Heriot-Watt University Accounting - June 2016 Section II Case Studies Case Study 1

HERIOT-WATT UNIVERSITY
ACCOUNTING – JUNE 2016
Section II
Case Studies
Case Study 1
‘I just don’t understand,’ said Aldo, the perennially glum CEO of Lisbon Pharma SA. ‘I’d
thought that, with all that investment in new shares and loans, our cash position would
have strengthened. Yet it seems that the opposite has happened.’
The board of directors of Lisbon Pharma SA is meeting to review the Income Statement
and the Balance Sheet for its financial year to 31 May 2016. (See Appendix 1.)
Aldo was Aldo Moreno, the long-serving CEO. He had a pessimistic nature and regarded
all new proposals with considerable caution.
‘I agree, Aldo,’ added Anabela DaRocha, the company’s Chief Marketing Officer. ‘What’s
happened to our cash, Emile?’
Emile Duarte was the Chief Financial Officer, appointed only six months ago. He had
found his new job unexpectedly challenging and had been struggling. In particular, he
had been experiencing difficulties in developing any working relationship with the CEO.
‘Oh, I’m sorry,’ apologised Emile. ‘I really should have prepared a Cash Flow Statement
as well.’
‘Hmm, that’s stating the obvious,’ complained Aldo. ‘I’d have expected better from you.’
Before Emile could respond, Anabela interceded on his behalf. ‘Aldo, you are being so
unreasonable. Emile’s had a lot to deal with recently with his father’s death – you need to
be more understanding.’
‘Aldo’s right. We need a clear analysis of what has happened to the funds invested in new
shares and loans. I’ll get to work right away,’ concluded Emile.
‘Well, we can rearrange our diaries and let’s come back within the hour,’ ordered Aldo.
‘Let’s see what you can come up with.’
1
Appendix 1
The following information has been extracted from the draft accounts of Lisbon Pharma
SA:
2016 2015
Income Statements €’000 €’000

Sales 9,854 7,805
Cost of Sales (5,417) (4,609)
Gross Profit 4,437 3,196
Selling & Distribution costs (1,440) (875)
Administrative Expenses (621) (484)
Operating Profit 2,376 1,837
Interest (228) (96)
Profit before taxation 2,148 1,741
Taxation (601) (435)
Profit after taxation 1,547 1,306
Dividends paid (450) (37)
Retained profit for the year 1,097 1,269
Balance Sheets €’000 €’000
Non-current Assets
Buildings 675 115
Plant & Machinery 1,665 1,013
Computer Equipment 172 91
2,512 1,219
Current Assets
Inventory 1,758 1,163
Debtors (see Note 4) 1,225 986
Cash at Bank 50 725
3,033 2,874
Current Liabilities
Trade Creditors 271 1,453
Taxation Payable 601 435
872 1,888
Net Current Assets 2,161 986
Total Assets less Current Liabilities 4,673 2,205
Long-term Liabilities
Loans (896) (125)
Net Assets 3,777 2,080
Capital and Reserves

Ordinary Share Capital 750 250
Share Premium 150 50
Retained Profits 2,877 1,780
3,777 2,080
2
The following additional information is available:
1. The annual depreciation charges for the year to 31 May 2016 were:
Buildings €20,000
Plant & Machinery €410,000
Computer Equipment €34,000
2. There were no disposals of buildings and computer equipment during the year.
3. Some plant and machinery was sold during the year for €45,000, giving rise to loss
on disposal of €15,000 – against a net book value of €60,000.
4. Debtors comprise:
2016 2015
€’000 €’000
Trade debtors 1,350 1,062

Less:
Provision for bad debts (125) (76)
1,225 986
5. Ordinary share capital comprises only ordinary shares with a nominal value of €1
per share. During the year, 500,000 €1 ordinary shares were issued at a price of
€1.20 per share.
6. Long-term liabilities comprise loans from financial institutions. Although new

loans were received during the year, €65,000 was also repaid on these loans.
Required:
1. Prepare a Cash Flow Statement for the year to 31 May 2016 (based on the draft
Accounts in Appendix 1) for discussion by the Board.
(24 marks)
2. From your Cash Flow Statement, identify the main factors that have contributed
to the reduction in the company’s cash at bank.
(7 marks)
3. From a review of the Income Statement, identify the key issues that should
concern the Board.
(4 marks)
Total 35 marks
3
Case Study 2
Oporto Tecnica LDA manufactures a single electronic component, used in the assembly
of washing machines.
For June 2016, the company has produced the following operating results:
Actual Original Budget

Units sold 17,000 16,000
€ €
Sales 646,000 592,000
Materials (200,260) (192,000)
Labour (306,850) (320,000)
Contribution Margin 138,890 80,000
Fixed Costs (27,000) (26,000)
Net Profit 111,890 54,000
The original budget was based on the following standards:
Sales Price €37 per unit
Materials 3kg @ €4 per kg = €12 per unit
Labour 2 hours @ €10 per hour = €20 per unit
Standard Contribution = €37 - €32 = €5 per unit
Fixed Costs €26,000
Budgeted Sales 16,000 units
The actual operating results are based on the following:
Sales Price €38 per unit
Materials 3.1kg @ €3.80 per kg = €11.78 per unit
Labour 1.9 hours @ €9.50 per hour = €18.05 per unit
Fixed Costs €27,000
Actual Sales 17,000 units
4
Required:
1. Prepare the Flexed budget for June and compare it to actual results and the
original budget in a tabular format.
(6 marks)
2. Compute the relevant materials, labour, fixed overhead and sales variances for
June.
(11 marks)
3. The budgeting process can provide several advantages to business operations.

Discuss and identify the benefits that may arise.
(5 marks)
4. Based on the variance analysis, advise management on the principal causes of the
differences between budgeted profit and actual profits.
(3 marks)
Total 25 marks
END OF PAPER

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HERIOT-WATT UNIVERSITY

ACCOUNTING – JUNE 2016

Income Statements €’000 €’000

Balance Sheets €’000 €’000

Net Current Assets 2,161 986

Total Assets less Current Liabilities 4,673 2,205

Net Assets 3,777 2,080

Capital and Reserves

Trade debtors 1,350 1,062

6. Long-term liabilities comprise loans from financial institutions. Although new

Actual Original Budget

Net Profit 111,890 54,000

The original budget was based on the following standards:

Sales Price €37 per unit

Materials 3kg @ €4 per kg = €12 per unit

Labour 2 hours @ €10 per hour = €20 per unit

Standard Contribution = €37 - €32 = €5 per unit

Fixed Costs €26,000

Budgeted Sales 16,000 units

The actual operating results are based on the following:

Sales Price €38 per unit

Materials 3.1kg @ €3.80 per kg = €11.78 per unit

Labour 1.9 hours @ €9.50 per hour = €18.05 per unit

Fixed Costs €27,000

Actual Sales 17,000 units

3. The budgeting process can provide several advantages to business operations.

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