Accounting for Business Exam: Financial Analysis and Budgeting

This document presents a comprehensive solution to an accounting for business exam, covering key areas of financial accounting and management accounting. Section A focuses on the preparation of financial statements, including the income statement and statement of financial position, with detailed calculations and adjustments for items such as depreciation, bad debts, and taxation. Section B delves into breakeven analysis, calculating breakeven points in units and revenue, analyzing sales volume for desired profitability, and examining the impact of increased fixed costs and labor costs on the breakeven point. The solution also outlines the key assumptions underlying breakeven analysis. Finally, the document discusses the benefits and limitations of budgeting, the role of budgets in controlling business performance, and the uses of the statement of cash flows in providing insights into a company's financial health and future financing needs. Desklib provides a platform for students to access similar solved assignments and past papers.

ACCOUNTING FOR
BUSINESS EXAM

Section A
Question: 1
(A) Income Statement
£000 £000
Sales 800
Less:
COGS
Op. Stock 50
Purchase 300
Closing stock (40) (310)
Gross profit 490
Less: Expenses
Rates and insurance 59 (60 – 2 + 1)
General expenses 27
Energy bill 26 (25 + 1)
Audit fee 20 (15 + 5)
Director remuneration 50
Bad debts 1
Debenture interest 4 (1 + 3)
Interest on bank loan 3
Salaries and wages 150
Depreciation on machinery 9.6 (100 – 20 = 80 * 12%)
Depreciation on fixtures and
fittings
50 (200 * 25%) (399.6)
Profit before tax 90.4
Less: provision for taxation (20)
Profit after tax 70.4
Less: dividends (60)

Interim ordinary dividend
paid
Final proposed (400 * 0.1)
20
40
Retained profit for the year 10.4
Retained profit brought
forward
50
Retained profit carry
forward
60.4
b) Statement of Financial Position as at 30th June 2020
Particulars Amount
ASSETS
Non – current Assets
Land and building 400
Machinery (cost less accumulated
Depriciation) (100 – 20 – 9.6)
70.4
Fixtures and fittings (cost less accumulated
Depriciation) (200 – 45 – 50)
105
Current assets
Inventory 40
Receivables 86
Prepaid insurance 2
Bank 9
Cash 3
TOTAL 715.4
£1 Ordinary share capital 400
Reserves
Share premium 20
Retained profits 60.4
Shareholder’s fund 480.4
Non-current liabilities
10% debentures 40
5% bank loan 60
Current liabilities
Payables 65
Accruals (1 + 5 + 1 + 3) 10
Provision for taxation 20
Dividend proposed 40
TOTAL 715.4

SECTION B
Question: 2
a)
Breakeven sales in units = Fixed costs / Contribution margin per unit
Contribution margin per unit = 12.15 – (4.1 + 2.6 + 1.05) = 4.4
Fixed costs = 112420
Breakeven sales = 112420 / 4.4 = 25550 units.
Breakeven in revenue = 25550 * 12.15 = £310432.5.
b)
Sales 45000 * 12.15 = 546750
Less: variable costs 45000 * 7.75 = 348750
Contribution margin 198000
Less: fixed costs 112420
Profit 85580
c) Sales volume at desired profitability of 61380 = desired profit + fixed costs / contribution
margin per unit = 61380 + 112420 / 4.4 = 39500.
Margin of safety = required sales level – breakeven sales = 39500 – 25550 = 13950 units.
d)
110% of incremental fixed costs = 110% * 112420 = 123662
110% of labour cost = 110% * 2.6 = 2.86
New contribution margin = 12.15 – (4.1 + 2.86 + 1.05) = 12.15 – 8.01 = 4.14
New breakeven point = Increased fixed costs / new contribution margin per unit = 123662 / 4.14
= 29870 units.
e) Five assumptions of breakeven analysis
 Overall costs can be categorized into fixed and variable costs.
 Sales volume, fixed costs, variable cost per unit and contribution margin per unit are
expected to be remains the same.
 Whatever has been produced will be sold,
 Sales price of the product would remain the same.
 There will be constancy in efficiency of labor and technological advancement.

Question: 4
(a) Key benefits of budgeting area as follows:
 The biggest benefit of budgeting lies in controlling affairs of the business by enhancing
an ability of the management to carry out continuous improvements in the operations and
processes of the business by anticipating problems at earlier hand.
 It allows for achieving financial goals with greater efficiency and effectiveness as sound
financial decision making are being facilitated with the help of provision of sound
financial information through budgeting.
 Budgeting enhances and ensures greater focus on goals through improved vision of the
management as with the provision of useful managerial information results in greater
confidence among management of the business to make effective decisions.
 By enabling monitoring and controlling of business performance, budgeting allows for
meeting business objectives with greater ease.
(b) Limitations of budgets are as follows:
 Despite many of its benefits, there is a major limitation of budget that is, it gives
inaccurate figures many time due to negligence of management and incompatibility and
poor experience of management.
 Sometimes preparation of budgets takes much of the time where management are not
able to concentrate on their core activities and accordingly, it leads to time consuming
affair of the business. Also, there are too much expenditure attached to the preparation of
budgets due to hiring experts and professionals for the same.
c) budgets allows managers to create benchmarks and accordingly at the end of the period the
actual performances are compared with the budgeted one which enables managers to identify
deviations between the actual and budgeted one. In this way, corrective actions are takes at the
right time to avoid such negative deviations and accordingly, managers are able to establish
control over the business through budgets.
d) uses of statement of cash flows
 Provide information regarding the cash receipts and payments.
 Provide information about how much net change occurs in operating, financing and
investing activities of the business.
 Provides information of how much cash has gone out of the business and how much
came in the business during the period under consideration.
 It indicates the liquidity position of the business.
 It indicates an ability of the business to meet its obligations that is going to be due in
nearer period.
 It provides the financing needs of the business that may arise in future.