Acct 90002 - Suggested Solutions Exam Sem 1

ACCT90002: FSA FINAL EXAM ……..Sem 1, 2014

Suggested answers

PART A

QUESTION 1

Problem 8-7 (60 minutes)

a.

SPYRES MANUFACTURING COMPANY

Comparative Common-Size Income Statements

Year Ended December 31         Increase

                                                  Year 9                       Year 8                (Decrease)

Net sales                  100.0%                             100.0%                 20.0%

Cost of goods sold                81.7                86.0                 14.0

Gross margin on sales                18.3                14.0                 57.1

Operating expenses                16.8                 10.2                 98.0

Income before taxes                  1.5                  3.8                 (52.6)

Income taxes                  0.4                1.0                (52.0)

Net income                  1.1                2.8                (52.9)

NOTE: Per cent increase/decrease based on actual numbers.

                                                                                (4 Marks)

1. Performance in Year 9 is poor when compared with Year 8. One bright spot is the percentage of Cost of Goods Sold to Sales, which decreased in Year 9. However, Operating Expenses climbed sharply. This sharp climb in operating expenses is unexpected since there is usually a larger fixed cost component comprising these costs compared with that for Cost of Goods Sold.

Management should further check operating expenses. If operating expenses had remained at the Year 8 level of 10.2%, income would have been up favorably for Year 9. Operating expenses may have included a future-directed component such as advertising or training costs. Also, management would want to follow up on the change in gross margin. The sharp improvement in gross margin may have been due to factors such as the sale of written down inventory layers or, alternatively, to something more fundamental with the activities of the firm.

                                                                        (3 Marks)

                                                                        Total:  7 marks

QUESTION 2

Problem 4-6 (45 minutes)

Straight-Line

($000s)                        YEAR 1        YEAR 2                YEAR 3        YEAR 4        YEAR 5

        Earnings before taxes

             & depreciation:                $1,500.0        $2,000.0        $2,500.0        $3,000.0        $3,500.0

(a)         Depreciation                    (400.0)            (400.0)            (400.0)            (400.0)            (400.0)

            Net Before Taxes                $1,100.0        $1,600.0        $2,100.0        $2,600.0        $3,100.0

(b)         Income Taxes                    (330.0)            (480.0)         (630.0)         (780.0)          (930.0)

(c)        Net Income                $   770.0        $1,120.0        $1,470.0        $1,820.0        $2,170.0

Sum-of-the-years'-digits

($000s)                        YEAR 1        YEAR 2        YEAR 3        YEAR 4        YEAR 5

Earnings before taxes

         & depreciation                 $1,500.0        $2,000.0        $2,500.0        $3,000.0        $3,500.0

(a)        Depreciation                    (666.67)            (533.33)            (400.0)            (266.67)         (133.33)

        Net Before Taxes                $833.33        $1,466.67        $2,100.00        $2,733.33        $3,366.67

(b)        Income Taxes                    (249.99)            (440.00)          (630.00)         (819.99)         (1,010.00)

(c)        Net Income                $   583.33        $1,026.67        $1,470.00        $1,913.33        $2,356.67

The manager will most likely choose the Straight Line method so that he/she would be eligible for a higher bonus payment at the end of year 2.  This is because the depreciation expense in years 1 and 2 are less than the depreciation expense under the Sum-of-the-years digits method, even though the tax expense is higher.  The net effect is that the Net Income is higher in Years 1 and 2 using the Straight line method.