ACC00724 Financial Statements For Management Of Morgan Ltd Assessment 2 Answer

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Question :

Accounting for Managers (ACC00724) S2, 2019

You should show all your calculations and word limit for the descriptive questions should not be more than 500 words.

Assessment 2 (20 Marks)

QUESTION 1 (10 Marks)

The following financial statements were prepared for the management of Morgan Ltd. The statements contain some information that will be disclosed in note form in the general purpose external financial statements to be issued to the investors.

Morgan Ltd

Income Statement

For the year ended 30 June 2018

Revenues (Note 2)$850,500

Expenses, excluding finance costs (Note 4)  686,700

Finance costs      6,300


Profit before income tax  157,500

Income tax expense    63,000

Profit $ 94,500

Morgan Ltd

Statement of Financial Position

As at 30 June 2018

Current assets

Cash and cash equivalents$ 37,800

Accounts receivables$299,250

  Less: Allowance for doubtful debts    18,900


Inventories 252,000

Total current assets 570,150

Non-current assets

Land 63,000


  Less: Accumulated Depreciation     37,800


Store equipment 47,250

  Less: Accumulated Depreciation 22,050

_________ 25,200

Total Non-current assets 239,400

Total assets 809,550

Current liabilities

Accounts payables 270,900

Preference dividends payable    3,780

Ordinary dividends payable  25,200

Other current liabilities  12,600

 Total current liabilities 312,480

Non-current liabilities

Long-term borrowings (Note 5)63,000

Total Non-current liabilities 63,000

Total liabilities 375,480

Net assets 434,070


Share capital$315,000

Retained earnings  119,070

Total equity 434,070

Morgan Ltd

Statement of Changes in Equity

For the year ended 30 June 2018

Share capital


Balance at start of period$252,000

Balance at end of period  252,000

Preference (Note 6):

Balance at start of period   63,000

Balance at end of period   63,000

Total share capital$315,000

Retained earnings

Balance at start of period  $53,550

Total profit for the period    94,500

Dividends – preferences    (3,780)

Dividends – ordinary  (25,200)
Balance at end of period$119,070

Notes to the financial statements

Note 2: Revenue

Sales $850,500

Note 4: Expenses

Cost of sales567,000

Selling and distribution expenses  89,000

Administration expenses  30,700

Note 5: Long-term borrowings

10% mortgage payable 63,000

Note 6: Preference shares

6% preference shares 63,000

Additional information:

The balance of certain accounts at the beginning of the year are:

Accounts receivables$315,000

Allowance for doubtful debts (26,350)

Inventories 220,500

Total assets and total equity at the beginning of the year were $756,000 and $368,550 respectfully.


  1. Name the ratios that a financial analyst might calculate to give some indication of the following cases: (2 Marks)
  2. A company’s earning power
  3. The extent to which internal resources have been used to finance acquisition of assets
  4. Rapidity with which accounts receivables are collected
  5. The ability of the entity’s earnings to cover its interest commitments
  6. The length of time taken by the business to sell its inventories
  7. Calculate and briefly discuss the suitability of the ratios mentioned for each of the above cases. (6 Marks)
  8. Given the above financial statements, comment on the company’s profitability and liquidity. (2 Marks)

QUESTION 2 (5 Marks)

Koala Bear Day-care provides day-care for children from Mondays through Fridays. Its monthly variable costs per child are:

Lunch $100

Educational supplies 75

Other supplies (paper products, toiletries, etc.)25

Total $200

Monthly fixed costs consist of:

Rent $2,000

Utilities (electricity, water, telephone expenses)300

Insurance 300

Salaries 2,500

Miscellaneous 500


Koala Bear charges each parent $600 per child.


  1. Calculate the break-even point. (1 Marks)
  2. Koala Bear’s target profit is $10,400 per month, calculate the number of children who must be enrolled to achieve the target profit (1 Marks)
  3. Koala Bear lost its lease and had to move to another building. Monthly rent for the new building is $3,000. At the suggestion of parents, Koala Bear plans to take children on field trips. Monthly costs of the field trips are $1,000. By how much should Koala Bear increase fees per child to meet the target profit of $10,400, assuming the same number of children as in requirement B? (1 Marks)
  4. How can a company with multiple products calculate its break-even point? Discuss and support your discussion by readings and research. (2 Marks)

QUESTION 3 (5 Marks)

Lennox Company uses a job costing system. The company uses predetermined overhead rates in applying manufacturing overhead costs to individual jobs. The predetermined overhead rate in Department A is based on machine-hours, and the rate in Department B is based on direct labour cost. At the beginning of 2018, the company’s management has made the following estimates for the year:

Department A Department B

Direct labour-hours 15,00030,000

Machine-hours 50,00012,000

Direct labour cost$80,000$172,000

Manufacturing overhead 162,500  215,000

Job 145 was initiated into production on August 1 and completed on September 15. The company’s cost records show the following information on the job:

Department A Department B

Direct labour-hours 2240

Machine-hours 8020

Direct material used$450$250

Direct labour cost 120180


  1. Calculate the predetermined overhead rates that should be used during 2014 in Department A and B. (1 Marks)
  2. Calculate the total overhead cost applied to job 145. (1 Marks)
  3. What would be the total cost of job 145? If the job contained 10 units, what would be the cost per unit? (1 Marks)
  4. What factors should be considered in selecting a base to be used in calculating the overhead absorption or recovery rates? Discuss. Your discussion should be supported by readings and research. (2 Marks)
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