing or trade discounts.
• Lower quality material purchased.

Adverse material usage variance

• Inferior materials leading to an increase in wastage.
• Less skilled workforce leading to more rejected products.
• Poor inventory control leading to deterioration of stock, possible theft of
inventory.

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Chapter 8
ACTIVITY 1
WHY PLC
1
Machine A Machine B Machine C
Investment (150,000) (180,000) (165,000)
Year 1 cash flow 45,000 36,000 30,000
(105,000) (144,000) (135,000)
Year 2 45,000 42,000 39,000
(60,000) (102,000) (96,000)
Year 3 45,000 90,000 39,000
(15,000) (12,000) (57,000)
Year 4 30,000 60,000 75,000
15,000 48,000 18,000
Year 5 24,000 45,000 75,000
39,000 93,000 93,000
Payback time 3.5 years 3.2 years 3.8 years

Based on the time taken to recover the cost of the new machine, Why Ltd should
select machine B.

ACTIVITY 2
CAM WATER COOLERS PLC
1
Average annual profit = Total profit
Number of years
Option 1: £3,000,000 = £600,000
5
Option 2: £2,900,000 = £580,000
5
Average investment = opening value of investment + closing value of investment
2
Option 1: £3,200,000 + £1,200,000 = £2,200,000
2
Option 2: £4,000,000 + £800,000 = £2,400,000
2

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Average rate of return % (ARR %) = Average annual profit x 100
Average investment
Option 1: £600,000 x 100 = 27.27%
£2,200,000
Option 2: £580,000 x 100 = 24.17%
£2,400,000
Cams Water Coolers should proceed with Option 1 as it has the greater ARR.

ACTIVITY 3
AZIZ AGGREGATES
1
Option 1:
Year Net cash flow Discount factor NPV
0 (24) 1 (24)
1 7.1 0.943 6.6953
2 7.1 0.890 6.3190
3 7.1 0.840 5.9640
4 7.2 0.792 5.7024
5 7.2 0.747 5.3784

Net present value is £6,059,100.

Option 2:
Year Net cash flow Discount factor NPV
0 (18) 1 (18)
1 5.5 0.943 5.1865
2 5.5 0.890 4.8950
3 5.5 0.840 4.6200
4 6 0.792 4.752
5 6 0.747 4.4820

Net present value is £5,935,000.

As the net present value of Option 1 is greater than Option 2, Option 1 should be
chosen.

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ACTIVITY 4
CLEAN CLOTHES LAUNDERETTE PLC
1
Year Annual cash flow PV factors at 20% Present value
0 (150,000) 1.000 (150,000)
1 60,000 0.833 49,980
2 60,000 0.694 41,640
3 60,000 0.579 34,740
4 60,000 0.482 28,920
5 20,000 0.402 16,080
6 20,000 0.335 6,700
128,060

Using the 20% return expected, we can see there is a positive NPV at the end of the
sixth year. This gives us the go-ahead for the project but it does not tell us what the
expected rate of return is. For this we use a further method to determine the internal
rate of return (IRR).
Using a higher rate of interest, we redo our calculations. Assuming a rate of 30% for
the project, the NPV would be as follows:

Year Annual cash flow PV factors at 30% Present value

0 (150,000) 1.000 (150,000)

1 50,000 0.759 45,140
2 50,000 0.592 35,520
3 50,000 0.455 27,300
4 50,000 0.350 21,000
5 20,000 0.259 10,750
6 20,000 0.207 4,140
(5,140)

In this case there is a deficit, which tells us the IRR is less than 30% but more than
the 20% minimum required by the directors.
IRR = 29.61

ACTIVITY 5
WHY PLC (2)
1
Why Ltd Year Discount factor A B C
Initial investment 0 1 (150,000) (180,000) (165,000)

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Net cash inflows: 1 0.893 40,185 32,148 26,790
2 0.797 35,865 33,474 31,083
3 0.712 32,040 64,080 27,768
4 0.636 19,080 38,160 47,700
5 0.567 13,608 25,515 42,525
Net present value (9,222) 13,377 10,866

2 This would indicate that Machine B should be chosen.

ACTIVITY 6
GLOBAL DIGITAL CONSTRUCTION PLC
1
Interest rate/
Source of funds £m Interest/return £m
expected return
Ordinary shares 250 6% 15
Preference shares 190 3% 5.7
Debenture 340 8% 27.2
Bank loan 170 5% 8.5
Total 950 56.4

Weighted cost of capital (WACC) = Cost of interest and returns x 100

Total cost of project
= 56.4 x 100 = 5.94%
950

2 The most appropriate funding package is the second option since the cost of capital
is lower.

ACTIVITY 7
FAST PRINTING SOLUTIONS
1 Annual cash flows: 500,000 - 50,000 (wages) - 100,000 (material) = £350,000

Payback year Cash flow Cumulative cash flow

0 -400,000 -400,000
1 350,000 -50,000
2 350,000 300,000

The payback period is longer than one year but less than two years.

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1 year + (52 weeks  50,000  350,000) = 1 year 7.4 weeks

2
Net present value
Year Cash flow Factor NPV
0 -400,000 1 -400,000
1 350,000 0.8333 291,655
2 350,000 0.6944 243,040
3 350,000 0.5787 202,545
4 350,000 0.4823 168,805
1,000,000 506,045

The positive NPV satisfies the company’s investment criteria.

3 Accounting rate of return

Annual net profits = sales - wages - materials - depreciation (400,000/4)
= 500,000 - 50,000 - 100,000 - 100,000 = £250,000

Average capital employed = 400,000  2 = £200,000

ARR = average annual profit  average capital employed  100%

250,000  200,000  100 = 125%
Card-cutting machine
Annual cost savings = savings 325,000 - 100,000 (annual cost of new machine)
= £225,000

4(a)
Payback year Cash flow Cumulative cash flow
0 -300,000 -300,000
1 225,000 -75,000
2 225,000 150,000

Payback period is longer than one year but less than two years.
1 year + 75,000 / (225,000 / 12) = 1 year + 4 months

(b)
Net present value
Year Cash flow Factor Net PV
0 -300,000 1 -300,000
1 225,000 0.8333 187,493
2 225,000 0.6944 156,240
3 225,000 0.5787 130,208
4 225,000 0.4823 108,518
600,000 282,459

The result shows a positive NPV.

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(c) ARR
Annual profit improvement = cutting revenue - running cost - depreciation
325,000 - 100,000 - (300,000) = 150,000
4
Average capital employed = 300,000 = 150,000
2
ARR = 150,000 = 100%
150,000

5 The new printing press gives the best return. Although the card-cutting machine
also gives a good return (100%), the printing press shows a shorter payback period.

ACTIVITY 8
ART LTD
1
Year Discount factor PV
1 0.909 (9,090)
2 0.826 49,560
3 0.751 71,345
4 0.683 51,225
163,040
Initial investment 100,000
NPV 63,040

Investment is worthwhile because the NPV is positive.

2
Year PV 20% PV 25% PV 30%
1 (8,333) (8,000) (7,690)
2 41,640 38,400 35,520
3 55,005 48,640 43,225
4 36,150 30,750 26,250
124,462 109,790 97,305
Investment 100,000 100,000 100,000

IRR is between 25% and 30%.

ACTIVITY 9
STYLISH WEAR LTD

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1
Net cash flows resulting from the replacement machine
Year Cash inflow Cash outflow Net cash flow
2021 365,000 200,000 165,000
2022 557,600 295,800 261,800
2023 702,000 374,400 327,600

2
Net present value of the replacement machine
Year Net cash flow Discount factor Present value
2021 -400,000 1.000 -400,000
2022 165,000 0.909 149,985
2023 261,800 0.826 216,247
2024 327,600 0.751 246,027
Net present value 212,259

3(a) The payback period is the amount of time it takes to recover or receive in cash
the income required to match the amount spent on the investment.
(b) The accounting rate of return is the average profit (expressed as a percentage) of
the capital invested in the project.
4 From the financial point of view the net present value indicates a return on
investment significantly in excess of the 10% cost of capital faced by the company.
There may be non-financial factors to take into account, e.g. reduction of the labour
force. Overall it would depend on company policy and how this decision fitted in with
its overall strategy.
5 If the net present value were zero instead of £212,259 then the exact return on the
investment would have equalled the chosen discount rate (10%). The exact rate is
known as IRR. Since NPV is higher than zero the IRR must be higher than 10%. It is
possible to estimate the IRR by deciding how much above zero the return is and
expressing this as a percentage.
6 The internal rate of return is more valuable than the net present value because it is
more precise.

ACTIVITY 10
HELICO LTD
1
Workings:
Income calculation:
Years 1 & 2 = 300 days  £690 = £207,000
Year 3 = (320 days  2)  £690 = £441,600
Years 4, 5 & 6 = (320 days  2)  £828 = £529,920

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Depreciation = £900,000 / 6 = £150,000 p.a.
Monthly expenses:
Years 1 & 2 = £315,000
Years 3, 4 & 5 = £355,000
Year 6 = £381,000

Payback period
Year Cash inflow Cash outflow Net cash flow
0 (950,000) (950,000)
1 207,000 (165,000) 42,000
2 207,000 (165,000) 42,000
3 441,600 (205,000) 236,600
4 529,920 (205,000) 324,920
5 529,920 (205,000) 324,920
6 529,920 (231,000) 298,920

At the end of year 5, £970,440 is paid back as calculated in the above cash flow
statement.

Payback is after four years and (20,440 / 324,920)  365 days = 4 years 23 days
Using the payback method and the fixed criteria of the company we would not invest
as the period is greater than four years (only 23 days excess).
Net present value
Year Net cash flow Discount factor Disc cash flow
0 (950,000) 1.000 (950,000)
1 42,000 0.870 36,540
2 42,000 0.756 31,752
3 236,600 0.658 155,683
4 324,920 0.572 185,854
5 324,920 0.497 161,485
6 298,920 0.432 129,133
NPV (249,553)

NPV shows that the company should not invest.

Average rate of return:
Total surplus of project = £1,269,360 - 950,000 = £319,360
Average annual return = £319,360 = £53,227 per year
6 years
Accounting rate of return = £53,227 x 100 = 5.60%
£950,000

As the company only invests where an average of 10% return is shown, it should not
invest in this project.

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2
In considering this project there are many things to take into account. These include:
• Accuracy of predictions.
• Chance of renewal of contract after the initial six years.
• Other possible investment projects available.
• Does the project identify with other objectives and/or strategy of the
company?

EXAM PRACTICE
1(a) The accounting rate of return is the profit as a percentage of the cost of the
investment over the life of the investment.
(b) The weighted average cost of capital for a company is the average interest rate
(cost) it must pay to finance a capital investment.

2
Cash flows

Year Cash inflows Cash Cumulative

NCF £
£ outflows £ cash flow
0 1,600,000 (1,600,000) (1,600,000)
1 312,000 84,000 228,000 (1,372,000)
2 338,000 8,200 248,800 (1,123,200)
3 416,000 89,200 326,800 (796,400)
4 416,000 84,000 332,000 (464,400)
5 1,890,000 73,600 1,816,400 1,352,000

NPV

NCF £ Discount factor NPV

(1,600,000) 0 (1,600,000)
228,000 1 215,004
248,800 2 221,432
326,800 3 274,512
332,000 4 262,944
1,816,400 5 1,356,851
NPV = 730,743

3 Payback period is five years as cash inflow from the sale of depot is not until the
end of the year.

4
Advantages of the pay back method

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 • It is a simple calculation and easy to understand. As such it is highly favoured
by managers and non-accountants. In the case of Dunburr it is easy to
calculate the period as five years.
• Considers the cash inflows and outflows and so reflects liquidity.
• Recognises that cash received earlier in the project is probably preferable to
cash received later.

Disadvantages of the payback method

• It does not measure total profitability over the life of the investment but merely
tells how long it will take to recover the initial investment – but in this example
the life of the investment is known.
• Does not consider the time value of money like NPV.
• Does not recognise the net cash inflows after the payback period – in this
case there are none.
Conclusion
Payback period is a useful method but is probably best used in combination with
another method.

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Chapter 9
ACTIVITY 1
TYPES OF COST
1
Definition Type of cost
(i) Costs that do not vary with output or
activity levels. (d) Fixed cost

(ii) An expense that contains an

element of fixed cost and an element of
(c) Semi-variable cost
variable cost.

(iii) Expenses that change in direct

(b) Variable cost
proportion to levels of activity/output.
(iv) Expenses that remain fixed over a
certain range of activity, then increase
and remain fixed over another range of (a) Semi fixed cost
activity. Sometimes referred to as
stepped-costs.

ACTIVITY 2
CLASSIFICATION OF COSTS
1(a) fixed
(b) fixed
(c) variable
(d) semi-variable
(e) fixed
(f) semi-fixed
(h) fixed
(i) fixed
(j) semi-fixed
(k) variable

ACTIVITY 3
BASHIR’S DASHCAMS
1 Variable cost per unit
Variable cost/unit £

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 Material 19.50
Labour 8.50
Total fixed cost 28.00

2 Fixed costs
Fixed costs £
Rent (£400X12) 4,800
Insurance 740
Other fixed costs 960
Total fixed cost 6,500

ACTIVITY 4
CHECKING THE HIGH–LOW CALCULATION
1 Calculate the total variable cost for a given level of output.
At 40,000 units, total variable cost = £15 x 50,000 = £750,000
Subtract the total variable cost from the given total cost (at the same level of output)
Fixed cost = Total cost - Total variable cost
£1,250,000 - £750,000 = £500,000

ACTIVITY 5
F8 LENSES PLC
1 Profit = TR - TC
TR = £35 x 12,500 = £437,500

Fixed cost £ Variable cost per unit £

Rent 22,800 Materials 14.50
Management salaries 48,000 Labour 3.50
Depreciation 14,400 Delivery costs 0.40
Other fixed costs 8,000 18.40
93,200

TC = TVC + FC
= (£18.40 x 12,500) + £93,200
= £323,200

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Therefore, profit = £437,500 - £323,200
= £114,300

ACTIVITY 6
NINGXIA BLOCKS PLC
1 Calculate the difference in cost between the two levels of output.
£896,450 - £787,300 = £109,150

Calculate the difference in the level of output.

300,000 - 241,000 = 59,000 units

Divide the difference in cost by the difference in the level of output.

£109,150 = £1.85
59,000

2 Calculate the total variable cost for a given level of output.

At 300,000 units, total variable cost = £1.85 x 300,000 = £555,000
Subtract the total variable cost from the given total cost (at the same level of output).
Fixed cost = Total cost - Total variable cost
£896,450 - £555,000 = £341,450

3
Jan 2020
TR = £3.25 x 300,000 = £975,000; TC = £555,000 + £341,450 = £896,450
Profit = TR - TC, £975,000 - £896,450 = £78,550

Feb 2020
TR = £3.25 x 241,000 = £783,250; TC = £445,850 + £341,450 = £787,300
Loss = TR - TC, £783,250 - £787,300 = £4050

ACTIVITY 7
GRAY MOULDINGS
1 Profit = (Unit contribution x output) - fixed cost.
= (£5.80 x 3,200) - £21,000
= £18,560 - £21,000
Loss = £2,440

ACTIVITY 8

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CLOSE SHAVE LTD
1 The break-even point in units will be:
160,000 = 20,000 units
8

The break-even value will be:

20,000 x £38 = £760,000

2(a) Selling price increases to £40 per unit:

BEP = 160,000 = 16,000 units
40 - 30

(b) Fixed costs increase to £180,000 and the selling price remains at £38:
BEP = 180,000 = 22,500 units
8

(c) Variable costs increase to £36 per unit; the selling price remains at £38:
BEP = 160,000 = 80,000 units
38 - 36

3 The effect of an increased selling price is to reduce the level at which the firm will
break even. When either fixed or variable costs increase, the break-even point rises.
Therefore, the break-even point moves in the same direction as cost changes, but in
the opposite direction to changes in selling price.

ACTIVITY 9
EXCEL TOYS
1 To calculate the break-even point we first need to know what the contribution is per
unit.

Variable costs = £18 + (£6 + £9) + £14 = £47

Contribution per unit = £90 - £47 = £43

(a) BEP in units = Fixed costs = 430,000 = 10,000 units

Contributions per unit 43

(b) Margin of safety

Estimated turnover = 945,000 = 10,500 units
SP per unit 90

MOS = Estimated sales in units less BEP = 10,500 - 10,000 = 500 units

(c) Calculation using marginal costing:

Sales (10,500 @ £90) 945,000

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Less variable costs (493,500)
Total contribution 451,500
Less total fixed costs 430,000
Anticipated profit 21,500

(d) To allow for the target profit of £215,000 we need to add that amount to the fixed
costs.

We now have a total of 430,000 + 215,000 that must be covered through the
contribution that each unit makes.

i.e. 430,000 + 215,000 = 15,000 units

43

2(i) SP £90 - 30% = £63

Volume/Sales units 10,500 + 50% = 15,750

Sales 15,750 units @ £63 £992,250

Variable costs 15,750 @ £43 (677,250)
Total contribution 315,000
Less fixed costs (430,000)
Net loss (115,000)

(ii) Sales 10,500 + 60% = 16,800 units

Variable o/h £14 + 50% = £21
Variable costs now = £18 + (£6 + £9) + 21 = £54

Sales 16,800 @ £63 1,058,400

Variable costs (£54) (907,200)
Contribution 151,200
Less fixed costs (430,000)
Net loss (278,800)

(iii) Variable costs are now increased because of the additional cost of a free toy.
£43 + £15 = £58

Sales 10,500 + 120% = 23,100

Profit statement
Sales 23,100 @ £90 2,079,000
Variable costs (£58) (1,339,800)
Contribution 739,200
Less fixed costs (430,000)
Profit £309,200

The best option is (iii).

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ACTIVITY 10
SPEEDY LTD
1(a) Present contribution per unit is £8 less (2 + 2.50 + 0.60) = £2.90
Future contribution per unit should be £7.80 less (1.60 + 2.50 + 0.60) = £3.10
Present break-even point in units = £96,000 = 33,103 units
2.90
Present break-even point in £s = 33,103  £8 = £264,824

(b) Future break-even point in units = £96,000 = 30,967 units

3.10
Future break-even point in £s = 30,967  £7.80 = £241,543
Margin of safety = 36,000 units - 30,967 units = 5,033 units

ACTIVITY 11
SMOOTH FABRICS
1 Break-even point = FC/Contribution = 3,000  14 = 215 ties
2 Revised break-even = FC + profit = 3,700 + 4,000 = £7,700
Contribution is SP - VC = 21 - 14 = 7
Therefore, ties to be sold = 7,700  7 = 1,100 ties

ACTIVITY 12
DESIGN LTD
1
Sales (9,000 units @ £65) 585,000
Less:
Direct materials 156,600
Direct labour 256,500
Variable production overhead 21,600
Variable admin overheads 10,800 445,500
Total contribution 139,500
Fixed production overhead 54,000
Other fixed costs 27,000 81,000
Net profit 58,500

Calculation: £139,500  9,000 = £15.5 per unit

Break-even:
Fixed costs £81,000
Contribution per unit £15.50
Break-even (units) 5,226 units

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Break-even (£s) £339,690
Margin of safety (units) = 9,000 - 5,226 = 3,774 units
Margin of safety (£s) £245,310
Sales (13,000 units @ £57) 741,000

Less:
Direct materials 226,200
Direct labour 305,500
Variable production overhead 31,200
Variable admin overheads 15,600 578,500
Total contribution 162,500
Fixed production overhead 99,000
Other fixed costs 27,000 126,000
Net profit 36,500

Contribution per unit £12.50

Fixed costs £126,000
Break-even (units) = 126,000  12.5 = 10,080 units

ACTIVITY 13
ROCKY LTD
1(a) Contribution per unit = 60,000  15,000 = £4
BEP = Fixed costs / Contribution = 30,000  4 = 7,500 units
(b) Sales price = 10 + 20% = £12
Variable costs per unit = £6 + 50% = £9
Contribution = £3
Therefore BEP = £30,000  3 = 10,000 units

ACTIVITY 14
TASTY LTD
1(a) Total variable costs = £3,100
This is equal to 3,100  200 = £15.50 per box
The contribution based on a selling price of £20 per box is 4.50  200 = £900
BEP = 700  4.50 = 156 boxes
At a selling price of £18 the contribution = 2.50  450 = £1,125
BEP = 700  2.50 = 280 boxes
At £17 the contribution = 1.50  600 = £900
BEP = 700  1.50 = 467 units

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2 This means the company should reduce its selling price to £18 and achieve a profit
of £425 per month. This assumes the company is able to achieve budgeted sales
and that fixed overheads remain constant.

EXAM PRACTICE
1(a)
Bluetooth Sounds: Statement of profit or loss and other comprehensive
income for the year ended 31 January 2020
£ £
Revenue 425,000
Less
Materials 112,200
Labour 108,800
Salary 24,000
Rent 18,000
Depreciation 9,600
272,600
Net profit for the year 152,400

(b)
Break-even point (units) = 51,600 = 860 units
125 - 65
Break-even point (value) = £125 x 860 = £107,500

(c)
Margin of safety (units) = 3400 - 860 = 2,540 units
Margin of safety (value) = £125 x 2,540 = £317,500

2
3,600 units = £52,360 + £200,000
Selling price - £77

Fixed cost = 18,360 (rent) + 24,400 (salary) + 9,600 (depreciation) = £52,360

Variable cost per unit = £35 (material) + £42 (labour) = £77

Contribution (SP-VC) = £252,360 = £70.10

3,600
Therefore, selling price = Contribution + variable cost per unit
= £70.10 + £77.00
= £147.10
3
Points in favour of break-even analysis

• It informs of the number of sales required to break even, which can be used to
determine if the business/product is viable. Break-even analysis has allowed
Amelia to see that her business is viable as it made a profit in the first year.

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 • A business can determine the level of output required to achieve a specific
target profit.
• It allows a simple risk assessment to be done in terms of the margin of safety;
the higher the margin of safety the more resilient the business will be when
trading conditions are unfavourable. Amelia can see that the business has a
relatively high margin of safety and can be confident in the future success of
the business.
Points against break-even analysis

• The selling price is unlikely to be the same for all output – a business will
often sell at different prices to different customers. Unless Amelia has a single
customer for her speakers, she is likely to have to sell them at different prices
to different customers, thus making the revenue calculation much more
difficult for use in a break-even analysis.
• Break-even analysis assumes that all output is sold. As this is only the second
year of trading, Amelia cannot be confident that she will sell all her production,
especially as it has increased by 200 units, which is almost a 6% increase in
sales.
Evaluation
A justified recommendation that could make reference to the fact that Bluetooth
Sounds is a single product company, which increases the validity of a break-even
analysis.

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Chapter 10
ACTIVITY 1
MULTI LTD
1 In order to advise management, we change the cost structure of each hairdryer to
absorb the total fixed costs. This now results in the hairdryer having fixed costs of
£17.50 per unit. Using this information we can calculate the following costing:

Hairdryer
Selling price 35
Unit cost:
Materials 14
Labour 9
Other variable costs 2
Fixed costs 17.5
Total cost 42.5
(Loss)/Profit per unit (7.5)
Units produced 1,000
(Loss) / Profit on product: (7,500)

This result is clearly far worse than when producing both products, and arises
because the total fixed costs must now be borne by a single product. What has been
lost is the contribution towards those fixed costs that had originally been made by the
hair curlers.
We now re-examine the original situation by showing the contribution per unit from
both products.

Hair curler Hairdryer

Selling price per unit 25 35
Unit cost:
Materials 10 14
Labour 7 9
Other variable costs 3.5 2
Total variable costs 20.5 25
Contribution per unit 4.5 10
Units 2,500 1,000
Contribution per product £11,250 £10,000

Total contribution 21,250

Less total fixed costs 17,500
Profit £3,750

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This shows what each product is actually contributing to the business. It also enables
us to see what will happen if the firm stops producing hair curlers – the loss of the
£11,250 contribution on the hair curlers turns an overall £3,750 profit into a £7,500
loss.
We see from this example that any product with a positive contribution will help us
maximise our profits.
The fixed costs are not specific to either product. This is not always the case.
Although fixed costs are supposed to remain constant in the short term, regardless
of the volume of production or sales, certain costs, such as maintenance of
machinery or managers’ salaries, could well disappear if the manufacture of one
product ceased.
The assumptions made here using the contribution approach for the two products
need to be looked at in more detail. The firm may be able to sell more dryers, in
which case the greater contribution per unit gained from selling each dryer could
build up a sufficient total contribution to absorb the fixed costs, and the production
capacity used for the curlers could perhaps be diverted to the dryers.
Normally a firm concentrates on a product that has the highest contribution per unit,
provided that there is sufficient demand and no shortage of resources. In this
example, the firm must continue to manufacture both products. Should there be an
upsurge in demand for the hair curler, the loss per unit that it is currently making
could be turned into a profit, provided that fixed costs remain unchanged.

ACTIVITY 2
JASON LTD
1
Normal Special
production order
Selling price per unit 40 36
Total variable costs per unit (30) (30)
Contribution per unit 10 6

Units demanded 5,000 1,000

Fixed costs £40,000

For normal production, total contribution is £50,000 (£10  5,000 units), so profit will
be £10,000 after deducting fixed costs. Although the special order has a lower selling
price, the variable costs have not risen per unit. This results in an extra contribution
of £6,000 and, as the fixed costs are already covered, this extra amount is all profit.
When a customer wants a special order, extra costs may be incurred. These costs
could be for special packaging or delivery costs. The company must ensure that

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there is a positive contribution and that it cannot use the spare capacity more
profitably.
In this example Jason Ltd would not want to end up with all the units for sale at £36,
as this would give a contribution of only £36,000 (£6  6,000 units). This would result
in a loss of £4,000.

ACTIVITY 3
KHALID & CO.
1 Our answer to the question of ranking would be calculated as follows:

A B C
Selling price 25 20 23
Variable costs 10 8 12
Contribution 15 12 11

Machine hours 4 3 4
Contribution per machine hour 3.75 4.00 2.75
Ranking order 2 1 3

Based on the above calculations we can produce 20 units of B  3 = 60 hours and

22 units of A  4 = 88 hours. This makes use of the total hours available.
We cannot produce the remaining three units of A, nor the 30 units of C.

ACTIVITY 4
BRANDEE & CO.
1
A B C
Selling price per unit 50 40 65
Variable costs per unit 25 19 29
Contribution 25 21 36
Hours of labour per unit 5 3 6
Contribution per labour hour 5 7 6
Ranking 3 1 2

Therefore product B should be produced first and then C. If any labour hours remain,
they can be used for producing product A, which has the lowest contribution per
labour hour.

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ACTIVITY 5
ERINA & CO.
1 The Gold service has the highest contribution followed by the Bronze service and
finally the Silver service. This would produce the following results:

Gold Silver Bronze

Hours of skilled service work 80,000 22,200 42,000
Services performed 2,000 740 1,200
Contribution per service £800 £540 £600
Total contribution per service 1,600,000 399,600 720,000

Total contribution 2,719,600

Less fixed costs £400,000
Profit £2,319,600

Note that there are only 22,200 hours left for Silver service. Therefore only 740 units
of this service can be offered.
We must also examine the contribution per service per hour of skilled employee
time, and use the ranking produced from that to find a profit figure for Erina & Co.

Contribution per service £800 £540 £600

Contribution per service per hour 20 18 17.14

The above table indicates that although Erina & Co should still place the Gold
service first, the Silver service should be ranked before the Bronze service.
We now need to calculate the profit using this fact.

Hours of skilled service work 80,000 60,000 4,200

Services performed 2,000 2,000 120
Total contribution per service £1,600,000 £1,080,000 72,000

Total contribution £2,752,000

Less fixed costs £400,000
Profit £2,352,000

If the ranking for the contribution per scarce factor were identical to that for the
contribution per service, the result would be the same. As this is not the case, we
find the maximum possible profit by taking into consideration not just the differences
between revenues and variable costs, but also how economical the usages are of
the limiting factor.
The Silver service requires less of the scarce skilled employee time than the Bronze
service, even though it had a lower contribution per service.

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Note: While this method indicates the highest profit obtainable, a firm may have
reasons, such as competition, for choosing a different combination.

ACTIVITY 6
SMOOTH FABRICS
1 Contribution = £28 - (7 + 2 + 3 + 2) = £14 per tie
New SP - VC = 18 - 14 = £4 contribution
Additional fixed costs are two months at £300 p.m. = £600

2 Therefore the contribution from this order = 400 ties @ £4 per tie = £1,600
The extra fixed costs incurred for this order = £600 additional rent. This results in a
positive contribution of £1,000 so the order should be accepted.

New designs:
Style 1 Style 2 Style 3
Material £4 £3 £5
Trimmings £2 £1 £2
Wages £3 £3 £3
Packaging £1 £1 £1
Total VC 10 8 11
Selling price £25 £20 £31
Contribution £15 £12 £20

Style 1 Style 2 Style 3

Machine hours per tie 5 3 4
Contribution per hour £3 £4 £5
Ranking 3rd 2nd 1st
Demand in units p.m. 20 15 25
Production in hours 55 45 100
Production in units 11 15 25

Only Style 1 has a limit placed on production. Although there is a demand for 20
units, only 11 can be produced because of machine-hour limitation.

ACTIVITY 7
ABLE & CO.
1
Marginal cost Absorption cost
Sales 6,000 6,000
Material 60p -1,200 60p -1,200
Labour 40p -800 40p -800

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Contribution 4,000
Factory rent £1,000 -1,000 £1,000 -1,000
Salary £2,000 -2,000 £2,000 -2,000
Profit 1,000

ACTIVITY 8
MYCO LTD
1
Small Medium Large
Selling price (per unit) 100 140 200
Total variable costs 68 92 128
Contribution 32 48 72

Contribution per machine hour £8 £6 £12

Ranking: 2 3 1

Myco Ltd will therefore elect to produce Large first, followed by Small. Should there
be any machine hours still available after that then they will be used to produce
Medium. In this case 2,000 units of Medium can be manufactured.

Small Medium Large

Machine hours needed 160,000 16,000 120,000
Products made 40,000 2,000 20,000
Contribution per unit 32 48 72
Total contribution 1,280,000 96,000 1,440,000

Total contribution 2,816,000

Less fixed costs 330,000
Profit £2,486,000

ACTIVITY 9
NISH LTD
1
UK Spain
Selling price per unit £150 £150
Variable costs:
Materials 60 66
Labour 30 31.5
Variable factory cost 10 10
Variable selling cost 15 12

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Contribution 35 30.5

Total contribution (35  20,000) (30.5  5,000)

700,000 152,500
Less fixed costs 330,000 16,000
Profit 370,000 136,500
Total profit £506,500

Nish Ltd would increase its profit by accepting the order. However, it will have
incurred additional fixed costs of £16,000 per annum, and if the Spanish order is not
repeated the following year, profit will be reduced by this additional fixed cost of
£16,000 per annum.
The decision will therefore depend on how anxious the company is to sell to another
market and whether it has any idea if the order is likely to be repeated.

ACTIVITY 10
MINIM LTD
1 The present profit/loss situation, based on full cost, is as follows:

Trumpets Saxophone
Sales revenue 750,000 540,000
Total cost 657,000 546,000
Profit/loss £93,000 -£6,000

Total profit for Minim Ltd is therefore £87,000.

If the factory producing saxophones were to be closed, £66,000 of the fixed costs
still remain to be paid. As there would be no revenue coming from saxophone
production, this £66,000 would have to be deducted from the profit of the trumpets,
leaving a profit of only £27,000.

ACTIVITY 11
ZEPHYR LTD
1
Contribution = Selling price 23.50
Less variable costs 9.30
Contribution £14.20
Total contribution (30,000 @ £14.2 per unit) 426,000
Less fixed costs 63,750
Profit 21,250

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You were told that the directors require a minimum return on capital employed of
16%. The above costing statement shows a return of 16.35%. Therefore, the
directors will agree that the selling price can be held at the lower level of £23.50.

ACTIVITY 12
SMART ATTIRE
1 At first glance we might decide that we should stop making ties and jackets, as
each of these products has a negative contribution towards fixed costs, and
obviously is non-profit-making. However, we also know that customers buy shirts
and ties so if production of ties is discontinued, we should also lose our market for
shirts.
In order to arrive at a well-formed opinion, we need to summarise the various
alternatives.
Discontinue jackets only
Total contribution: Shirts 216,000
Ties -12,000
Pants 312,000
516,000
Fixed costs 180,000
Profit 336,000

Discontinue jackets and ties and lose market for shirts

Total contribution: Pants 312,000
Fixed costs 180,000
Profit 132,000

Although ties have a negative contribution (£12,000), they are bought jointly with
shirts, which have a positive contribution. Therefore, the firm should continue to
produce and sell ties and in so doing, should also be able to sell shirts. This would
maximise profits at £336,000.
Smart Attire should, of course, try to find ways of reducing the variable costs relating
to ties in order to raise profits further.
The volume of sales determines profit. For example, if the firm’s sales of pants had
been identical to those for shirts and ties (i.e. 40,000 units) then the contribution from
pants would be only £156,000.
Therefore, although we look for items that give us a positive contribution per unit, it is
the amount we are then able to sell them for that is important. Where there are
products that have a joint demand (such as above), we must consider the options
very carefully.

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EXAM PRACTICE
1 Variable cost per unit = (£2,250 + £1750 + £500) / 200 units = £22.50
The order of 500 chopping boards at £22.00 per board will result in a negative
contribution per unit of £0.50 and a negative contribution of £250.
The order for 100 chopping boards at £28 per board will give a positive contribution
of £5.50 per board, a total of £550.
Looking at the financial factors, the order for 100 chopping boards should be
accepted as it provides a positive contribution.
The factory has spare capacity so this is not an issue. However, will the order affect
the selling price of existing sales? If the business accepts the larger quantity order it
might be able to increase the selling price so that it makes a positive contribution.

2
Small (£) Medium (£) Large (£)
Selling price 8.25 14.25 21.00
Direct materials 4 5 8
Direct labour 1.5 4.50 6
Variable cost/unit 5.5 9.50 14
Contribution 2.75 4.75 7
Contribution per labour
11 6.33 7
hour

Contribution per labour hour = contribution per unit

labour hours per unit

Production
Small: 4,000 units @ 15 minutes = 1,000 hours
Large: 5,000 units @ 60 minutes = 5,000 hours
Medium: 400 units @ 45 minutes = 300 hours
6,300 hours

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Chapter 11
ACTIVITY 1
ACCOUNTING APPS AND SOFTWARE PACKAGES RESEARCH
1(a)–(c) Students’ own answer.

ACTIVITY 2
HUMAN ASPECTS OF ICT AND ACCOUNTING
1 One advantage would be professional development. The introduction of ICT would
result in staff training and greater skills, which would improve staff motivation.

On the other hand, staff may feel threatened by the introduction of ICT. It could lead
to the de-skilling of staff into merely inputting transactions into a system. At the
extreme, staff could feel threatened that they might be replaced by technology.

ACTIVITY 3
EAST MEETZ WEST
1 ICT stands for Information and Communication Technology: it is the technology
that gathers, store, processes and analyses a range of data.

2 One function that would benefit from ICT is the trade receivables function. ICT
would allow the business to identify quickly those customers who do not pay their
invoices on time, allowing them to chase up debts quickly and avoid cash flow
problems.

A second function that could benefit from ICT is break-even analysis. ICT will be able
to calculate the contribution, break-even point and margin of safety. It will also be
able to prepare a graphical representation of break-even for the figure inputted.
Perhaps more importantly, the owners of East Meetz West will be able to quickly do
‘what-if’ scenarios by changing the variables – price, variable cost and fixed cost.

EXAM PRACTICE
1
Points in favour

• Spreadsheets can be created for a wide range of budgets. Dunya is likely to

have to prepare budgets for sales, purchases, inventory and purchases, as

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 well as a cash budget. The spreadsheet will save her time and will be able to
automatically transfer information between different budgets.
• It will allow her to flex her budgets for different levels of activity. This will be
important to Dunya as her business is growing so she cannot be certain of the
level of output.
Points against

• Dunya and any staff she employs will need to be trained to use the
spreadsheets correctly. A lack of training may result in inaccurate information
being provided in the budgets.
• The hardware and the software will need to be purchased. This might be more
than the available retained profits. Once purchased, it must be properly
maintained, adding to costs.
Conclusion
To be based on arguments presented, which could be in favour or against the
decision to invest in ICT.

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