JRE300H1F: Fundamentals of Accounting and Finance
MIDTERM EXAMINATION (30% of Final Grade): Fall 2016
Time Allowed: 2 Hours
LAST NAME:________ ________________________________________
FIRST NAME:______ ________________________________________
STUDENT NUMBER: ______________________________________
PLEASE INDICATE YOUR INSTRUCTOR:
S. Douglas___________
F. Tolias___________
Instructions:
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Write all of your answers on the examination paper. If you need additional space,
use the back of the page facing the question and clearly identify the question
being answered.
This is a closed book exam. One double-sided 8.5'x11' hand-written or typed aid
sheet containing formulas/notes is permitted. Non-programmable calculators
are permitted.
Pencil or pen may be used. However, papers written in pencil or papers with
white outs will not be re-marked.
THERE ARE <> PAGES TO THIS MID-TERM.
1
QUESTION 1 (15 marks)
The following monthly data are available for the Challenger Ltd and its only product,
Product SW:
Sales
Variable Expenses
Contribution Margin
Fixed Expenses
Net Income
Total
$110,000
44,000
66,000
Per Unit
$275
$110
$165
52,800
$13,200
Required:
a) What is the total contribution margin at the break-even point? (1 mark)
The total contribution margin is $52,800 since it is equal to the fixed expenses at the breakeven point.
b) Compute the sales dollars required to attain a target after-tax profit of $14,700. Assume
a tax rate of 30%. (3 marks)
Total to recover = $52,800 (FC) + (14,700/.3) (profit) = $73,800
CM ratio: $165/275 = 60%Total
Sales dollars needed: $73,800/.6 = $123,000
c) Management is contemplating the use of plastic materials rather than metal materials in
Product SW. This change would reduce variable costs by $15 per unit. The company's
marketing manager, however, predicts that the change in material will reduce the overall
quality of the product, which would result in a decline in sales to 350 units per month.
Should this change be made? Support your answer using calculations! (3 marks)
The $15 decrease in variable costs will cause the contribution margin per unit to increase
from $165 to $180.
2
CONCLUSION: The less costly material should not be used to manufacture Product SW.
Net income will decrease by $3,000.
d) Management wants to increase sales and feels that this can be done by cutting the
selling price by $25 per unit and increasing the advertising budget by $20,000 per month.
Management predicts that these actions will increase unit sales by 50%. Should these
changes be made? (4 marks)
The decrease in selling price per unit will cause the unit contribution margin to decrease
from $165 to $140.
Expected total contribution margin:
400 x 150% x $140 =
Present total contribution margin:
400 x $165 =
Incremental contribution margin
Change in fixed costs:
Less incremental advertising expense
Reduction in operating income
$84,000
66,000
$18,000
20,000
$(2,000)
CONCLUSION: The change should not be made.
e) Management wants to automate a portion of the production process for Product SW. The
new equipment would reduce direct labour costs by $20 per unit but would result in a
monthly rental cost for the new robotic equipment of $10,000. How many units per
month would have to be sold to realize the benefits (i.e. higher profits) of automation? (4
marks)
The use of more fixed costs increases the breakeven point. However, the benefit of
automation is a reduction in the unit cost of the product through the reduction of the
variable cost per unit. The cross over point where costs under both cost structures produce
the same total costs is computed as follows:
62,800 + 90Q = 52,800 + 110Q
Q = 500
INTERPRETATION: If Challenger sells less than 500 units, should stay with the current cost
structure as total profits would be higher under the current cost structure.
Challenger needs to sell more than 500 units to realize the benefits (i.e. more profits) of
automation. At 500 units, both cost structures will yield the same profits.
3
QUESTION 2 (30 marks)
PART A: (15 marks)
Merrigold Merchandising Inc. started business operations on January 1st, 2016. Below are
the assets, liabilities and share capital of the company as at November 30th, 2016, as well as
the revenues, expenses and dividends for the period from January 1st to November 30th,
2016:
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Accounts Payable
Accounts Receivable
Cash
Inventory
Common Shares
Computers & Equipment
Insurance Expense
Notes Payable
Rent Expense
Office Supplies Expense
Prepaid Insurance
Income Tax Expense
Accumulated Depreciation
Cost of Goods Sold
Revenue
Depreciation Expense
Salaries Expense
Income Tax Payable
Dividends
$108,700
$165,000
$ 65,000
$77,000
$120,000
$50,000
$1,650
$60,000
$38,500
$110,000
$ 150 (policy covers Jan-Dec 2016)
$55,900
$13,750
$687,500
$1,250,000
13,750
175,000
$12,000
$125,000
Required:
Prepare the Statement of Earnings (i.e. Income Statement) and Statement of Retained
Earnings for the first 11 months of operation, and a classified Statement of Financial
Position (i.e. Balance Sheet) as at November 30th. Assume that all adjusting entries up to
November 30th have already been accounted for in the above balances.
4
Statement of Earnings (for the period January 1st to November 30th)
Revenue
$1,250,000
Cost of Goods Sold
$687,500
Gross Profit
$562,500
Expenses:
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Salaries
Office Supplies Expense
Depreciation Expense
Office Rent
Insurance Expense
$175,000
$110,000
$13,750
$38,500
$1,650
Net Income before Taxes
Income Taxes
Net Income
$338,900
$223,600
$55,900
$167,700
Statement of Retained Earnings (for the period January 1st to November 30th)
Retained Earnings, beginning of period
$0
Net Earnings
$167,700
Dividends
$125,000
Retained Earnings, end of period
$42,700
Statement of Financial Position (as at November 30, 2016)
Assets
Current Assets:
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Cash
Accounts Receivable
Inventory
Prepaid Insurance
$65,000
$165,000
$77,000
$ 150
Non-Current ( or Long-Term) Assets:
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Computers & Equipment
Total Assets
$36,250
$343,400
Liabilities
5
Current Liabilities:
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Accounts Payable
Notes Payable
Income Taxes Payable
$108,700
$60,000
$12,000
Shareholders’ Equity
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Common Shares
Retained Earnings
Total Liabilities & Shareholders’ Equity
$120,000
$42,700
$343,400
PART B: (15 marks)
The following events and transactions occurred in December:
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December 1 – Rent of $3,500 (for December) paid in cash
December 1 – Various office supplies purchased for $10,000; paid cash
December 5 – Annual insurance premium of $2,000 (for 2017); paid in cash
December 6 – 2 sales staff hired to assist with busy holiday season
December 15 – Payment of $80,000 received for goods shipped and previously
invoiced in prior months
December 20 – Paid $15,000 to a supplier for goods that were delivered in
November
December 27 – Issued 10 invoices totaling $100,000 to various clients for goods
delivered in December. The cost of the goods delivered was $45,000
December 28 – Salaries of $23,000 paid. The office closes on December 29th-31st
and no salary expense is incurred during this period.
December 28 – Received payment of $8,500 from a customer for work to be
performed in January
Other information:
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The company uses a perpetual inventory system.
The note payable is a six-month note with 10% annual interest, signed November
30, 2016. Interest is payable on first day of the every month, starting January 1,
2017, until the note is paid in full
The computers and equipment were purchased on January 2, 2016. The company
estimates that the useful life of these assets will be 3 years, at which time it will
replace the equipment. The company believes that it will be able to sell the used
equipment in 3 years for $5,000. The company policy is to depreciate assets on a
straight-line basis.
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(a) Prepare all journal entries for December. (10 marks)
December 1
Rent Expense
Cash
$3,500
December 1
Office Supplies
Cash
$10,000
$10,000
December 5
Prepaid Insurance
Cash
$2,000
$3,500
$2,000
December 6
NO ENTRY (not an economic event)
December 15
Cash
Accounts Receivable
$80,000
$80,000
December 20
Accounts Payable
Cash
$15,000
$15,000
December 27
Accounts Receivable
Revenue
$100,000
$100,000
December 27
Cost of Goods Sold
Inventory
$45,000
$45,000
December 28
Salaries Expense
Cash
$23,000
$23,000
December 28
Cash
Unearned Revenue
$8,500
Depreciation Expense
Accumulated Depreciation
$1,250
Interest Expense
Interest Payable
$ 500
December 31
December 31
December 31
Insurance Expense
Prepaid Insurance
$8,500
$1,250
$500
$150
$150
7
(b) Prepare a year-end post-closing trial balance (i.e. close off all income statement
accounts to retained earnings before you prepare the trial balance). (5 marks)
Post-Closing Trial Balance (5 marks)
Cash
100,000
Accounts Receivable
185,000
Inventory
32,000
Office Supplies
10,000
Prepaid Insurance
2,000
Computer Equipment(net)
50,000
Accumulated Depreciation
15,000
Accounts Payable
93,700
Unearned revenue
8,500
Income Tax Payable
12,000
Notes Payable
60,000
Interest Payable
500
Common Shares
120,000
Retained Earnings
Totals
69,300
$379,000
$379,000
8
QUESTION 3 (10 marks)
Matrex Inc. sells one product, item X, and uses a periodic inventory system. Information as
to balances on hand, purchases, and sales of item X are given in the following table for
2016:
Quantities
Unit Price
Date
Purchased
Sold
Balance
of Purchase
January 1
—
—
300
$5.00
March 11
1,300
—
1,600
5.20
July 6
—
300
1,300
—
August 27
—
560
740
—
October 31
600
—
1,340
5.60
November 2
200
—
1,540
5.80
—
450
1,090
—
December 13
a) Calculate the ending inventory to be reported on the Statement of Financial Position
(Balance Sheet) for 2016 using the FIFO cost assumption. (4 marks)
290 @ $5.20 =$1,508
600
@ $5.60 =
$3,360
200
@ $5.80 =
1,160
1,090
$6,028
b) How would your ending inventory answer in Part A change if Matrex was using a
perpetual system? (2 marks)
Would not change – ending inventory would still be $6,028
c) At the year-end inventory count, the accounting staff by mistake included some units of
item X, which were being held on consignment by Matrex (therefore held for sale with
another company). What impact will this error have on the financial statements (if any)?
(2 marks)
1.
2.
Net Assets Overstated
Net Income Overstated
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d) Why might a manager prefer to use the FIFO method vs. weighted average? (2 marks)
In a period of rising prices, use of the FIFO method will yield higher net income
and net assets than weighted average
QUESTION 4 (20 marks)
The annual report of Easy Software Inc. for the company’s 2015 fiscal year end show the
following financial information. All amounts reported are in thousands of dollars.
Statement of Financial Position (as at October 31st, 2015)
Cash
Accounts Receivable
Inventory
Prepaid Expenses
Investments
Intangible Assets
Property, Plant & Equipment
Accumulated Depreciation
Liabilities and Shareholders Equity
Accounts Payable
Deferred Revenue
Long Term Notes
Payable
Common Shares
Retained Earnings
2015
$2,990
4,000
1,710
460
1,050
6,480
6,100
(2,200)
$20,590
2014
$1,500
3,770
2,060
470
200
6,000
5,000
(2,000)
$17,000
$6,790
2,100
$7,000
2,000
1,300
7,000
3,400
$20,590
4,000
4,000
$17,000
Statement of Earnings (year ended October 31, 2015):
Sales
Cost of Goods Sold
Gross Profit
Depreciation
Distribution Costs
Gain on Sale of Property, Plant & Equipment
Other Expenses
Net
Income
$3,600
500
3,100
700
600
(400)
500
$1,700
10
Other information:
1. Property, plant and equipment, with a cost of $1,000 and related accumulated
depreciation of $500, was sold on September 30, 2015.
2. During the year, the company issued shares with a value of $1,800 in exchange for
property, plant and equipment.
3. Included in other expenses is an impairment loss of $300 due to a decline in fair
value of inventory held by the company.
REQUIRED:
1. Prepare the Statement of Cash Flows using the indirect method for the year ended
October 31, 2015. (16 marks)
2. What is the total amount of cash that was collected from customers? What is the
total amount of cash that was paid to suppliers? (4 marks) necessary?
Cash Flow from Operating Activities:
Net Income
Non-Cash items:
Depreciation
Gain on Sale of PPE
Non-Cash Changes to Working Capital:
Increase in A/R
Decrease in Inventory
Decrease in Prepaid
Assets
Decrease in A/P
Increase in Deferred Revenue
Net Cash Provided by Operating Activities
$1,700
700
(400)
(230)
350
10
(210)
100
2,320
Cash Flow from Investing
Activities:
Purchase of Investments
Proceeds on Sale of PPE
Purchase of PPE
Purchase of Intangible Assets
Net Cash Provided by Investing Activities
(850)
900*
(300)**
(480)
(730)
Cash Flow from Financing
Activities:
Payment of Dividends
Proceeds on Issuance of Shares
Proceeds Received from Long-Term Note
Net Cash Provided by Financing
(2,300)
1,200
1,300
200
11
Activities
Net Increase in Cash
Cash, beginning of year
Cash, end of year
$1,490
1,500
$2,990
Notes to solution:
*POD
NBV
Gain
900
500
400
PPE (OB)
Sale
Exchange
**Purchase of PPE
PPE (EB)
5000
-1000
1800
300
6100
Cash collected from customers: 3,600 (sales) – 230 (increase in A/R) + 100 (increase
in deferred revenue) = $3,470 (2 marks)
Cash paid to suppliers: $500 (COGS) – 50 (decrease in inventory net of write-down) +
210 (decrease in A/P) = $660 (2 marks)
QUESTION 5 (25 marks)
Appendix 1 contains the 2014 and 2015 Balance Sheet and Income Statement for
Bombardier Inc. Please fill out the table below using the financial statements provided.
Please note that you can detach (“rip out”) Appendix 1 for easier analysis.
a) (10 marks) Calculate the following ratios for 2014 and 2015: (1 mark per ratio)
2015
2014
Debt to Total Assets = Total Liabilities/Total Assets
26,957/22,903=1.177
27,559/27,614=0.998
Times Interest Earned = EBIT/Financing Expense
12
-4,838/418= -11.57
-566/249 = - 2.27
Cash to Total Debt Coverage= Cash provided by Operating Activities/ Current Liabilities
20/11,823 =0.002
847/13,435=0.063
Working Capital = Current Assets - Current Liabilities
12,105 - 11,823= 282.0
13,119 - 13,435= -316.0
Current Ratio= Current Assets/Current Liabilities
12,105/ 11,823= 1.024
13,119/13,435= 0.976
13
b) (6 marks) In the fall 2016, Bombardier requested $1 billion in federal funding (that
is for the Canadian government to invest $1 billion in the company). Using the ratios
calculated in part a) what can you conclude about Bombardier's request. Frame your
answer using the company's liquidity and solvency. Please identify the ratios that you
are using as a reference. Do not exceed 4-5 sentences in your answer!
Points:
The company has no cash and therefore it's short term liquidity and solvency
remain in question - students can use any/all the ratios to prove the point
Conclusion: without a cash injection from the government the company will
likely go bankrupt
c) (9 marks) The CFO of the company has asked you to analyze Bombardier's
Operating Cycle and Cash Conversion Cycle to determine if this is a problem for the
company. Please provide him with your opinion by calculating both cycles using the
information provided.
•
•
Operating cycle = Days in inventory + Days in receivables
Cash cycle = Operating cycle – Days in payables
6 ratios required (1 mark each)
Operating Cycle: 157.23 + 29.586 = 186.816 days (1 mark)
Cash Cycle:
186.816 - 91 days= 95.816 days (1 mark)
Conclusion: this is not the company's problem - cash is received in 30 days
(rounding) and payables are paid in 90 days 1 mark
Receivables turnover 
Credit Sales $18,172

 12.337x
Receivables $1,473
Accounts payable deferral period 
Inventory turnover ratio 
Days in receivables 
365
 29.586 days.
12.337x
365
Cost of Goods Sold $16,199
 91 days.

 4.010 Days in payables 
4.01
Average payables
$4,040
Cost of goods sold $16,199

 2.32ax
Average inventory $6,978
Days in inventory 
365
 157.23 days.
2.32
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APPENDIX 1
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15
Partial Cash Flow Statement
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Question
Total Points
1
15
2
30
3
10
4
20
5
25
Total
100
Marks Awarded
17