November 2007 - SURNAME OF CANDIDATE: FIRST NAME OF...

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SURNAME OF CANDIDATE: FIRST NAME OF CANDIDATE: STUDENT ID: SIGNATURE: SCHOOL OF ACCOUNTING ACCT 1511: Accounting and Financial Management 1B FINAL EXAMINATION November 2007 Time Allowed: 3 Hours Reading Time: 10 minutes Total Number of Questions: 7 Answer ALL questions. The questions are NOT of equal value. Answers to Questions 1 to 6 must be written in ink on the lines or in spaces provided in this Booklet . Question 7 must be answered on the separate Generalised Answer Sheet provided using a 2B pencil. This paper is NOT to be retained by the candidate. DO NOT OPEN THIS PAPER UNTIL INSTRUCTED BY THE EXAM SUPERVISOR Official Use Only Q Mark 1 2 3 4 5 6 Total (/75)
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1 QUESTION 1 (10 MARKS): CASH FLOW STATEMENTS The CEO of Jackson Corporation has come to your bank for a loan. He states: “Each of the last three years, our cash has gone down. This year, we need to increase our cash by $7,000 so that we have a $20,000 cash balance at year-end. We have never borrowed any money on a long-term basis and are reluctant to do so. We definitely, however, need to purchase some new and more advanced equipment to replace the old equipment we are selling this year. We received quotes ranging from $25,000 to $35,000 for the new equipment. We also want to buy back some of our own shares because they would be a good investment. In addition, we would like to pay dividends of 50% of net profit instead of our usual 40%. Given our expected net profit of $20,000 and the following estimations of cash flows, I estimate we will have to borrow $12,000 and this is the maximum amount we are willing to borrow.” SCHEDULE OF EXPECTED CASH FLOWS FOR 2007 $ $ Inflows of cash: Cash collected from customers 34,000 Gain on sale of old equipment 3,000 Proceeds from sale of old equipment 8,000 Proposed bank loan 12,000 Total inflows 57,000 Outflows of cash: Depreciation expense 6,000 Purchase equipment 30,000 Cash paid to suppliers 4,000 Pay dividends (50% of net profit) 10,000 Total outflows 50,000 Increase in Cash 7,000 Opening cash balance 13,000 Closing cash balance 20,000 The CEO explains that the $5,000 expected cost of share buyback was not included because it would involve only a transaction between the company and its existing shareholders and would be of no interest to “outsiders.” After looking at the schedule, you find that there are serious problems and inaccuracies. You need to explain to the CEO why his schedule of cash flows is incorrect and that he will likely need to borrow more than $12,000 to have a $20,000 cash balance at the end of 2007.
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2 Required: (a) Identify and explain three (3) inaccuracies in the Jackson Corporation’s schedule of expected cash flows for 2007. (6 marks) 1. 2.
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This note was uploaded on 01/31/2012 for the course ACCT acct taught by Professor A during the Three '11 term at University of New South Wales.

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November 2007 - SURNAME OF CANDIDATE: FIRST NAME OF...

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