Faculty of Commerce and Management Studies

UNIVERSITY OF KELANIYA

FACULTY OF COMMERCE AND MANAGEMENT STUDIES

MASTER OF BUSINESS ADMINISTRATION DEGREE EXAMINATION

Academic year – 2013/2014 - Year 1 Semester I – March 2015

MBA 51013 - Accounting for Decision Making/MBA 51023 (R)– Accounting for Business

No. of Questions: 06(Six)

Answer any (05) five questions Time: Three (03) Hours

Question Number 01

Mr. Pradeep, wholesaler in sunflower oil, is a client of your accounting firm. From the files, you pick up his balance sheet as at 31.3.2013 reading as below.

Balance sheet as at 31.03.2013

LiabilitiesRs

Anthony’s Capital150,000

Creditors for oil purchases200,000

12% security deposit from customers50,000

Creditors for expenses:

Rent6,000

Salaries4,000

Commission20,000

Assets:

Cash and bank balances75,000

Debtors160,000

Stock of oil (125 ( 4 liters) tins) 125,000

Furniture30,000

Less: depreciation 3,00027,000

Rent advance12,000

Electricity deposits 1,000

Three wheeler Tempo Van40,000

Less: depreciation10,00030,000

430,000

A summary of the rough cash book of Pradeep for the year ended 31st March 2013 is as follows.

Receipts:Rs.

Cash sales526,000

Collection from debtors2,673,500

Payments:

Landlord79,000

Salaries48,000

Miscellaneous office expenses 12,000

Commissions70,000

Transfer on 1.10.2013 to 12% fixed deposit 600,000

Creditors for oil suppliers 2,400,000

A scrutiny of the other records gives you the following information

1. During the year oil was purchased at 250 ( 4 liters) tins per month basis as a unit cost of Rs. 1,000. Five tins were damaged in transit in respect of which insurance claim has been preferred. The surveyors have since approved the claim at 80%. The damaged ones were sold for Rs. 1,500 which is included in cash sales. One tin has been used up for personal consumption. Total number of tins sold during the year was 3,000 at a unit price of Rs. 1,750.
2. Rent until 30.09.2013 was Rs. 6,000 per month and was increased thereafter by Rs. 1,000 per month. Additional advance rent of Rs. 2,000 was paid and this is included in the figure of payments to landlord.
3. Provide depreciation at 10% and 25% of straight line basis on furniture and Tempo van respectively.
4. It is further noticed that a customer has paid Rs. 10,000 on 31.03.2014 as security deposit by cash. One of the staff has misused this amount. The claim against the insurance company is pending.

You are required to prepare the final accounts for the year ended 31.03.2014. You are advised to make the correct assumptions when you come to the net profit of Pradeep.

(20 Marks)

Question Number 2:

You have been appointed as an theinvestment consultant of Mr. Rohan Rodrigo. He is interested to invest on one of the manufacturing companies in Sri Lanka which is engaged in the business of assembly of sewing machines, manufacture of cabinets and stands for sewing machines. You have been provided with thethe following financial extracts of the company namely, Statement of Comprehensive income, Statement of Financial Position and Statement of Cash flowsas for the financial year ended 31st March, 2014, for your reference.

a) Statement of Comprehensive Income (all amounts in LKR thousands)

For the year ended 31st March / 2014 / 2013
Revenue / 745,997,677 / 713,559,570
Cost of sales / (730,340,625) / (695,146,681)
Gross profit / 15,657,052 / 18,412,889
Other income/ (expenses) / 6,748,487 / 5,794,358
Gain on Disposal Value of Current Investment / - / 55,001,247
Change in Fair Value of Investment Property / 12,605,000 / -
Administrative expenses / (6,806,991) / (6,927,130)
Distribution expenses / (1,565,940) / (302,582)
Voluntary retirement scheme / (2,500,000) / (26,105,250)
Profit from operations / 24,137,608 / 45,873,532
Finance income / 13,459,762 / 7,405,370
Finance expenses / (4,620,232) / (6,557,862)
Share of Profit/(Loss) of Equity Accounted Investee (Net of Income Tax) / 6,499,750 / (718,899)
Profit before tax / 39,476,888 / 46,002,141
Tax (expense) / refund / (5,617,548) / 483,692
Profit for the Year from Continuing Operations / 33,859,340 / 46,485,833
Profit from Discontinued Operations - (Net of Income Tax) / - / 4,979,936
Profit for the Year / 33,859,340 / 51,465,769
Other comprehensive income
Revaluation of Property, Plant and Equipment / 81,010,344 / -
Tax on other comprehensive income / (5,882,896) / -
Other Comprehensive Income for the Year - (Net of Income Tax) / 75,127,448 / -
Total comprehensive income for the year / 108,986,788 / 51,465,769

b) Statement of Financial Position (all amounts in LKR thousands)

As at 31st March, / 2014 / 2013
Assets
Non- current assets
Property, Plant & Equipment / 563,275,513 / 487,896,364
Investment Property / 113,445,000 / 100,840,000
Equity Accounted Investee / 59,246,050 / 52,746,300
Other Receivables / 3,792,887 / 3,747,059
Deferred Tax Assets / - / 6,526,147
Total Non-Current Assets / 739,759,450 / 651,755,870
Current assets
Inventories / 152,005,618 / 119,242,593
Trade and other receivables / 124,220,309 / 79,619,159
Prepayments / 1,880,538 / 1,133,462
Income Tax Recoverable / 7,359,131 / 8,459,740
Investments in Fixed Deposits / 59,388,951 / 121,162,406
Cash and cash equivalents / 59,388,951 / 938,644
Total current assets / 346,187,936 / 330,556,004
Total assets / 1,085,947,386 / 982,311,874
Equity and Liabilities
Capital and reserves
Stated capital / 38,463,000 / 38,463,000
General reserves / 475,184,972 / 401,716,737
Retained earnings / 401,716,737 / 384,576,632
900,733,282 / 824,756,369
Non- current liabilities
Differed tax liability / 524,284 / -
Retirement benefit obligations / 46,298,164 / 43,846,503
Total Non-Current Liabilities / 46,822,448 / 43,846,503
Current liabilities
Trade and Other Payables / 67,126,812 / 1,085,947,386
Amounts due to Related Parties / - / 17,375,371
Provisions / 12,728,034 / 14,999,054
Dividend Payable / 507,830 / 507,830
Loans and Borrowings / 58,028,980 / 21,782,644
Total current liabilities / 138,391,656 / 113,709,002
Total liabilities / 185,214,104 / 157,555,505
Total equity and liabilities / 1,085,947,386 / 982,311,874

c).Statement of Cash Flow (all amounts in LKR thousands)

For the year ended, / 2014 / 2013
Cash flows from operating activities
Profit before taxes / 39,476,888 / 52,918,718
Adjustments / 13,328,103 / 41,783,458
Operating profit before working capital changes / 26,148,785 / 11,135,260
Working capital changes / (90,486,760) / 75,917,057
Cash generated from operations / (64,337,975) / 87,052,317
Interest paid / (4,620,232) / (7,115,078)
Retiring gratuity paid / (2,538,869) / (7,233,125)
Income tax paid / (2,704,155) / (10,094,474)
Net cash flow from operating activities / (74,201,231) / 62,609,640
Cash flows from investing activities
Acquisition of property, plant and equipment / (7,451,667) / (468,200)
Proceeds from disposal of property, plant and equipment / 4,223,215 / 1,927,225
Proceeds from disposal of investments / - / 259,887,747
Withdrawal of/ (invested in) fixed deposits / 71,665,545 / (121,162,406)
Investments in equity accounted investee / - / (27,000,000)
Interest received / 3,567,672 / 6,933,992
Dividend received / - / 2,875,181
Net cash flow from investing activities / 72,004,765 / 122,993,539
Cash flows from financing activities
Repayment of long term loan / (6,275,254) / (7,523,604)
Loan repayment to related companies / - / (30,000,000)
Dividend paid / (33,655,125) / (33,656,325)
Net cash flow from financing activities / (39,930,379) / (71,179,929)
Net increase/ (decrease) in cash and cash equivalents / (42,126,845) / 114,423,250
Cash and cash equivalents at the beginning of the year / (14,568,746) / (128,991,996)
Cash and cash equivalents at the end of the year / (56,695,591) / (14,568,746)

The following additional information are given.Additional information

1. Number of shares of the company is 3,846,300.
2. Cash and cash equivalents

2014 (Rs’000) / 2013 (Rs’000)
Cash and Bank Balances / 1,333,389 / 938,644
Bank Overdrafts and Short-Term Loans / (58,028,980) / (15,507,390)
Total / (56,695,591) / (14,568,746)

1. The market for sewing

In some Asian countries, though sewing is labeled as a ‘sunset’ industry, it is not so in Sri Lanka. The Company has been able to keep sewing craft alive through their sewing schools and educational programs in collaboration with the Department of Education. To support their customer base they hold regular sewing machine clinics across the nation, going direct to householders to service and upgrade their machines periodically. Such clinics are sometime held in a town centre or a prominent public place where a customer can bring her model in for review and improvement or call-in so that the company’s staff can visit such homes. Companyadaptability to keep abreast of sewing community needs brings new customers to company’s fold through endorsements or firsthand experience of service initiatives beyond the call.

1. Market evolution

The Company produced close to 45,000 machines. Market is moving towards portables due to rapid expansion of electricity, apartment style living, revival of youth market. The company’smanagement is planning to extend the line by adding more models to this range and young adults is one of the keys to expansion. As company’s distribution spreads wide in the North and East and more families resettle, they perceive territorial expansion in such peripheral markets. Company’s management team will be challenged to grow the sewing market as a long term leader with marginal competition.

You are required to,

You arerequired to, aAdvice to Mr. Rohan Rodrigo on his decision of investing in above company by analyzing financial ratios and non-financial factors. (Use at least two profitability ratios, two cash flow ratios and two liquidity ratios for your report).

(Total 20 marks)

Question No.03

a)Differentiate between the company’s income and other comprehensive income.

(05 marks)

b)‘Cash flows from operations (CFO) is a broader view of operating activities than is net income.’ Do you agree? Justify your answer.

(05 marks)

c)List out the limitations of statement of cash flow reporting.

(05 marks)

d)Briefly explain the importance of selecting appropriate accounting policies for an entity.

(05 marks)

(Total 20 marks)

Question No.04

Richard Silva, a MBA student decided to go into business for himself. To start his own guide service, Silva estimated that at least Rs. 48,000 cash would be needed. On 1st June 2014, he borrowed Rs. 32,000 from his father and signed a three-year note payable which stated that no interest would be charged. He deposited this borrowed money along with Rs.16,000 of his own savings in a business bank account to begin a business known as SL Servicing Ltd.. The Rs.32,000 note payable is a liability of the business entity. Also, on 1st June 2014 (on the starting date), SL Servicing Ltd. carried out the following transactions:

(i)Purchased Bought a number of canoes at a total cost of Rs.64,000, paid Rs. 16,000 cash and agreed to pay the balance within 60 days.

(ii)Bought Purchased camping equipment at a cost of Rs.32,000 payable in 60 days,

(iii)Purchased Bought supplies for cash, Rs.8,000.

After the close of the season onOn31stDecember 2014, Silva asked from another student, named Joseph Gallage, who had taken a course in accounting, to help him to determine the financial position of the business.;

The only recordSilva had maintained was a chequecheckbook with memorandum notes written on the chequecheck stubs that are the only records which are maintained by him.However, using the chequestubs, From this source Gallage discovered that Silva had invested an additional Rs.16,000 of his own savings in the business on 1stJuly 2014, and also that the accounts payable arising from the purchase of the canoes and camping equipment had been paid in full. A bank statement received from the bank on 31st December 2014 showed a balance on deposit of Rs.32,400.Meanwhile, Silva informed to to the Gallage that he had deposited in the bank all cash received from by the business. Further, hHe had also paid by check all bills by cheques, immediately upon receipt. ceiptAs a result, the company’s all bills had been paid as on 31st December .; consequently, as of 31st December, all bills for the season had been paid.

The canoes and camping equipments were all in excellent condition at the end of the season and Silva planned to resume operations. In fact, he had already accepted reservations from many customers who wished to return. Gallage felt that some consideration should be given to the wear and tear on the canoes and equipment but he agreed with Silva that for the present purpose the canoes and equipment should be listed in the Statement of Financial Position at the original cost. The supplies remaining on hand had cost Rs.400 and Silva felt that he could obtain a refund for this amount by returning them to the supplier.

Gallage advised suggested tha t to maketwo Statement of Financial Positions (two balance sheets)be prepared, one to showing the condition of the business as at on1st June 1 2014 and the other showing the condition on 31st December 2014. Furthermore, Hehe instructed also recommended to Silvathat ato complete a set of accounting records. be established

You are required to make the following questions.Questions:

a.) Use the information in the first paragraph (including the three numbered transactions) as a basis for preparing a Statement of Financial Position dated 1st June 2014.

b.) Prepare aStatement of Financial Position asat 31st December 2014. (Because of the incomplete information available, it is not possible to determine the amount of cash at 31st December 2014, by adding cash receipts and deducting cash payments throughout the season. The amount on deposit as reported by the bank as at 31st December 2014, is to be regarded as the total cash belonging to the business at that date).

c.)By comparing the two Statement of Financial Position, compute the change in owner's equity. Explain the sources of this change in owner's equity and state whether you consider the business to be successful. Also comment on the cash position at the beginning and end of the season. Has the cash position improved significantly? Explain.

(Total 20 marks)

Question No 05

(A1) “Accounting provides information to stakeholders to make economic decisions of an entity. It use transactions and events as the input, process them and generate the output through financial statements.”

(a)What are the inherent limitations of financial statements in terms of satisfying needs of stakeholders? howHowan entityentities overcome those limitations?

(5 marks)

(b)What are the qualitative characteristics of accounting information proposed by “Accounting Framework”? Suggest techniques/methods/ways that can be used by an entity to comply with those characteristics in financial statements.

(5 Marks)

( c ) From the inception of Accounting, the Historical Cost is used as a way of recording

transactions in a business. Later, Fair Value method is originated as a mode of recording some transactions in business”.

Write four benefits of using Fair Value concept against Historical cost.

(4 Marks)

(B2)Space Ltd has entered into a lease agreement with VGI Ltd to rent space for its corporate offices. The lease is classified as an operating lease in accordance with LKAS 17, Leases.

The lease entered into between Space Ltd and VGI has a 10-year lease term, and there is no option to renew nor is the ability to negotiate for renewal provided in the lease agreement.

In addition, the lease agreement contains certain provisions that may require Space Ltd to undertake certain activities and incur certain costs at the end of the lease term.

Such provisions include the following:

1. Lessor may require the lessee to perform general repairs and maintenance on the leased premises.

2. Lessor may require the lessee to remove all leasehold improvements such that the premise is reinstated to original condition.

Within the leased premise, Space Ltd has placed into service various leasehold improvements (e.g., temporary wall and carpeting) that have economic useful lives of 10 years.

You are required to complete the following question.

How should Space Ltd account for the two (1 and 2 above) obligations noted as provisions in the lease agreement?

(6 marks)

(Total 20 marks)

Question No.06

(1) Delt Phama is a public listed company. It has been considering the accounting treatment of its intangible assets and has asked for your opinion on how the matters below should be treated in its financial statements for the year to as at 31st March 2015.

a.)On 1stst October 2014, Delt Phama acquired Tem Phama, a small company that specializes in pharmaceutical drug research and development. The purchase consideration was by way of a share exchange and valued at Rs.35 million. The fair value of Temerity's net assets was Rs.15 million (excluding any items referred to below). Tem Phama owns a patent for an established successful drug that has a remaining life of 8 years. A firm of specialist advisors, Leadvaluers, has estimated the current value of this patent to be Rs.10 million, however the company is awaiting the outcome of clinical trials where the drug has been tested to treat a different illness. If the trials are successful, the value of the drug is then estimated to be Rs.15 million. Also included in the company's statement of financial position is Rs.2 million for medical research that has been conducted on behalf of a client

(4 marks)

b)In the current accounting period, Delt Phama has spent Rs.3 million sending its staff on specialist training courses. Whilst these courses have been expensive, they have led to a marked improvement in production quality and staff now need less supervision. This in turn has led to an increase in revenue and cost reductions. The directors of Delt Phama believe these benefits will continue for at least three years and wish to treat the training costs as an asset.

(3 marks)

In c) On December 2014, Delt Phama paid Rs.5 million for a television advertising campaign for its products that will run for 6 months from 1 January 2015 to 30 June 2015. The directors believe that increased sales as a result of the publicity will continue for two years from the start of the advertisements.

(3 marks)

(2) ABC & Co., is installing a new plant at its production facility. It has incurred following costs:

-Cost of the plant Rs. 250,000.

-Initial delivery and handling cost Rs. 20,000.

-Cost of site preparation Rs. 60,000.

-Consultants used to advice on the acquisition Rs. 70,000.

-Interest charges paid to supplier for deferred credit Rs. 20,000.

-Estimated dismantling cost to be incurred after 7 years (in Present Value terms)

Rs. 30,000.

-Operating losses before commercial production Rs. 40,000.

Find out the costs to be capitalized as per LKAS-16- Property Plant and Equipment?

(4 marks)

(C3)A retail entity supplies products to the public on three year deferred payment terms. On 1st January 2013 the entity supplies a product for a total price of Rs.13,310, payable on 1st January 2016. The credit rating of the customer is such that a relevant imputed annual rate of interest is 10%. The entity’s year end is 31 December.
You are required to calculate,
(a)the rRevenue from the sale of goods on 1st January 2013

(b)Interest revenue of the transaction and the distribution of interest income over three years

Discounting Factors (DF) at the rate f 10%

Year123

DF@10%0.910.830.75

(6 marks)

(Total 20 marks)

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