Reference no: EM132343383

Question 1: Catrike Cycles Ltd

Part 1: Catrike Cycles Ltd is a small company that was originally started in late 2010 by a group of cycling enthusiasts who were unable to obtain the parts needed to repair or modify their bikes. From its early days Catrike Cycles Ltd's business model has been very locally focused with its services and product offerings tailored to meet the needs of cyclists from around the east coast of Australia.

While the firm imports a range of specialist racing componentry from suppliers throughout Europe and the United States it primarily manufactures its own frames and, using some imported components, assembles race and touring bikes within a factory unit located in Fyshwick. The firm also operates from two retail outlet/showroom in Manuka and Civic. It leases all premises on a 'month-to-month' basis. The firm's management has traditionally competed with larger European and American-based brands, such as 'Cannondale' or 'Colnago', based upon its ability to offer greater individual customer service (set-ups and bespoke frames) and expert advice based on their knowledge of the Asian-Pacific riding conditions.

The management of Catrike Cycles Ltd has increasingly witnessed changes in their market with many of their local clients now purchasing cycling products via the internet rather than directly from the firm's factory unit/retail outlet. In addition, the firm is now also experiencing strong sales growth from across the Asian-Pacific region, with more orders for bespoke components coming from Singapore, Hong Kong and Manilla. Catrike Cycles Ltd's management are willing to embrace this changing marketplace but some members of the executive team are concerned about the firm's recent financial performance. Others within the company's management group have a conflicting view, believing Catrike Cycles Ltd is performing comparatively well.

In a management meeting during December, several directors (who are also among the major shareholders) of the firm expressed their concerns about the performance of Catrike Cycles Ltd. These directors/shareholders have made loans to the company of $1,400,000 in the recent past and were also therefore its major creditors. The loan was provided to Catrike Cycles Ltd free of any interest charge and now these directors require that the firm would begin to repay them their loan capital in the coming months.

These shareholder/directors have also recently suggested that they require more timely financial data from the company. As a result of their demands the firm will now produce monthly financial statements. The management of Catrike Cycles Ltd have scheduled a finance committee meeting in early February 2015 to discuss the business's performance. Catrike Cycles Ltd's external accountant had prepared the following post-closing trial balance as at the end of December 2018 and a list of summarised transactions that had occurred during January 2015.

Catrike Cycles Ltd: Post closing trial Balance as at 31st of December 2018
Account	Debit	Credit
	$	$
Cash at Bank	592,500
Accounts receivable	1,700,000
Less: Allowance for Doubtful Debts		190,000
Inventory	2,220,000
Prepaid insurance	70,000
Prepaid property lease	235,000
Equipment	4,400,000
Motor vehicles	1,000,000
Total accumulated depreciation		1,340,000
Accounts payable		2,700,000
Accrued salary and wages		440,000
Advertising payable		580,000
Directors loan		1,400,000
Share capital		2,747,500
Retained earnings		820,000
	$10,217,500	$10,217,500

During January 2015, the following events occurred:

a. Catrike Cycles Ltd paid $1,708,000 cash to its creditors;

b. The firm also paid all salaries and wages outstanding at the end of December;

c. Catrike Cycles Ltd purchased $800,000 worth of cycle parts to hold in inventory on credit from its US and European suppliers;

d. The firm made internet sales (including sales via its inter-state and Asian Pacific agents) on credit of $2,265,680 during January;

e. The firm made direct 'store-based' sales and service fees from its unit/outlet in cash totalling $470,000 during January;

f. The management of Catrike Cycles Ltd conducted a 'stock-take' at the end of January and determined that Cost of Goods Sold [CoGS] for the month was $1,570,000;

g. The firm's existing insurance coverage expires at the end of January. As a result, Catrike Cycles Ltd paid cash for its annual composite insurance premium of $840,000 (12 months policy commencing 1st of February 2015, covers building / equipment; fire and theft, motor vehicles; person liability, workers compensation etc);

h. The firm received in cash the total sum of $2,800,000 during the month from its current debtors;

i. Catrike Cycle Ltd's management are becoming increasingly aware that their segment of cycling market is dependent on the technical innovation of their frames. As a result they have begun to undertake a more formalised approach to 'research and development'. During the month they have spent $12,500 cash investigating the incorporation of a variety of new alloys into their frames. Unfortunately, these alloys have provided no real benefit to their products, and as a result management will commit future funds to research into a range of composite materials;

j. Paid $150,000 as an initial repayment of the monies owing on the 'Director's loan';

k. During a television interview recorded at the 'L'Etape Australia' (a cycling event held in the NSW Snowy Mountains during December) both Cadel Evans (former Tour De France winner) and recently retired Olympian, Anna Meares, offered positive endorsements for Catrike Cycles Ltd's products. The international media exposure provided by these interviews immediately led to an increase in activity on the firm's website. The firm's management are delighted and believe that, although the pair's endorsements was unsolicited, it was the equivalent of the firm spending $1,000,000 on publicity and marketing;

l. Unfortunately, the management of Catrike Cycles Ltd had already embarked upon an advertising campaign using a variety of media in late 2018 (and thus were unable to capitalise on the recent favourable press). All advertisements went to air in December 2018. The contract called for Catrike Cycles Ltd to pay the firm's advertising liability in two equal instalments. During January, the firm paid the first of these two instalments on its advertising liability;

m. Paid lease on retail space/factory unit for February of $240,000. (The lease is payable monthly in advance. A new lease agreement begins from February);

n. The firm paid utility-related expenses (lighting, power, government charges), incurred during January, of $210,000;

o. The management of Catrike Cycles Ltd has received notification that Vulcan Corporation Cycling Ltd has gone bankrupt - this is a debtor with an outstanding balance of $130,000;

p. After writing-off Vulcan Corporation Cycling Ltd's debt, management requires the Allowance for Doubtful Debts to have a balance of $180,000;

q. The management of Catrike Cycles Ltd depreciates equipment at a rate of 20 per cent per annum based on its historic cost (straight-line). (Note: For the simplicity, the firm's management maintains a single accumulated depreciation account relating to both equipment and motor vehicles);

r. The management of Catrike Cycles Ltd depreciates motor vehicles at a rate of 15 per cent per annum based on its historic cost (straight-line);

s. The management of Catrike Cycles Ltd has noted that the current book value of their plant and equipment is slightly below its current market price. As a consequence, the firm's management is unsure as the whether they should revalue the plant and equipment upward by an additional $2,000;

t. The firm incurred (but has not yet paid) salaries and wages expense of $310,000 for January;

u. The firm has hired a new part-time staff member with specific expertise in the promotion of internet sales and web design. She is expected to increase internet sales by $80,000 per month. She will commence employment with Catrike Cycles Ltd on the 1st of March 2015 and will receive $12,000 per month;

v. Each year during January, the firm's management declares a dividend. The total dividend declared during January 2015 is $100,000 to be shared across all shareholders. The dividend will be paid on March the 31st, 2015;

w. Sales for January included several new products. Importantly these new offerings include the release of a carbon-fibre racing frame. As a consequence of the innovative nature of the new frame, management have offered a 12-month warranty with each of the new units sold. Given the total sales of the new frame they estimate the potential total cost of replacing or repairing all frames that prove faulty will only amount to a total of $7,500;

x. On the last day of the month, management determines that several of the firm's motor vehicles are now surplus to the company's requirements. As a result, on that day the company sells these older trucks and delivery vans. Those vehicles sold had originally cost $250,000 (in total) and were sold for an agreed price of $25,000. The firm had depreciated the vehicles until the 31st of January and they collectively had accumulated depreciation of $240,000. The cash payment for the vehicles was received immediately;

y. Catrike Cycles Ltd has just begun selling some of its products on consignment through cycle shops throughout Australia and the region. These retailers charge the firm a consignment fee on the sales they make. Consignment fee for a month are determined on the last day of that month based on the proportion of sales made by the firm's sales agents. For January, consignment fees were $22,000. This amount will be paid in February;

z. As a result of the publicity generated during the 'L'Etape Australia' by late January Catrike Cycles Ltd received an order from Sydney Bikes Ltd to sell $155,000 worth of custom designed frames to be delivered in late March 2015. Given that Sydney Bikes Ltd are a new customer, Catrike Ltd will require them to pay a deposit of 20 per cent ($31,000) by the end of February 2015;

aa. The company tax rate is currently 30 per cent;

Required: (Note. Make and fully explain any assumptions needed)

For the month ending 31st of January 2015:

• Prepare journal entries (including adjusting entries);
• Post to ledger accounts;
• Prepare a 'post-adjustments' trial balance;
• Prepare closing entries and a 'post-closing' trial balance;
• Prepare an Income Statement (a statement of financial performance) for the month of January 2015;
• Prepare a Balance Sheet (a statement of financial position) as at the 31st of January 2015;

Part 2: Catrike Cycles Ltd - One of the directors also suggested that the firm needed to benchmark its performance against other 'cycle-based' organisations. The firm's operations manager has obtained the following basic ratios from a commercial supplier of financial data (see below).

Basic industry ratios:
ROE	24.9 per cent	ROA	17.5 per cent
Leverage	1.51 times	Profit margin	4.0 per cent
Gross margin	39 per cent	Inventory turnover	17.2 times
Asset turnover	5.01 times	Current ratio	.51 times
Debtor turnover	33.4 times
[Note: These ratios are based on the full financial year ended 30th June 2018].

However, some within the firm's management group have cautioned against direct financial comparisons, suggesting that this may be problematic given that truly comparable data may be difficult to obtain and interpret.

Required:

• Irrespective of such concerns, prepare an analysis of your results.
• Using the financial reports, you have created, and the industry data obtained by the operations manager, comment on the performance of Catrike Cycles Ltd for the month of January 2015. What issues should the management of Catrike Cycles Ltd consider when interpreting such data?

Question 2: Vulcan Corporation Furniture Ltd

Part 1: Vulcan Corporation Furniture Ltd began operations only ten years ago, as a private carpentry business, but grew quickly when the firm moved from the manufacture of traditional furniture to the less expensive 'customer-assembled' alternative. The firm success has been based on the quality of its product. Rather than using cheaper 'particle board', the firm has gained increasing sales and market share through the use of higher quality materials. The 'up-market flatpacks' are principally created using a variety of timbers and stainless-steel fixing components. The 'flatpacks' are sold predominantly throughout Australia and (increasingly) across Asia by independent furniture retailers.

Initially, Vulcan Corporation Furniture Ltd produced only kitchen cabinets. Due to increasing enquires from customers the firm has recently expanded its range to fit a wider selection of furniture including bookcases, dining tables and chairs. All 'flatpacks' are of a very similar design, but models differ in size and quality based upon their application. Recently management has noted that demand for the firm's 'flatpacks' are being increasingly dominated by sales of newer, more complex pieces.

The firm's operational managers have become increasingly concerned as to the level of difficulty involved in producing these more intricate 'flatpacks'. The retail customers for these new model 'flatpacks' are also more demanding in terms of their expectation of quality and are quick to reject panels they believe to be inferior. The senior management of Vulcan Corporation Furniture Ltd have hired an external analyst who has noted some inconsistency in the processes used to construct some models of the firm's product range. A discussion with the firm's operations manager revealed that the more complex 'flatpacks' were considered particularly laborious by production personnel. Employees of Vulcan Corporation Furniture Ltd have complained at the difficulties associated with maintaining build-quality for these lower volume components compared to the original kitchen-based 'flatpacks'. The firm's sales and marketing team however believes the expansion of the firm's range will be a major factor in Vulcan Corporation Furniture Ltd's success in the future.

The firm's founding shareholders were a small group of carpenters and as a result it uses only a very basic management accounting system that collects and collates aggregate/average cost data on the manufacturing and wholesaling processes. When Vulcan Corporation Furniture Ltd initially began operations, accounting was seen only as a 'distraction' with the firm's management focused on product development and sales, however many within the current management team are becoming increasingly concerned that the accounting system's 'generic' treatment of data is hindering their ability to properly manage the operations of the business. In addition, the firm's current management believes that if Vulcan Corporation Furniture Ltd is to continue to grow it will need to seek finance beyond that they will be able to provide, thus better accounting systems and data is becoming increasingly essential.

The following is an extract from Vulcan Corporation Furniture Ltd's trial-balance that was prepared at the end of June 2015 and the existing predictive data available for the three-month period from 1st of July 2015 to 31^st of September 2015:

Vulcan Corporation Furniture Ltd Extract from trial-balance as at 30th of June, 2015
	$	$
Cash at Bank	$2,940,000
Accounts Receivable	$9,000,000
Inventory:  Finished Goods	15,691,200
Inventory:  Materials*	5,520,000
Manufacturing Equipment	38,000,000
Less: Total Accumulated Depreciation		13,500,000
Sales and administrative Equipment	11,720,000
Less: Total Accumulated Depreciation		480,000
Taxation payable		350,000
Share Capital		41,820,000
Retained Earnings		24,721,200
* includes Timber @ $4,800,000 and Fixing componentry @ $720,000

Additional data:

Sales data:

• 'Flat-packs' range in price from $1,540 to $260 depending upon application. However, the average unit selling price of a body-panel is $580. Vulcan Corporation Furniture Ltd management use the average price for the preparation of its sales budget. Projected total sales [all types of panels] for the coming four months: July, 2015 40,000, August, 2015 50,000, September, 2015 60,000 and October, 2015 60,000.
• Sales are all assumed to be made on a 'credit' basis. Vulcan Corporation Furniture Ltd expects to collect all the outstanding 'accounts receivable' owed to it at the end of June. This means they will collect the entire amount of $9,000,000 (as shown in the trial balance above) during July.
• The firm's accounting records suggest that 65 per cent of the firm's sales are collected in the month that the sale is made
• Given the potential economic conditions expected for 2015, the firm's management is predicting 'bad debts' of one percent of sales, therefore of the remaining 35 per cent to be collected during the following month, the firm expects to collect only 34 per cent of the cash owed to it (however, given the firm will pursue the payment of all monies for a period of six months following a sale, all 'bad debts' will be included in Accounts Receivable balances);

Selling and administrative (S&A) costs:

• Monthly selling and administrative expenses are also estimated using a flexible budgeting formula. (Activity is measured in units sold.)

S&A	Fixed costs	Variable costs
Salaries	$120,000	-
Commissions	-	$3.40
Depreciation	$120,000	-
Shipping	-	$2.30
Other	$90,000	$5.10

• Monthly selling and administrative expenses are paid in cash during the month within which they are incurred;

Finished goods inventory:

The following data pertain to production policies and manufacturing specifications followed by Vulcan Corporation Furniture Ltd:

• Finished goods inventory on the 1st of July is 32,000 units;
• The desired ending inventory for each month is 80 percent of the next month's sales;

Materials:

• The data on materials used are as follows:

Direct Material	Per-Unit Usage	Cost per metre or component
Timber	10 metres	$24
Fixing components	6 components	$6

• Inventory policy dictates that sufficient materials be on hand at the beginning of the month to produce 50 percent of that month's estimated sales. This is exactly the amount of material on hand on the 1st of July;
• All materials are purchased using cash;

Labour:

• The direct labour used per unit of output is on average four (4) hours;
• In an attempt to boost the local manufacturing sector Vulcan Corporation Furniture Ltd has been/will be heavily subsidised by both the Victorian state and Federal Governments and as a result the 'average' direct labour cost per hour is only $40.00;
• Direct labour expenses are paid within the month they are incurred;

Manufacturing overhead:

• Manufacturing overhead each month is estimated using a flexible budget formula. Activity is measured using direct labour hours. Fixed costs are allocated to determine 'unit cost', using the following algorithm,

Fixed cost per unit = direct labour hours per unit x (total fixed overhead / total labour hours).

Overheads	Fixed-Cost	Variable-Costs (per DLHr)
Supplies	-	$1.50
Power	-	$1.00
Maintenance	$60,000	$1.10
Supervision	$28,000	-
Depreciation	$1,000,000	-
Taxes	$36,000	-
Other	$290,000	$6.60

Liquidity management:

• If the firm develops a shortage of cash by the end of a month, sufficient cash is borrowed to cover the shortage. Any cash borrowed is repaid at the end of the quarter, as is any interest due. (Cash borrowed at the end of the quarter is repaid at the end of the following quarter);
• The interest rate on borrowings is 8 per cent per annum;
• Vulcan Corporation Furniture Ltd's cash balance on the 1st of July is $2,940,000. (Thus, no money is owed at the beginning of July).

Dividends and Taxation:

• Vulcan Corporation Furniture Ltd current income tax rate is 30 per cent;
• All income tax payable for the period ending June 30th of 2015 will be paid by the end of July 2015;
• All income tax payable for the July to September period will be due for payment after June 30th of 2020;
• The management of Vulcan Corporation Furniture Ltd intends to declare a dividend of $250,000 on the 1st of September to its shareholders. The amount will be paid on the 1st of December 2015;

Required: (Note. Make and fully explain any assumptions needed)

Prepare a monthly operating budget for the first quarter of 2015 (July to September inclusive) using the following schedules:

1. Sales budget;

2. Collection of cash schedule from accounts receivable;

3. Production budget;

4. Direct materials purchases budget;

5. Direct labour budget;

6. Manufacturing overhead budget;

7. Selling and administrative expenses budget;

8. Ending finished goods inventory budget;

9. Cost of goods sold budget;

10. Cash Budget;

11. Budgeted income statement for the quarter (including income taxes);

Part 2: Vulcan Corporation Furniture Ltd - Competition has intensified for Vulcan Corporation Furniture Ltd with a number of Vietnamese firms recently beginning to also supply higher quality self-assembled furniture. Sales staff have suggested that several of Vulcan Corporation Furniture Ltd's wholesale customers have begun to directly import packs from these suppliers. Anecdotally the sales team at Vulcan Corporation Furniture Ltd have suggested that not all types of panels are being directly imported and that for some product lines the firm seems to have maintained its comparative advantage. As a result, management have become concerned that their budgetary data is too general to truly assist in their decision making and therefore needs to be more 'refined'.

After meeting the management of a cross-section of its customers and suppliers the senior management of Vulcan Corporation Furniture Ltd would like to investigate the possibilities of establishing an 'activity cost based' budgeting and costing system. Many of the management team had read about activity-based costing (ABC) in American business journals. These journals had often suggested that some smaller firms lagged behind in terms of adopting innovative business practises, while their larger competitors implement new techniques without hesitation. Vulcan Corporation Furniture Ltd's management team saw this as an opportunity to adopt the 'world's best practice'.

Required: (Note. Make and fully explain any assumptions needed)

Having completed the budget for the period spanning July to September 2015 comment on the issues the management of Vulcan Corporation Furniture Ltd need to consider before adopting an 'activity based' budgeting and costing system.

Irrespective of whether the firm was to adopt an 'ABC' budgeting and costing system, given Vulcan Corporation Furniture Ltd uses only a very basic management accounting system that collects and collates only 'generic' data, briefly state what would be the major changes you would make to the firm's current budgetary system.

Attachment:- Accounts Questions.rar