Acct 90002 – Suggested Solutions Exam Sem 1
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ACCT90002: FSA FINAL EXAM ……..Sem 1, 2014Suggested answers PART AQUESTION 1Problem 8-7 (60 minutes)a.SPYRES MANUFACTURING COMPANYComparative Common-Size Income StatementsYear 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 14.0Gross margin on sales 18.3 14.0 57.1Operating expenses 16.8 10.2 98.0Income 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)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 marksQUESTION 2Problem 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 5Earnings 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.