Detailed Solution for Accounting for Business Online Exam

This document presents a comprehensive solution to an online exam in Accounting for Business. It includes an income statement for the year ended 31st December 2020 and a statement of financial position as of the same date, detailing assets, liabilities, and equity. Furthermore, it covers capital budgeting techniques, including the calculation of payback period and Net Present Value (NPV) for three different machines, providing a recommendation based on the analysis. The solution also discusses other factors to consider in investment decisions, such as risk and liquidity. Finally, it addresses break-even point analysis, calculating break-even points in units and value, margin of safety, and also discusses the limitations of break-even analysis. Desklib offers this document along with a wealth of other resources for students.

Online exam - Accounting for
Business

TABLE OF CONTENTS
QUESTION 1...................................................................................................................................3
(a)................................................................................................................................................3
(b)................................................................................................................................................4
QUESTION 3...................................................................................................................................5
a. Calculating payback period.....................................................................................................5
b. Calculation of NPV.................................................................................................................6
c. Ranking of project...................................................................................................................7
d. Recommending one machine to company..............................................................................7
e. Five other factors which require consideration.......................................................................8
QUESTION 4...................................................................................................................................8
(a)................................................................................................................................................8
(b)................................................................................................................................................9
(c)................................................................................................................................................9
(d)................................................................................................................................................9
e. Limitation of BEP analysis...................................................................................................10
REFERENCES..............................................................................................................................11

SECTION A
QUESTION 1
(a)
Income Statement for the year ended 31st December 2020
Particulars Details £ Amount £
Sales Revenue 234000
Less Cost of Sales
Opening Inventory 25000
Add Purchases 167000
Less Closing inventory 28000
Total cost of sales 164000
Gross Profit 70000
Less Operating expenses
Directors’ fees 14000
Insurance (1000-200) 800
Salaries 24000
Rent and rates (5300-300) 5000
Bad debts 2000
General expenses (5000+100) 5100
Depreciation on machinery
(34000*10%) 3400
Depreciation on vehicles (16000-
6000)*20% 2000
Total operating cost 56300
Net profit before interest and tax 13700
Less Debenture interest (700+200) 900
Net profit before tax 12800
Less Corporate tax 4000
Net profit for the year 8800

(b)
Statement of Financial Position as at 31st December 2020
Particulars Cost
Accumulated
depreciation Net Book value
ASSETS
Non-current assets
Machinery 34000 19400 14600
Vehicles 16000 8000 8000
Current assets
Receivables 35000 35000
Bank 12000 12000
Inventory 28000 28000
Prepaid insurance 200 200
Prepaid rates 300 300
Cash 1000
Total assets 99100
Current liabilities
Payables 18000 18000
General expense
payables 100 100
Tax payable 4000 4000
Debenture interest
payable 200 200
Non-current liability
10% Debenture 9000 9000
Net assets 67800

Equity
£1 Ordinary share 60000
Retained profit 2000
Add profit for year 8800
Less interim dividend 3000
Closing retained profit 7800
Total equity 67800
SECTION B
QUESTION 3
a. Calculating payback period
Computation of Payback period
Year Cash inflows Cumulative cash inflows
1 16 16
2 14 30
3 12 42
4 10 52
5 8 60
Initial investment 44
Payback period 3
0.2
Payback period 3 year and 2 month
Computation of Payback period for Machine B
Year Cash inflows Cumulative cash inflows
1 8 8
2 10 18
3 12 30
4 14 44
5 16 60
Initial investment 40

Payback period 3
0.7
Payback period 3 year and 7 month
Computation of Payback period for Machine C
Year Cash inflows Cumulative cash inflows
1 12 12
2 12 24
3 12 36
4 12 48
5 12 60
Initial investment 44
Payback period 3
0.7
Payback period 3 year and 7 month
b. Calculation of NPV
Computation of NPV Machine A
Year Cash inflows PV factor @ 10 %
Discounted
cash inflows
1 16 0.909 14.55
2 14 0.826 11.57
3 12 0.751 9.02
4 10 0.683 6.83
5 8 0.621 4.97
Total discounted cash inflow 47
Initial investment 44
NPV (Total discounted cash
inflows - initial investment) 3
Computation of NPV Machine B
Year Cash inflows
PV factor
@ 10 %
Discounted cash
inflows

1 8 0.909 7.27
2 10 0.826 8.26
3 12 0.751 9.02
4 14 0.683 9.56
5 16 0.621 9.93
Total discounted cash inflow 44
Initial investment 40
NPV (Total discounted cash inflows -
initial investment) 4
Computation of NPV Machine C
Year Cash inflows
PV factor
@ 10 %
Discounted cash
inflows
1 12 0.909 10.91
2 12 0.826 9.92
3 12 0.751 9.02
4 12 0.683 8.20
5 12 0.621 7.45
Total discounted cash inflow 45
Initial investment 44
NPV (Total discounted cash inflows -
initial investment) 1
c. Ranking of project
Machine A Machine B Machine C
NPV Rank 2 (3) Rank 1 (4) Rank 3 (1)
IRR Rank 1 (13%) Rank 1(13%) Rank 2 (11%)
PAYBACK PERIOD METHOD Rank 1 (3.2) Rank 2 (3.7) Rank 2 (3.7)
d. Recommending one machine to company
By evaluating the NPV and payback period calculation it is clear that the company must
go with machine B. The reason behind the selection of machine B is that the company wants the
payback period of 3 and half years. This simply implies that the machine A is having 3.2 years
which is low as required by the company. Along with this NPV of the machine B is highest in
comparison to other machines. Moreover in addition to this, the internal rate of return is also

high for the project B. Thus it is advisable to the company that it must go with the option of
machine B for the investment. Another point for recommending the machine B as the investment
option is that the initial investment is also low in comparison to the other two machines. Thus
this is more beneficial for the company as they will get more returns in less investment only.
e. Five other factors which require consideration
There are other different factors as well before finalising the decision relating to investment the
following-
 The first factor is the risk associated with the investment. The risk to capability of the
company also affects the decision relating to the investment.
 In addition to this another factor to be considered is the liquidity of the investment option
(Manes-Rossi and et.al., 2018). This is necessary because in case assets will not be liquid
then it is not good for company to invest as they are not easily convertible in cash.
 In addition to this political changes taking place in external environment also affect the
decision relating to the investment.
 Another factor to be considered while taking the decision of investment is the industry
standards and the practice which is being currently followed.
 Along with this another requirement or factor to be considered is the current and future laws
and rules relating to the investment if any prescribed by the government.
QUESTION 4
(a)
Particulars Details £ Amount £
Sales revenue 120000*170 20400000
Less Variable cost 120000*110 13200000
Contribution 7200000
Less Fixed cost 3500000
Net Profit 3700000
(b)
Breakeven point calculation:
In units = Fixed cost / (sales price per unit – Variable cost per unit)

= 3500000 / (170 – 110)
= 3500000 / 60 = 58333.33
In value = Fixed cost / contribution margin
= 3500000 / 35.29% = £9917824
Contribution margin = contribution / net sales * 100
= 7200000 / 20400000 * 100 = 35.29%
Margin of Safety calculation
= Current level sales – break-even sales / Current level sales * 100
= 20400000 – 9917824 / 20400000 * 100
= 51.38%
(c)
Particulars Details £ Amount £
Sales revenue 101500*185 18777500
Less Variable cost 101500*110 11165000
Contribution 7612500
Less Fixed cost 3500000
Net Profit 4112500
(d)
Particulars Details £ Amount £
Sales revenue 125000*180 22500000
Less Variable cost 125000*122 15250000
Contribution 7250000
Less Fixed cost 3500000 + 85000 3585000
Net Profit 3665000
Breakeven point calculation:
In units = Fixed cost / (sales price per unit – Variable cost per unit)
3585000 / (180-122)

= 61810.34
In value = Fixed cost / contribution margin
= 3585000 / 32.22%
= 11126629
Contribution margin = 32.22%
Margin of Safety
= Current level sales – break-even sales / Current level sales * 100
22500000 – 11126629 / 22500000 * 100
= 50.54%
e. Limitation of BEP analysis
There are many different limitations pertaining to BEP analysis which are discussed as
follows-
 The first and foremost limitation of break even analysis is that it does not predict the
demand (Sintha, 2020). It outlines the minimum level of production for which company will
be at no profit no loss situation but it does not predict the future demand.
 Along with this another limitation of BEP is that it ignores the competition. The competitor
is a major factor affecting the business production and just analysis does not include the
competitors.

REFERENCES
Books and Journals
Sintha, L., 2020. Importance of Break-Even Analysis for the Micro, Small and Medium
Enterprises. International Journal of Research-Granthaalayah. 8(6).
Manes-Rossi, F., and et.al., 2018. Ensuring more sustainable reporting in Europe using non-
financial disclosure—De facto and de jure evidence. Sustainability. 10(4). p.1162.
Online
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