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30-07-2018

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QUESTION 1

AdannaGhany is the founder and manager of Ceramics Unlimited. Adanna has approached the local bank for a loan to expand her business. As part of the loan application, Adanna was asked to prepare Financial Statements for the business. She prepared the following balance sheet and income statement based on the first month of operations (see below).

 

Ceramics Unlimited

BALANCE SHEET

November 30, 2016

 Cash

$ 1,400

 

Equity

$ 1,400

 

$ 1,400

 

 

$ 1,400

 

 

Ceramics Unlimited

 

INCOME STATEMENT

For the Month Ended, November 30, 2016

Sales

 

$4,400

Rent

$300

 

Kiln

4,500

4,800

Net Income

 

($400)

 

 

Adanna stated that she was not pleased with the first month’s results. But she believes she will show a greater profit next month as she will not have large expenses for items such as purchasing a new Kiln (Oven).

In discussions with Adanna and by reviewing the accounting records of Ceramics Unlimited, you discover the following facts

  1.  
  2. Adanna opened Ceramics Unlimited (a ceramic studio) on November 1st 2016 in leased office space, paying the first month's rent of $300 and a $1,000 security deposit with a check on her personal account.
    1. Ceramics Unlimited sells ceramic pieces as well as offers training courses that teach participants how to make their own ceramics pieces.
  3. Adanna had been making ceramic pieces as a hobby. She took molds and tools, worth about $7,500, from her home in order to start the studio.
  4. Adanna also bought a new firing kiln (oven) to start the business. The new kiln had a list price of $5,000. Adanna wrote a check on her personal checking account.
    1. The first customer of Ceramics Unlimited’s paid a total of $1,400 to attend classes for two months. Adanna opened a checking account in the company's name with the $1,400.
  5. Ceramics Unlimited has conducted classes for one month and has sold some ceramic pieces for $3,000 cash. Cost incurred in making the ceramic pieces was $1,000. Adanna paid these cost with her personal credit card.

 

As the person to decide whether or not to grant Adanna the requested loan. You have to decide if Adanna prepared the financial statements of Ceramics Unlimited correctly. You need to determine if she violated any accepted accounting principles, assumptions or concepts.

a. Either justify Adanna’s treatment of each event and her preparation of the financial statements based on your understanding of the generally accepted accounting principles

or

b. Identify the generally accepted accounting principles, assumptions or concepts that were violated.

i.  Explain how each event should have been handled in accordance with the generally accepted accounting principles.

ii. Prepare a corrected Classified balance sheet and income statement based on your understanding of the generally accepted accounting principles.

 

 

QUESTION 2

AJ Ventures Ltd is a company engaged in the manufacture of water bottles which are bought mainly for sporting activities. Present sales are direct to retailers, but in recent years there has been a steady decline in output because of increasing foreign competition. In the last business year (2016) the company produced its lowest profit in ten (10) years. The forecast for 2017 indicates that the present deterioration in profits is likely to continue.

The company considers that a profit of $80,000 should be achieved to provide an adequate return on capital. The managing director has asked that a review be made of the present pricing and marketing policies. The marketing director has completed this review, and passes the proposals on to you for evaluation and recommendation, together with the Income statement for the year ending December 31, 2016 (see below).

 

AJ Ventures limited

INCOME STATEMENT

For the Year Ending, December 31, 2016

Sales Revenue (100,000 Bottles at $10)

 

 

$1,000,000

Cost of goods sold

 

 

 

Direct Materials

$100,000

 

 

Direct Labour

350,000

 

 

Variable Manufacturing overheads

60,000

 

 

Fixed Manufacturing overheads

220,000

 

 

 

 

$730,000

 

Administrative Overhead

 

140,000

 

Selling and Distribution Overhead

 

 

 

Sales commission (2% of sales)

20,000

 

 

Delivery cost (variable per unit sold)

50,000

 

 

Fixed costs

40,000

 

 

 

 

110,000

 

 

 

 

$980,000

Income

 

 

$20,000

  The information to be submitted to the managing director includes the following three proposals:

(i) To proceed on the basis of analyses of market research studies that indicate that the demand for the bottles is such that a 10% reduction in selling price would increase demand by 40 %.

(ii) To proceed with an enquiry that the marketing director has had from a mail order company about the possibility of purchasing 50,000 bottles annually if the selling price is right. The mail order company would transport the bottles from AJ ventures to its own warehouse, and no sales commission would be paid on these sales by AJ ventures. However, if an acceptable price can be negotiated, AJ ventures would be expected to contribute $60,000 per annum towards the cost of producing the mail order catalogue. It would also be necessary for AJ ventures to provide special additional packaging at a cost of $0.50 per bottle. The marketing director considers that in 2016 the sales from existing business would remain unchanged at 100,000 bottles, based on a selling price of $10 if the mail order contract is undertaken.

(iii) To proceed on the basis of a view held by the marketing director that a 10% price reduction, together with a national advertising campaign costing $30,000, may increase sales to the maximum capacity of 160,000 bottles.

Required

a. The calculation of break-even sales value based on the 2016 results.

b. A financial evaluation of proposal (i)

c. A calculation (under proposal (i)) of the number of bottles AJ ventures would need to sell at $9 each to earn the target profit of $80.000.

d. A calculation of the minimum prices that would have to be quoted to the mail order company to

          I.    ensure that AJ ventures would at least break even on the mail order contract

         II.    ensure that the same overall profit is earned as in proposal (i) from the mail order contract.

       III.    Ensure that the overall target profit is earned, from the mail order contract.

e. A financial evaluation of proposal

Product code: Accounts-A267

Download Questions

Q1 (a) Or (b) 1.Adanna opened Ceramics Unlimited (a ceramic studio) on November 1st 2016 in leased office space, paying the first month's rent of $300 and a $1,000 security deposit with a check on her personal account.-

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