ACC 312 Midterm: Profit and loss account formats

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greenwalrus59

29 Nov 2017

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There are four alternative profit and loss account formats permitted by the companies acts 1985/1989, and in line with the provisions of frs 3. In formats 1 and 3, expenses are classified by function, for example, cost of sales, distribution costs, administrative expenses. In formats 2 and 4, expenses are classified by type, for example, raw materials and consumables, staff costs, and depreciation. Format 1 is seen more frequently than format 2, and is the format most widely used by the majority of uk limited companies. Frs 3, reporting financial performance, contains supplementary provisions relating to the format of the profit and loss account, in addition to the four alternative formats allowed in the companies act. One of the main provisions of frs 3 relates to the separate identification within the profit and loss account of turnover and operating profit relating to continuing operations and discontinued operations.

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You have obtained the following information:

STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR TO 31 DECEMBER

		20X8	20X7
	Note	Draft ($m)	Actual ($m)
Revenue	(1)	645.5	606.5

Other income	(2)	15.6	14.4

Changes in inventories		3.8	(16.4)

Cost of materials		(334.1)	(286.8)

Employee benefits expense		(91.0)	(83.9)

Depreciation	(3)	(29.8)	(23.6)

Other expenses	(4)	(116.3)	(100.6)

Interest income, net	(5)	12.3	(20.9)

Profit before tax		106.0	130.5

Income tax expense		(44.4)	(47.7)

Profit for the year		61.6	82.8

STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER

		20X8	20X7
	Note	Draft ($m)	Actual ($m)
Assets
Non-current assets
Intangible assets	(6)	47.8	40.5
Property, plant and equipment	(7)	124.5	102.5
		172.3	143.0
Current assets
Inventories	(8)	30.3	27.9
Trade receivables		73.1	50.3
Cash and cash equivalents		111.4	86.0
Total assets		387.1	307.2
Equity and liabilities
Equity		5.8	5.8
Share capital		15.3	15.3
Share premium		112.1	80.1
Retained earnings		133.2	101.2
Non-current liabilities
Provisions	(9)	160.1	121.4
Current liabilities
Trade payables		33.5	31.8
Tax		50.4	44.3
Other liabilities		9.9	8.5
Total equity and liabilities		387.1	307.2

Notes

(1) Revenue from business activities:

Revenue from business activities
	20X8 ($M)	20X7 ($M)
Vehicles	588.0	526.0
Parts and accessories	39.6	36.8
Other	17.9	43.7
	645.5	606.5

Other income includes gains on the disposals of tangible assets and income from the reversal of provisions.

Average number of employees:


	20X8 (Draft)	20X7 (Actual)
Wage earners	484	499
Salaried employees	483	477
Apprentices and trainees	36	37
	1,003	1,013

Other expenses include costs for warranties, administration and distribution, maintenance and insurance.

Interest income, net:

	20X8 (Draft ($m)	20X7 (Actual $m)
Interest and similar income	16.8	25.1
Interest and similar expenses	(4.5)	(4.2)
	12.3	20.9

Intangible assets include development costs, also franchises and industrial rights and licenses. During the year, $12.7 million (20X7 - $6.3 million) was spent on developing a new sports model, the Fox.

Property, plant and equipment:

	Land and Buildings	Equipment	Assets under construction	Total
	$m	$m	$m	$m
Cost
1 January 20X8	61.8	212.1	19.0	292.9
Additions	5.0	28.9	9.4	43.3
Disposals	0.0	(4.5)	0.0	(4.5)
Reclassification	3.0	8.9	(11.9)	0.0
31 December 20X8	69.8	245.4	16.5	331.7

Depreciation
Current year	1.9	18.4	0.0	20.3
Accumulated	28.7	178.5	0.0	207.2

Net book value
31 December 20X8	41.1	66.9	16.5	124.5
31 December 20X7	34.9	48.6	19.0	102.5

(8) Inventories comprise:


	20X8 (Draft $m)	20X7 (Draft $m)
Raw materials, consumables and supplies	8.3	7.3
Work-in-progress	6.8	4.8
Finished goods	15.2	15.8
	30.3	27.9

(9) Provisions mainly cover manufacturing warranty, product liability and litigation risks. Also, provisions have been established for deferred maintenance and IT reorganization.

The following additional information is available:

(i) Pavia has achieved record sales in 20X8 with the delivery of 10,153 vehicles (20X7 â 7,642 vehicles).

(ii) Although some sales are direct to individual customers the majority are ordered through dealers who take new vehicles on consignment.

(iii) Since 1 January 20X8 Pavia has offered 0% finance for three years on new vehicle sales in its most competitive markets.

(iv) The launch of the Fox has been postponed from late 20X8 to early 20X9 as internal trials have revealed that the doors are not sufficiently secure at high speeds.

(v) A car part required for the Cipeta model is bought-in exclusively from an overseas manufacturer. Deliveries of supplies have been unpredictable in 20X7 causing disruption to the Cipeta model assembly schedules.

1. Evaluate how you might use analytical procedures to provide audit evidence and reduce the level of detailed substantive procedures.

N.B these are pointers are for this question:

Analytical Procedures - Examples: o Receivables - Receivables - Compare gross margin % with previous years (by product line). (Possible misstatement â Over/understatement of sales and accounts receivable). This analytics will reduce the detailed substantive procedure because we have identified that there may be a possible over/understatement of sales so now we need to perform additional audit procedures on sales/revenue. For example by selecting a sample of invoices generated throughout the year and comparing to the General Ledger to ensure completeness and accuracy. Note: Use the information in the case to calculate the analytical procedures you have identified. Also, explain how the analytical procedures will provide audit evidence and help to reduce the level of detailed substantive procedures.

Customer Profitability Analysis

Rogers Aeronautics, LTD, is a British aeronauticssubcontract company that designs and manufactures electroniccontrol systems for commercial airlines. The vast majority of allcommercial aircraft are manufactured by Boeing in the U.S. andAirbus in Europe; however, there is a relatively small group ofcompanies that manufacture narrow-body commercial jets. Assume forthis exercise that Rogers does contract work for the two majormanufacturers plus three companies in the second tier.
Because competition is intense in the industry, Rogers has alwaysoperated on a fairly thin 20% gross profit margin; hence, it iscrucial that it manage non-manufacturing overhead costs effectivelyin order to achieve an acceptable net profit margin. With decliningprofit margins in recent years, Rogers Aeronautics' CEO, LenRogers, has become concerned that the cost of obtaining contractsand maintaining relations with its five major customers may begetting out of hand. You have been hired to conduct a customerprofitability analysis.
Rogers Aeronautics' non-manufacturing overhead consists of $2.5million of general and administrative (G&A) expense,(including, among other expenses, the CEO's salary and bonus andthe cost of operating the company's corporate jet) and selling andcustomer support expenses of $3 million (including 5% salescommissions and $1,050,000 of additional costs). The accountingstaff determined that the $1,050,000 of additional selling andcustomer support expenses related to the following four activitycost pools:

Activity	Activity Cost Driver	Cost per Unit of Activity
1. Sales visits	Number of visit days	$1,200
2. Product adjustments	Number of adjustments	1,500
3. Phone and email contacts	Number of calls/contacts	150
4. Promotion and entertainment events	Number of events	1,500

Financial and activity data on the five customers follows (Salesand Gross Profit data in millions):

			Quantity of Sales andSupport Activity
Customer	Sales	Gross Profit	Activity 1	Activity 2	Activity 3	Activity 4
#1	$19.00	$3.80	106	23	220	82
#2	14.00	2.80	130	36	354	66
#3	5.00	1.00	52	10	180	74
#4	6.00	1.20	34	6	138	18
#5	5.00	1.00	16	5	104	10
	$49.00	$9.80	338	80	996	250

In addition to the above, the sales staff used the corporate jetat a cost of $800 per hour for trips to customers as follows:

Customer #1	24 hours
Customer #2	36 hours
Customer #3	5 hours
Customer #4	0 hours
Customer #5	6 hours

The total cost of operating the airplane is included in generaland administrative expense; none is included in selling andcustomer support costs.

a. Prepare a customer profitability analysis for RogersAeronautics that shows the gross profits less all expenses that canreasonably be assigned to the five customers.
Enter figures as complete numbers (with all zeros). For example, 1million is 1,000,000. Do not use negative signs with anyanswers.
Round return on sales to one decimal place. (Ex: 10.4%)

	Customer #1	Customer #2	Customer #3	Customer #4	Customer #5
Sales	Answer	Answer	Answer	Answer	Answer
Cost of goods sold	Answer	Answer	Answer	Answer	Answer
Gross profit	Answer	Answer	Answer	Answer	Answer
Less expenses
Sales commissions	Answer	Answer	Answer	Answer	Answer
Sales visits	Answer	Answer	Answer	Answer	Answer
Product adjustments	Answer	Answer	Answer	Answer	Answer
Phone and other remote contacts	Answer	Answer	Answer	Answer	Answer
Promotion and entertainment	Answer	Answer	Answer	Answer	Answer
Corporate jet expense	Answer	Answer	Answer	Answer	Answer
Customer profitability	$Answer	$Answer	$Answer	$Answer	$Answer

Customer return on sales	Answer%	Answer%	Answer%	Answer%	Answer%

b. Now assuming that the remaining general and administrativecosts are assigned to the five customers based on relative salesdollars, calculate net profit for each customer.
Enter figures as complete numbers (with all zeros). For example, 1million is 1,000,000.
Do not use negative signs with any answers.
Do not round during calculation G&A expenses. Round finalG&A expenses to the nearest whole number.
Round return on sales to one decimal place. (Ex: 10.4

	Customer #1	Customer #2	Customer #3	Customer #4	Customer #5
Customer profitability	$Answer	$Answer	$Answer	$Answer	$Answer
Less G & A expense	Answer	Answer	Answer	Answer	Answer
Net customer profitability	Answer	Answer	Answer	Answer	Answer

Net customer return on sales	Answer%	Answer%	Answer%	Answer%	Answer%

yellowferret172

Jackson County Senior Services is a nonprofit organizationdevoted to providing essential services to seniors who live intheir own homes within the Jackson County area. Three services areprovided for seniorsâhome nursing, Meals On Wheels, andhousekeeping. Data on revenue and expenses for the past yearfollow:

	Total		Home Nursing		Meals On Wheels		House- keeping
Revenues	$	919,000	$	264,000	$	402,000	$	253,000
Variable expenses		468,000		114,000		199,000		155,000

Contribution margin		451,000		150,000		203,000		98,000

Fixed expenses:
Depreciation		69,800		8,400		40,700		20,700
Liability insurance		43,400		20,200		8,000		15,200
Program administratorsâ salaries		116,000		40,400		38,800		36,800
General administrative overhead*		183,800		52,800		80,400		50,600

Total fixed expenses		413,000		121,800		167,900		123,300

Netoperating income (loss)	$	38,000	$	28,200	$	35,100	$	(25,300)

*Allocated onthe basis of program revenues.

The head administrator of JacksonCounty Senior Services, Judith Miyama, is concerned about theorganizationâs finances and considers the net operating income of$38,000 last year to be too small. (Last yearâs results were verysimilar to the results for previous years and are representative ofwhat would be expected in the future.) Therefore, she has asked formore information about the financial advisability of discontinuingthe housekeeping program.

The depreciation in housekeepingis for a van that transports housekeepers and their equipment fromjob to job. If the program were discontinued, the van would bedonated to a charitable organization. Depreciation charges assumezero salvage value. None of the general administrative overheadwould be avoided if the housekeeping program were dropped, but theliability insurance and the salary of the program administratorwould be avoided.

Required:

1a.

What is the impact on net operating income by discontinuinghousekeeping program? (Input the amount as a positivevalue.)

(Click to select)DecreaseIncrease in net operatingincome by

1b.

Should thehousekeeping program be discontinued?

	Yes
	No

Would a segmented income statement format be more useful tomanagement in assessing the long-run financial viability of thevarious services.

Yes

Climate-Control, Inc., manufactures a variety of heating andair-conditioning units. The company is currently manufacturing allof its own component parts. An outside supplier has offered to sella thermostat to Climate-Control for $23 per unit. To evaluate thisoffer, Climate-Control, Inc., has gathered the followinginformation relating to its own cost of producing the thermostatinternally:

	Per Unit		14,300 Units per year
Direct materials	$	5	$	71,500
Direct labor		7		100,100
Variable manufacturing overhead		2		28,600
Fixed manufacturing overhead, traceable		10*		143,000
Fixed manufacturing overhead, common, butallocated		9		128,700

Total cost	$	33	$	471,900

*40% supervisorysalaries; 60% depreciation of special equipment (no resalevalue).

Required:

1a.

Assuming that the company has no alternative use for thefacilities now being used to produce the thermostat, compute thetotal cost of making and buying the parts. (Round yourFixed manufacturing overhead per unit rate to nearest dollaramount.)

	Make	Buy
Total relevant cost (14,300 units)	$	$

1b.

Should theoutside supplier's offer be accepted?

	Accept
	Reject

2a.

Suppose that if the thermostats were purchased, Climate-Control,Inc., could use the freed capacity to launch a new product. Thesegment margin of the new product would be $91,500 per year.Compute the total cost of making and buying the parts.(Round your Fixed manufacturing overhead per unit rate tonearest dollar amount.)

	Make	Buy
Total relevant cost (14,300 units)	$	$

2b.

Should Climate-Control, Inc., accept the offer to buy thethermostats from the outside supplier for $23 each?

Reject

Solex Company manufactures three products from a common input ina joint processing operation. Joint processing costs up to thesplit-off point total $100,000 per year. The company allocatesthese costs to the joint products on the basis of their total salesvalue at the split-off point. These sales values are as follows:product X, $55,000; product Y, $93,000; and product Z, $64,000.

Each product may be sold at thesplit-off point or processed further. Additional processingrequires no special facilities. The additional processing costs andthe sales value after further processing for each product (on anannual basis) are shown below:

Product	Additional Processing Costs		Sales Value after Further Processing
X	$	38,000	$	81,000
Y	$	39,000	$	162,000
Z	$	10,000	$	82,000

Required:
a.	Compute the incremental profit (loss) for each product.(Loss amounts should be indicated with a minussign.)

	Product X	Product Y	Product Z
Incremental profit (loss)	$	$	$

Blueline Tours, Inc., operates tours throughout the UnitedStates. A study has indicated that some of the tours are notprofitable, and consideration is being given to dropping thesetours to improve the companyâs overall operating performance.

One such tour is a two-day HistoricMansions bus tour conducted in the southern states. An incomestatement from a typical Historic Mansions tour is given below:


Ticket revenue (105 seat capacity Ã 40% occupancy Ã $70 ticket price perperson)	$	2,940	100	%
Variable expenses ($14.00 per person)		588	20

Contribution margin		2,352	80	%

Tourexpenses:
Tour promotion	$	750
Salary of bus driver		380
Fee, tour guide		700
Fuel for bus		200
Depreciation of bus		500
Liability insurance, bus		150
Overnight parking fee, bus		70
Room and meals, bus driver and tourguide		190
Bus maintenance and preparation		220

Total tour expenses		3,160

Netoperating loss	$	(808)

The followingadditional information is available about the tour:

a.	Bus drivers arepaid fixed annual salaries; tour guides are paid for each tourconducted.
b.	The "Bus maintenance and preparation" cost is an allocation ofthe salaries of mechanics and other service personnel who areresponsible for keeping the companyâs fleet of buses in goodoperating condition.
c.	Depreciation of buses is due to obsolescence. Depreciation dueto wear and tear is negligible.
d.	Liabilityinsurance premiums are based on the number of buses in thecompanyâs fleet.
e.	Dropping the Historic Mansions bus tour would not allow BluelineTours to reduce the number of buses in its fleet, the number of busdrivers on the payroll, or the size of the maintenance andpreparation staff.

Required:

By how much will the profits increase or decrease if this touris discontinued? (Input the amount as a positivevalue.)

Profits would (Click to select)decreaseincrease by

skygiraffe236

ACC 312 Midterm: Profit and loss account formats

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