BUS101 Accounting Fundamentals Take-home Exam Solution, Semester 1

This document presents a comprehensive solution to the BUS101 Accounting Fundamentals take-home exam. The solution addresses various aspects of accounting, including inventory valuation methods like LIFO and FIFO, explaining their impact on costs, profits, and inventory valuation. It also covers financial analysis techniques such as the Du Pont analysis, detailing its components and usefulness in comparing firm performance. Furthermore, the solution explores the concept of asset-light strategies, discussing their implications for businesses like Hyatt. It also addresses depreciation rules for small businesses, and provides a detailed analysis of a business's financial performance, including profitability, liquidity, and operational efficiency, identifying areas for improvement and strategic recommendations. The document provides a complete analysis of the case study including the profitability of the business, financial position, and recommendations for improvement.

Running head: ACCOUNTING FUNDAMENTALS
Accounting Fundamentals
Name of the Student
Name of the University
Author Note

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Table of Contents
Answer to Question 1...................................................................................................................2
Answer to Question 2...................................................................................................................2
Answer to Question 3...................................................................................................................3
Answer to Question 4...................................................................................................................3
Part B............................................................................................................................................4

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Answer to Question 1
Fruits
5 $18 Revenue $90
LIFO FIFO
$4 $4
$4 $4
$8 $8
$8 $8
Profit $10 $50
In the above example, if the cost of goods sold was calculated on the basis of LIFO, then
the costs incurred by the company would be valued at $80 and the profits earned by the entity
would be lower at $10. However, the value of the inventory would be much higher at $8 per unit.
This means that the final goods would be valued at $80 in case there are 10 units with the
business. If the company uses FIFO method of valuation, the profits earned by it would be higher
at $50. However, the ending valuation of inventory would be much lower at $40 for 10 units
available with it. Hence, any profits which are earned by the entity would be off-set by the
change in the valuation of the ending inventory. Hence, constant switching between FIFO and
LIFO as methods of costing does not provide any additional benefits to the business. It is an
unnecessary burden to the business.
Answer to Question 2
The Du Pont analysis is a framework which analyses the underlying financial
performance of an entity popularised by the DuPont Corporation. Various aspects which are
included as a part of the calculation of a firm’s performance include Net Profit Margin, Asset
Turnover and Equity Multiplier. It takes into account all aspects of a business such as
profitability, efficiency and risk faced by the business. The equity multiplier is calculated with

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the help of the formula average total assets divided by average shareholder’s equity. It is also
known as the business risk. The main information provided by the analysis is the components
which are making the most significant contribution to the profits earned by the entity. It is useful
in comparing the operational efficiency of two firms which are similar in nature. Investors use
this analysis to identify which is the better managed company among two and is a more viable
option as an investment.
Answer to Question 3
It refers to the strategy where the company has relatively few capital assets. It is the
business strategy workout to efficiency by focussing equity investment on areas where an
organisation expertise achieves the best return for the investors. Hyatt is adopting asset light
strategy to have large cashflow that can be used in other investments such as technology, product
development and customer loyalty. It will make easier for hyatt to acquire other hotel companies.
This strategy allows hotel chains to concentrate on business of hotel management. Other issues
in this case include the large amounts of depreciation and reduction in the value of the capital
assets. The capital expenditure incurred is very high. Holding on to an asset like land subjects the
business to the market risk which may be faced due to the reduction in the prices. Hence, the
dependence on external factors increases the risk faced by the business.
Answer to Question 4
If a business comes under the definition of a small business entity with an aggregated
turnover of $10 million, then the benefits of accelerated depreciation are available to the business
if they use the simplified depreciation rules. In that case, the business is eligible to charge a
depreciation of 57.5% on the business portion of a new depreciating asset rather than 15% of the
asset. If a business purchases a new asset and uses it or installs it on or after 12 March until 30

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June 2021, then the business is eligible for claiming an increased rate of depreciation on the
assets. This would result in a decrease in the profits earned by the businesses while making more
funds available with them for reinvestment. Hence, as more investment is encouraged by the
government, this encourages the businesses to make more investments and ultimately results in
positively impacting their profits in the long run.
Part B
1. a) The profitability of the business has gone down significantly from 2015 to 2017. This
is because of the significant increase in the operating expenditure of the business
combined with a disproportionate increase in the sales made by it. While sales have only
gone up by 82%, the total operating expenses have gone up almost by 172%. The wages
and marketing expenses involved in the business have also increased. This means that the
business has not been able to create a sustained market for itself to take advantage of the
expansion made by it. The interest payments suggest that more debt is being used which
is extremely risky for the business. Default in payments could lead to bankruptcy of the
business. The increased maintenance and repairs by the business are also a sign of
inefficiency in operations. Hence, it is clear that the business has not grown in an
efficient manner and has not been able to handle the expansion of the business in an
efficient manner.
b) It cannot be said that Fantastic Hotels is in a strong financial position for a hotel business.
This is because it does not have sufficient current assets which can be used as a part of the
business. This results in a reduced liquidity of the business which makes meeting the short
term obligations of the business difficult. Having too much of value invested in long term
assets reduces the operational flexibility which is required for a hotel. The average

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occupancy per room and the revenue generated per room have also come down significantly
for the business. The business cannot sustain for a long time in the current manner as it needs
to generate more returns on the assets used by it. Otherwise, there is a possibility of the
business shutting down if it carries on in the manner in which it is continuing in the present
day.
c) The business needs to improve its overall room occupancy to ensure that it generates more
revenues as a part of the operations. More investment needs to be made in the current assets
to make the business operationally flexible and carry on operations in a successful manner.
The marketing expenditure incurred by the business is significantly high and needs to be
reduced in the future. This suggests a growth in the market share and popularity of the
business. The employees hired by the business are being extremely high amount of wages but
the results are not evident. Hence, the business can reduce some of the workforce and use the
funds in acquiring more current assets. The maintenance and repairs can be reduced by
investing more in quality assets which can be used by the business for a longer period of
time.