Financial Accounting Exam Sample

Examination Duration: 120 minutes

Reading Time: 10 minutes

Exam Sheet Instructions to Students:

  • Answer all questions using the writing book and the Multiple Choice Answer
  • Sheet provided.
  • This sample exam is intended to be an indication of the content of the main and final exams. It is not intended to be a complete indication of the content of the supplementary exam, as this exam also assesses all course content

Question 1

Go Stop Limited is preparing its budget for the quarter beginning 1 January 2013. The bank balance at 1 January is expected to be $10,000,000.

The directors have the policy to purchase just enough to cover that month’s expected sales. Purchases are to be paid for by the end of the following month. Sales are on credit as follows:


Current month 60%
month before 30%
2 months before 10%
 Total 100%

Budgeted Sales are:

$,000 $,000 $,000 $,000 $,000
November December January February March
46,800 48,000 50,000 52,000 56,000

The firm’s gross profit margin is 30%. The following fixed monthly expenses are all paid on cash terms ($, 000):

Wages 15,000
Rent 6,000
Rates 3,000
Insurance 1,500

An expensive piece of equipment was paid for in February, costing $1,200,000


  1. Prepare the company’s cash budget for the three months beginning 1 January showing the balance at the end of each month. Show workings. Use the proforma cash budget sheet that follows
  2. Advise the management on the forecast cash position
  3. Advise management of the importance of Cash Management

Answer Sheet:

Go Stop Limited

January February March Total
$,000 $,000 $,000 $,000
Total Cash receipts
Total cash payments
Net cash flows
Opening Bank Balance
Closing Bank Balance

Question 2

Given below is a table that sets out the annual budgeted income statement for a large clothing retailer, together with actual performance figures. The retailer has several stores located all over Australia and New Zealand. Sales are made directly over the counter and also by mail delivery

Income statement for year ended 30 June
Budgeted $,000 Actual $,000
Sales 4,200,000 5,000,000
Cost of sales 3,640,000 3,430,000
Marketing 12,000 40,000
Distribution costs 10,000 23,000
Administration costs 213,000 316,000
Interest expense 104,000 110,000
Abnormal expense 0 25,000
Net profit 221,000 1,056,000


  1. Calculate the variances for each item and state whether they are Favourable (FAV) or Adverse (ADV)
  2. Comment on each variance in light of the information given about the company and suggest further investigation that will be necessary to better ascertain the cause of these variances
  3. Comment on the company’s overall performance during the year and discuss the key areas that the business should be considering

Question 3 James Wilson, process engineer, had been given the task of redesigning an existing process to improve environmental performance. He knew that the acceptance of a more environmentally efficient process would depend on its economic feasibility. The process design required new equipment and an infusion of working capital. The equipment would cost $450,000 and its cash operating expenses would total $90,000 per year.

The equipment would last for seven years but would need a major overhaul costing $45,000 at the end of the fifth year. At the end of 7 years, the equipment could be sold for $30,000. The annual depreciation for this equipment using the straight-line method would be $60,000. An increase in working capital (Current Assets – Current Liabilities) totaling $45,000 would also be required at the beginning. This would be recovered at the end of seven years. On the benefit side, James estimated that the new process would save $202,500 per year in environmental costs by eliminating fines and clean-up costs.

The cost of capital is 10%.


  1. Prepare a schedule of relevant net cash flows for the proposed project.
  2. Calculate the NPV of the project.
  3. Should the new process design be accepted?
  4. What factors should James consider other than environmental ones when deciding whether to go ahead with this project?

Question 4 Sailaway Limited is a small yacht builder. It has operated successfully for many years from a factory that allows for the production of 40 yachts per year. In most years the company can sell all the yachts it can produce. The selling price of each yacht is $12 600.

Variable labor and materials costs are $7 750 per yacht, and the fixed costs associated with running the business from the present factory are $58 200. The company’s directors are meeting to discuss a proposal to increase the business’s production capacity. A neighboring factory has become vacant and it would be possible to rent the additional space in order to produce more yachts. The additional capacity in terms of production would be 20 yachts. The sales director is confident that, with the growth in the leisure yachting market, he will be able to sell the additional yachts.

Variable costs per yacht will remain the same because the same labor and materials are used. However, the expansion would produce an additional $14 550 in fixed costs.


  1. Advise the company’s directors on whether to go ahead with this proposal
  2. What would be the break-even in the number of yachts:
    1. Without the proposal
    2. With the proposal 3. What is the margin of safety in the number of yachts and percentage of yachts
    3. Without the proposal
    4. With the proposal From this comment of which is the riskiest alternative Multiple choice questions:

Answer these questions on the separate multiple-choice answer sheet

Each question carries one mark

1. One of the approaches to setting budgets is known as the ‘top down’ approach. This is best described as:
A production budget set first and working from this to other budgets.
B setting the sales forecast and working from this to other budgets.
C budget targets set by senior management.
D budget targets set at the lowest level of management.
2. High operating gearing refers to:
A an activity with relatively high variable costs compared with its fixed costs.
B an activity with relatively high fixed costs compared with its variable costs.
C an activity with relatively low fixed costs compared with its variable costs.
D an activity with fixed costs equal to its variable costs.
3. The decision rule for the accounting rate of return method of assessing investment projects is to accept all projects with:
A a positive return.
B the highest return subject to a minimum required return.
C the highest return.
D none of the above.
4. A disadvantage associated with the use of the accounting rate of return method for assessing investment opportunities is:
A it is a method that is not widely understood by the business.
B it is based on an accrual approach rather than cash flows.
C it ignores the time value of money.
D B and C.
5. The time value of money is an important concept in investment decisions as it takes into account that:
A a dollar received tomorrow is more valuable than a dollar received today.
B a dollar received today is equal to a dollar received tomorrow.
C it takes time to earn profits.
D a dollar received today is more valuable than a dollar received tomorrow.

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