2010年ACCAP4-P7真题

2010年ACCA P4-P7真题

Section A – BOTH questions are compulsory and MUST be attempted

1.Doric Co, a listed company, has two manufacturing divisions: parts and fridges. It has been manufacturing parts for domestic refrigeration and air conditioning systems for a number of years, which it sells to producers of fridges and air conditioners worldwide. It also sells around 30% of the parts it manufactures to its fridge production division. It started producing and selling its own brand of fridges a few years ago. After limited initial success, competition in the fridge market became very tough and revenue and profits have been declining. Without further investment there are currently few growth prospects in either the parts or the fridge divisions. Doric Co borrowed heavily to finance the development and launch of its fridges, and has now reached its maximum overdraft limit. The markets have taken a pessimistic view of the company and its share price has declined to 50c per share from a high of $2·83 per share around three years ago. Extracts from the most recent financial statements:

A survey from the refrigeration and air conditioning parts market has indicated that there is

potential for Doric Co to manufacture parts for mobile refrigeration units used in cargo planes and containers. If this venture goes ahead then the parts division before-tax profits are expected to grow by 5% per year. The proposed venture would need an initial one-off investment of $50 million. Suggested proposals

The Board of Directors has arranged for a meeting to discuss how to proceed and is considering each of the following proposals:

To cease trading and close down the company entirely.

To undertake corporate restructuring in order to reduce the level of debt and obtain the additional capital investment required to continue current operations.

To close the fridge division and continue the parts division through a leveraged management buy-out, involving some executive directors and managers from the parts division. The new company will then pursue its original parts business as well as the development of the parts for mobile refrigeration business, described above. All the current and long-term liabilities will be initially repaid using the proceeds from the sale of the fridge division. The finance raised from the management buy-out will pay for any remaining liabilities, the additional capital investment required to continue operations and re-purchase the shares at a premium of 20%.

The following information has been provided for each proposal:

Cease trading

Estimated realisable values of assets not sold as going concern are:

$ million Land and buildings 60 Machinery and equipment 40 Inventory 90 Receivables 20 Corporate restructuring

The existing ordinary shares will be cancelled and ordinary shareholders will be issued with 40 million new $1 ordinary shares in exchange for a cash payment at par. The existing unsecured bonds will be cancelled and replaced with 270 million of $1 ordinary shares. The bond holders will contribute $90 million in cash. All the shares will be listed and traded. The bank overdraft will be converted into a secured ten-year loan with a fixed annual interest rate of 7%. The other unsecured loans will be repaid. In addition to this, the directors of the restructured company will get 4 million $1 share options for an exercise price of $1·10, which will expire in four years. An additional one-off capital investment of $80 million in machinery and equipment is necessary to increase sales revenue for both divisions by 7%, with no change to the costs. After the one-off 7% growth, sales will continue at the new level for the foreseeable future.

It is expected that the Doric’s cost of capital rate will reduce by 550 basis points following the restructuring from the current rate.

Management buy-out

The parts division is half the size of the fridge division in terms of the assets and liabilities attributable to it. If the management buy-out proposal is chosen, a pro rata additional capital investment will be made to machinery and equipment on a one-off basis to increase sales revenue of the parts division by 7%. Sales revenue will then continue at the new level for the foreseeable future.

All liabilities categories have equal claim for repayment against the company’s assets.

It is expected that Doric’s cost of capital rate will decrease by 100 basis points following the management buy-out from the current rate.

The following additional information has been provided:

Redundancy and other costs will be approximately $54 million if the whole company is closed, and pro rata for individual divisions that are closed. These costs have priority for payment before any other liabilities in case of closure. The taxation effects relating to this may be ignored. Corporation tax on profits is 20% and losses cannot be carried forward for tax purposes. Assume that tax is payable in the year incurred.

All the non-current assets, including land and buildings, are eligible for tax allowable depreciation of 15% annually on the book values. The annual reinvestment needed to keep operations at their current levels is roughly equivalent to the tax allowable depreciation. The $50 million investment in the mobile refrigeration business is not eligible for any tax allowable depreciation. Doric’s current cost of capital is 12%.

Required:

Prepare a report for the Board of Directors, evaluating the financial and non-financial impact of all the three proposals to Doric Co’s main stakeholder groups, that includes:

(i) An estimate of the return the debt holders and shareholders would receive in the event that Doric Co ceases trading and is closed down. (3 marks)

(ii) An estimate of the income position and the value of Doric Co in the event that the restructuring proposal is selected. State any assumptions made. (8 marks)

(iii) An estimate of the amount of additional finance needed and the value of Doric Co if the management buy-out proposal is selected. State any assumptions made. (8 marks)

(iv) A discussion of the impact of each proposal on the existing shareholders, the unsecured bond holders, and the executive directors and managers involved in the management buy-out. Suggest which proposal is likely

Fubuki Co, an unlisted company based in Megaera, has been manufacturing electrical parts used in mobility vehicles for people with disabilities and the elderly, for many years. These parts are exported to various manufacturers worldwide but at present there are no local manufacturers

of mobility vehicles in Megaera. Retailers in Megaera normally import mobility vehicles and sell them at an average price of $4,000 each. Fubuki Co wants to manufacture mobility vehicles locally and believes that it can sell vehicles of equivalent quality locally at a discount of 37·5% to the current average retail price.

Although this is a completely new venture for Fubuki Co, it will be in addition to the company’s core business. Fubuki Co’s directors expect to develop the project for a period of four years and then sell it for $16 million to a private equity firm. Megaera’s government has been positive about the venture and has offered Fubuki Co a subsidised loan of up to 80% of the investment funds required, at a rate of 200 basis points below Fubuki Co’s borrowing rate. Currently Fubuki Co can borrow at 300 basis points above the five-year government debt yield rate.

A feasibility study commissioned by the directors, at a cost of $250,000, has produced the following 1information.

Initial cost of acquiring suitable premises will be $11 million, and plant and machinery used in the manufacture will cost $3 million. Acquiring the premises and installing the machinery is a quick process and manufacturing can commence almost immediately.

It is expected that in the first year 1,300 units will be manufactured and sold. Unit sales will grow by 40% in each of the next two years before falling to an annual growth rate of 5% for the final year. After the first year the selling price per unit is expected to increase by 3% per year.

In the first year, it is estimated that the total direct material, labour and variable overheads costs will be $1,200 per unit produced. After the first year, the direct costs are expected to increase by an annual inflation rate of 8%.

Annual fixed overhead costs would be $2·5 million of which 60% are centrally allocated overheads. The fixed overhead costs will increase by 5% per year after the first year.

Fubuki Co will need to make working capital available of 15% of the anticipated sales revenue for the year, at the beginning of each year. The working capital is expected to be released at the end of the fourth year when the project is sold.

Fubuki Co’s tax rate is 25% per year on taxable profits. Tax is payable in the same year as when the profits are earned. Tax allowable depreciation is available on the plant and machinery on a straight-line basis. It is anticipated that the value attributable to the plant and machinery after four years is $400,000 of the price at which the project is sold. No tax allowable depreciation is available on the premises.

Fubuki Co uses 8% as its discount rate for new projects but feels that this rate may not be appropriate for this new type of investment. It intends to raise the full amount of funds through debt finance

and take advantage of the government’s offer of a subsidised loan. Issue costs are 4% of the gross finance required. It can be assumed that the debt capacity available to the company is equivalent to the actual amount of debt finance raised for the project.

Although no other companies produce mobility vehicles in Megaera, Haizum Co, a listed company, produces electrical-powered vehicles using similar technology to that required for the mobility vehicles. Haizum Co’s cost of equity is estimated to be 14% and it pays tax at 28%. Haizum Co has 15 million shares in issue trading at $2·53 each and $40 million bonds trading at $94·88 per $100. The five-year government debt yield is currently estimated at 4·5% and the market risk premium at 4%.

Required:

(a) Evaluate, on financial grounds, whether Fubuki Co should proceed with the project. (17 marks) (b) Discuss the appropriateness of the evaluation method used and explain any assumptions made in part (a) above. (8 marks) (25 marks)

Section A – BOTH questions are compulsory and MUST be attempted

2.Film Productions Co (FP) is a small international company producing films for cinema release and also for sale on DVD or to television companies. FP deals with all areas of the production from casting, directing and managing the artists to negotiating distribution deals with cinema chains and TV channels. The industry is driven by the tastes of its films’ audience, which when accurately predicted can lead to high levels of profitability on a successful film.

The company’s stated mission is to ‘produce fantastic films that have mass appeal’. The company makes around $200 million of sales each year equally split between a share of cinema takings, DVD sales and TV rights. FP has released 32 films in the past five years. Each film costs an average of $18 million and takes 12 months to produce from initial commissioning through to the final version. Production control is important in order to hit certain key holiday periods for releasing films at the cinema or on DVD.

The company’s films have been moderately successful in winning industry awards although FP has never won any major award. Its aims have been primarily commercial with artistic considerations secondary.

The company uses a top-down approach to strategy development with objectives leading to critical success factors (CSFs) which must then be measured using performance indicators. Currently, the company has identified a number of critical success factors. The two most important of these are viewed as:

(i) improve audience satisfaction

(ii) strengthen profitability in operations

At the request of the board, the chief executive officer (CEO) has been reviewing this system in particular the role of CSFs. Generally, the CEO is worried that the ones chosen so far fail to capture all the factors affecting the business and wants to understand all possible sources for CSFs and what it means to categorise them into monitoring and building factors.

These CSFs will need to be measured and there must be systems in place to perform that role. The existing information system of the company is based on a fairly basic accounting package. However, the CEO has been considering greater investment in these systems and making more use of the company’s website in both driving forward the business’ links to its audience and in collecting data on them.

The CEO is planning a report to the board of Film Productions and has asked you to help by drafting certain sections of this report.

Required:

You are required to draft the sections of the CEO’s report answering the following questions: (a) Explain the difference between the following two types of CSF: monitoring and building, using examples appropriate to FP. (4 marks)

(b) Identify information that FP could use to set its CSFs and explain how it could be used giving two examples that would be appropriate to FP. (6 marks)

(c) For each of the two critical success factors given in the question, identify two performance indicators (PIs) that could support measurement of their achievement and explain why each PI is relevant to the CSF.

(10 marks)

(d) Discuss the implications of your chosen PIs for the design and use of the company’s website, its management information system and its executive information system. (9 marks)

Professional marks will be awarded in Question 1 for appropriateness of style and structure of the answer. (2 marks) (31 marks)

Robust Laptops Co (RL) make laptop computers for use in dangerous environments. The company’s main customers are organisations like oil companies and the military that require a laptop that can survive rough handling in transport to a site and can be made to their unique requirements. The company started as a basic laptop manufacturer but its competitors grew much larger and RL had to find a niche market where its small size would not hinder its ability to compete. It is now considered one of the best quality producers in this sector.

RL had the same finance director for many years who preferred to develop its systems organically. However, due to fall in profitability, a new chief executive officer (CEO) has been appointed

who wishes to review RL’s financial control systems in order to get better information with which to tackle the profit issue.

The CEO wants to begin by thinking about the pricing of the laptops to ensure that selling expensive products at the wrong price is not compromising profit margins. The laptops are individually specified by customers for each order and pricing has been on a production cost plus basis with a mark-up of 45%. The company uses an absorption costing system based on labour hours in order to calculate the production cost per unit.

The main control system used within the company is the annual budget. It is set before the start of the financial year and variances are monitored and acted upon by line managers. The CEO has been reading about major companies that have stopped using budgets and wants to know how such a radical move works and why a company might take such a step. He has been worried by moves by competitors into RL’s market with impressive new products. This has created unrest among the staff at RL with two experienced managers leaving the company.

Financial and other information for Robust Laptops

Robust Laptops

Data for the year ended 30 September 2010

Volume (units) 23,800

Total $’000

Direct variable costs Material 40,650 Labour 3,879 Packaging and transport 2,118

––––––– Subtotal 46,647 ––––––– Overhead costs Customer service 7,735 Purchasing and receiving 2,451 Inventory management 1,467

Administration of production 2,537 –––––––

Subtotal 14,190 –––––––

Total 60,837 –––––––

Labour time per unit 3 hours Data collected for the year: No of minutes on calls to customer 899,600 No of purchase orders raised 21,400 No of components used in production 618,800

Administration of production (absorbed as general overhead) 3 Labour hrs per unit

Required: Write a report to the CEO to include:

(a) An evaluation of the current method of costing against an Activity Based Costing (ABC) system. You should provide illustrative calculations using the information provided on costs for 2010 and Order 11784. Briefly state what action management might take in the light of your results with respect to this order. (15 marks)

(b) An explanation of the operation of a beyond budgeting approach and an evaluation of the potential of such a change at RL. (10 marks)

Professional marks will be awarded in Question 2 for appropriateness of format, style and structure of the report. (4 marks)

Section A – BOTH questions are compulsory and MUST be attempted

3.Jolie Co is a large company, operating in the retail industry, with a year ended 30 November 2010. You are a manager in Jen & Co, responsible for the audit of Jolie Co, and you have recently attended a planning meeting with Mo Pitt, the nance director of the company. As this is the rst year that your rm will be acting as auditor for Jolie Co, you need to gain an understanding of the business risks facing the new client. Notes from your meeting are as follows:

Jolie Co sells clothing, with a strategy of selling high fashion items under the JLC brand name. New ranges of clothes are introduced to stores every eight weeks. The company relies on a team of highly skilled designers to develop new fashion ranges. The designers must be able to anticipate and quickly respond to changes in consumer preferences. There is a high staff turnover in the design team.

Most sales are made in-store, but there is also a very popular catalogue, from which customers can place an order on-line, or over the phone. The company has recently upgraded the computer system and improved the website, at signi cant cost, in order to integrate the website sales directly into the general ledger, and to provide an easier interface for customers to use when ordering and entering their credit card details. The new on-line sales system has allowed overseas sales for the rst time.

The system for phone ordering has recently been outsourced. The contract for outsourcing went out to tender and Jolie Co awarded the contract to the company offering the least cost. The company providing the service uses an overseas phone call centre where staff costs are very low.

Jolie Co has recently joined the Ethical Trading Initiative. This is a ‘fair-trade’ initiative, which means that any products bearing the JLC brand name must have been produced in a manner which is clean and safe for employees, and minimises the environmental impact of the manufacturing process.

A signi cant advertising campaign promoting Jolie Co’s involvement with this initiative has recently taken place. The JLC brand name was purchased a number of years ago and is recognised at cost as an intangible asset, which is not amortised. The brand represents 12% of the total assets recognised on the statement of nancial position.

The company owns numerous distribution centres, some of which operate close to residential areas.

A licence to operate the distribution centres is issued by each local government authority in which a centre is located. One of the conditions of the licence is that deliveries must only take place between 8 am and 6 pm. The authority also monitors the noise level of each centre, and can

revoke the operating licence if a certain noise limit is breached. Two licences were revoked for a period of three months during the year.

To help your business understanding, Mo Pitt has e-mailed to you extracts from the draft statement of comprehensive income, and the relevant comparative gures, which are shown below.

Extract from draft statement of comprehensive income

Required:

(a) Prepare brie ng notes to be used at a planning meeting with your audit team, in which you evaluate the business risks facing Jolie Co to be considered when planning the nal audit for the year ended 30 November 2010. (15 marks)

Professional marks will be awarded in part (a) for the format of the answer and the clarity of the evaluation. (2 marks)

(b) Using the information provided, identify and explain FIVE nancial statement risks. (10 marks) (c) Recommend the principal audit procedures to be performed in respect of the valuation of the JLC brand name. (5 marks) (32 marks)

You are a manager in Newman & Co, a global rm of Chartered Certi ed Accountants. You are responsible for evaluating proposed engagements and for recommending to a team of partners whether or not an engagement should be accepted by your rm.

Eastwood Co, a listed company, is an existing audit client and is an international mail services operator, with a global network including 220 countries and 300,000 employees. The company offers mail and freight services to individual and corporate customers, as well as storage and logistical services.

Eastwood Co takes its corporate social responsibility seriously, and publishes social and environmental key performance indicators (KPIs) in a Sustainability Report, which is published with the nancial statements in the annual report. Partly in response to requests from shareholders and pressure groups, Eastwood Co’s management has decided that in the forthcoming annual report, the KPIs should be accompanied by an independent assurance report. An approach has been made to your rm to provide this report in addition to the audit.

To help in your evaluation of this potential engagement, you have been given an extract from the draft Sustainability Report, containing some of the KPIs published by Eastwood Co. In total, 25 environmental KPIs, and 50 social KPIs are disclosed.

Extract from Sustainability Report Year ended Year ended 31 October 2010 31 October 2009 DRAFT ACTUAL

CO2 emissions (million tonnes) 26·8 28·3 Energy use (million kilowatt hours) 4,895 5,250 Charitable donations ($ million) 10·5 8·2 Number of serious accidents in the workplace 60 68 Average annual

spend on training per employee $180 $175

You have also had a meeting with Ali Monroe, the manager responsible for the audit of Eastwood Co, and notes of the meeting are given below.

Notes from meeting with audit manager, Ali Monroe

Newman & Co has audited Eastwood Co for three years, and it is a major audit client of our rm, due to its global presence and recent listing on two major stock exchanges. The audit is managed from our of ce in Oldtown, which is also the location of the global headquarters of Eastwood Co. We have not done any work on the KPIs, other than review them for consistency, as we would with any ‘other information’ issued with the nancial statements. The KPIs are produced by Eastwood Co’s Sustainability Department, located in Fartown. We have not visited Eastwood Co’s of ces in Fartown as it is in a remote location overseas, and the departments based there are not relevant to the audit.

We have performed audit procedures on the charitable donations, as this is disclosed in a note to the nancial statements, and our evidence indicates that there have been donations of $9 million this year, which is the amount disclosed in the note. However, the draft KPI is a different gure – $10·5 million, and this is the gure highlighted in the draft Chairman’s Statement as well as the draft Sustainability Report. $9 million is material to the nancial statements.

The audit work is nearly complete, and the annual report is to be published in about four weeks, in time for the company meeting, scheduled for 31 January 2011.

Your rm has recently established a sustainability reporting assurance team based in Oldtown, and if the engagement to report on the Sustainability Report is accepted, it would be performed by members of that team, who would not be involved with the audit.

Required:

(a) Identify and explain the matters that should be considered in evaluating the invitation to perform an assurance engagement on the Sustainability Report of Eastwood Co. (12 marks) (b) Recommend procedures that could be used to verify the following draft KPIs:

(i) The number of serious accidents in the workplace; and

(ii) The average annual spend on training per employee. (6 marks)

(c) You have a trainee accountant assigned to you, who has read the notes taken at your meeting with Ali Monroe. She is unsure of the implications of the charitable donations being disclosed as a different gure in the nancial statements compared with the other information published in the annual report.

Required: Prepare brie ng notes to be used in a discussion with the trainee accountant, in which you:

(i) Explain the responsibility of the auditor in relation to other information published with the nancial statements; and

(ii) Recommend the action to be taken by Newman & Co if the gure relating to charitable donations in the other information is not amended. (8 marks)

Professional marks will be awarded in part (c) for the format and clarity of your answer. (2 marks) (28 marks)

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