King’s College London

MSc International Management

7SSMM102 Accounting and Finance

Mock paper 1

Instructions to candidates:
• Answer two out of three questions in Section A.
• Answer the question in Section B.
• If more than two questions are answered in Section A, only the first two
questions answered will be marked.
• Please number the questions answered in the booklet provided.
• Please provide your detailed working for numerical questions.
• The financial ratios and present value table are provided at the end of the
paper.

© King’s College London

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Section A
Answer two questions (and all their parts) from this section.

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Question 1

Milton Ltd makes a product for which the standard selling price and costs per unit
of product are:
£
Sales price 31
Direct labour (2hrs at £5.5/hr) 11
Direct materials (1kg at £10/kg) 10
Fixed overhead 3
Standard profit 7

The budgeted output for September was 1,000 units and the actual output was 1,100
units which sold for £34,950. No stocks were left at the end of the month.
The actual production costs were:
£
Direct labour (2,150 hrs) 12,210
Direct materials (1,170 kg) 11,630
Fixed overheads 3,200

Required:
a. Prepare the original budget and a budget flexed to the actual volume.

(2 marks)

b. Calculate the following variances:

• Sales price and volume variances

• Material price and usage variances

• Labour rate and efficiency variances

• Fixed overhead variance

You should state clearly whether a variance is favourable (F) or adverse (A).

(14 marks)

c. Comment on the performance of Milton Ltd for the month of September

referring to the budgets prepared in part (a) and the variances calculated in
part (b). In your answer, ensure to suggest possible explanations for the
variances you have calculated.
(14 marks)
(Total 30 marks)
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Question 2

Ripley Ltd manufactures and sells a single product which has the following cost and
selling structure:
£/unit
Selling price 25
Direct labour 5
Direct materials 4
Variable overheads 1

The direct costs are considered to be variable.

The fixed overheads are £300,000.
The forecast sales/output are 30,000 units and the maximum output of product is
40,000 units.
Required:
a. Calculate the contribution margin ratio. (1 marks)
b. Calculate the break-even point in units and sales revenue. (2 marks)
c. Calculate the margin of safety in units and as a percentage at the forecast
output. (2 marks)
d. Calculate the required number of units of output to achieve a profit of
£100,000 (show your answer to the nearest whole number). (2 marks)
e. Calculate the profit at the forecast output. (2 marks)
f. One of the managers has suggested that if the selling price were reduced to
£19 per unit, then the sales would increase to the maximum amount and a
cheaper material could be used costing 25% less than the original material
cost. For this new strategy, calculate:
• the new break-even point in units,
• the new margin of safety in units,
• the new forecast profit.
Explain briefly if you would recommend the manager’s suggestion to be
implemented? (5 marks)
g. As an alternative to the strategy discussed in (f) above an overseas customer
operating in a different market has approached Ripley Ltd and offered to
purchase the extra 10,000 units available above the forecast sales of 30,000
units for £150,000. The overseas customer intends to sell these units onto
customers in their home market. Specify whether Ripley Ltd should accept

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this offer on a purely financial basis. Furthermore, identify some other factors
that the business needs to consider before accept or reject this offer.
(7 marks)
h. Discuss the weakness of break-even analysis. (9 marks)
(Total 30 marks)

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Question 3

Discuss the main steps in the budget setting process.

(Total 30 marks)

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Section B
Answer question 4. This question is compulsory.

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Question 4

a. The following is the statement of financial position of May Day Company as at 31

December 20X7:

Statement of financial position as at 31 December 20X7

£
Assets
Non-current assets
Machinery 50,600
Current assets
Inventories 24,400
Trade receivables 42,600
Prepaid expenses (rates) 800
Cash 16,600
84,400
Total assets 135,000

Equity and liabilities

Equity 97,800
Current liabilities
Trade payables 33,800
Accrued expenses (wages) 3,400
37,200
Total equity and liabilities 135,000

During 20X8, the following transactions took place:

• The owners withdrew equity in the form of cash of £46,000.

• Premises were rented at an annual rental of £40,000. During the year, rent of
£50,000 was paid to the owner of the premises.
• Rates on the premises were paid during the year for the period 1 April 20X8
to 31 March 20X9 and amounted to £4,000.
• Some machinery (a non-current asset), which was bought on 1 January 20X7
for £26,000, has proved to be unsatisfactory. It was part-exchanged for some
new machinery on 1 January 20X8 and May Day Company paid a cash amount
of £12,000. The new machinery would have cost £30,000 had the business
bought it without the trade-in.
• Wages totalling £47,600 were paid during the year. At the end of the year,
the business owed £1,720 of wages.
• Electricity bills for the four quarter of the year were paid, totalling £5,400.
• Inventories totalling £286,000 were bought on credit.

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• Inventories totalling £24,000 were bought on cash.
• Sales revenue on credit totalled £422,000 (cost of goods sold £254,000).
• Cash sales revenue totalled £84,000 (cost of goods sold £50,000)
• Receipts from trade receivables totalled £396,000
• Payments to trade payables totalled £312,000
• Van running expenses paid totalled £35,000

The business uses the reducing-balance method of depreciation for non-current

assets at the rate of 30 per cent each year.

Required:

Prepare an income statement for the year ended 31 December 20X8 and a
statement of financial position as at that date. (20 marks)

b. Explain the matching convention. (10 marks)

c. “Improvements in managing working capital can release significant amounts
of funds for a business and are considered important sources of short-term
finance”.

Critically discuss the above statement. (10 marks)

(Total 40 marks)

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Financial Ratios
Operating profit
Return on capital employed = x 100
Share capital + Reserves + Non-current liabilities
Gross profit
Gross profit margin = Sales revenue x 100
Operating profit
Operating profit margin = x 100
Sales revenue
Average inventories held
Average inventories turnover period = x 365
Cost of sales
Average trade receivables
Average settlement period for trade receivables = x 365
Credit sales revenue
Average trade payables
Average settlement period for trade payables = x 365
Credit purchases
Sales revenue
Sales revenue to capital employed ratio = Share capital + Reserves + Non-current liabilities
Current assets
Current ratio = Current liabilities
Current assets excluding inventories
Acid-test (quick) ratio = Current liabilities
non-current liabilities
Gearing ratio = x 100
Share capital + Reserves + non-current liabilities
Operating profit
Interest cover ratio = Interest payable
Dividends announced for the year
Dividend payout ratio = x 100
Earnings for the year available for dividends
Earnings for the year available for dividends
Dividend cover ratio = Dividends announced for the year
Dividend per share
Dividend yield ratio = x 100
Market value per share
Earnings available to ordinary shareholders
Earnings per share = Number of ordinary shares in issue

Market value per share

Price/Earnings ratio = Earnings per share

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Present Value Table

Present value of £1, that is, 1/(1+r)n

where r = discount rate
n = number of periods until payment

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