BUSINESS 114

Accounting for Decision Making

SEMESTER TWO 2023

QUESTION 1 – Balance Sheet, Income Statement, and Financial Statement Analysis

DiveMasters Pro, a New Zealand company which sells diving goods and provides diving services for enthusiasts of all experience levels, has recently completed operations for the month of September 2023. The balance sheet at the end of August 2023 is shown below.

DiveMasters Pro – Balance Sheet as at 31 August 2023

The events listed below occurred during the month of September 2023:

1 DiveMasters Pro purchased some inventory (diving gear) for a total of $15,000, with half paid in cash and the remaining half on credit.

2 DiveMasters Pro received $500 from a customer who books a diving excursion that will take place next month (i.e., October 2023).

3 DiveMasters Pro issued an invoice to the University of Auckland Diving Club for $4,500 for a delivery of diving gear. The goods sold (being inventory) cost $3,000. The full $4,500 payment will be received at the end of the year.

4 DiveMasters Pro takes out an investment by transferring $5,000 cash to a 6-month term deposit, which accrues interest at an annual rate of 6%, compounded monthly. The accumulated interest will be paid with the principal amount upon investment maturity.

5 The business paid 50% of the outstanding accounts payable from August in cash.

Required:

(a)  For each transaction provided above, analyse the impact on the financial statements by providing the following information and as per the table below:

•    Name of the account impacted by the transaction – select the appropriate account name from the drop-down menu: various account names.

•    The  change in the account - use the drop-down menu to indicate whether there is an increase, decrease, or no impact on the account.

•    The type of account – select one of the following from the drop-down menu: Non-Current Asset, Non-Current Liability, Current Asset, Current Liability, Revenue, or Expense.

•    The specific financial statement affected by the transaction – select one of the following from the drop-down menu: Income Statement or Balance Sheet.

•    The   monetary  amount  involved  in  each  transaction  -  type   in  the   amount  for  the transaction.

(13 marks)

(b)  What is the balance of the Capital account after the above five transactions and the owner draws out $500 cash for personal use at the end of the month? Show all workings.   (2 marks)

(c)  When  analysing  a  firm’s  financial   performance,   a  common  way   is  to   compare  the  firm’s performance with that of its industry peers. The gathered financial information of DiveMasters Pro and its industry peers is as follows:

In light of the provided financial ratios, evaluate how DiveMasters Pro is doing relative to its industry peers regarding profitability to investment and financial risk.   (2 marks – 100 words maximum)

(d)  Taking into account DiveMasters Pro ratios and Balance Sheet, do you think the company should invest the $5,000 into the 6-month term deposit (transaction 4) or would it be more prudent to utilize  this  amount  towards   reducing  the   bank   loan?  (Note:  there  is  no   need  to   do  any calculations). (2 marks – 100 words maximum)

(e)  Why is it important to compare financial ratios against appropriate benchmarks? In addition to comparing against industry peers, identify one alternative way that DiveMasters Pro can employ to gauge its financial performance using financial ratios. (2 marks – 100 words maximum)

(Total for Question 1: 21 marks)

QUESTION 2 – Cost Understanding

Nebula Enterprises is a leading manufacturer of a high-quality game console called Orion. With the rising popularity of augmented reality (AR) games, the company plans to introduce a new AR accessory called Vega  in  2023. Alongside this, their  marketing  manager,  Alex,  is  considering a  promotional campaign offering a free VR headset with each purchase of the Vega product to boost sales in the initial months.

The following information has been provided:

If the promotional campaign proceeds, there will be an additional fixed cost of $150,000 and each VR headset will incur a cost of $10 per unit for the company.

Required:

(a)        (i)        Calculate the breakeven point in revenue for the Orion and Vega products, respectively,

based on the 2023 data and without the new promotional campaign. (Round your answer to two decimal places, if required).   (2 marks)

(ii)       Calculate the profit for the Orion product based on the given data.  (1 mark)

(iii)     Calculate   the   profit  for  the  Vega   product  based  on  the  given  data,  without  the promotional campaign.  (1 mark)

(iv)     Calculate the  additional total  costs  associated with the  promotional campaign for the Vega product.  (1 mark)

(v)       Calculate   the   profit   for   the   Vega    product   when   the    promotional   campaign   is implemented, considering the costs from (iv).   (1 mark)

(vi)     Compare the profits before and after introducing the Vega product with its promotional campaign. Discuss Nebula Enterprises’ financial performance post-launch in light of your findings.   (2 marks – 100 words maximum)

Nebula Enterprises, renowned for its in-house production, is considering an offer from a manufacturer in  Country  Z,  recently  scrutinised  for  poor  labour  standards,  to  produce  its  Vega  product  (i.e., outsource  production)  rather than to  manufacture  it  themselves. The  manufacturer  in  Country Z proposes: (i) a production cost of $165 per unit for the Vega product with a minimum order of 80,000 units, and (ii) a charge of $5 per unit for shipping costs. Accepting this offer would nullify Nebula Enterprises’ variable costs related to manufacturing the Vega product themselves. Moreover, this would also allow Nebula Enterprises to lease part of their manufacturing facility, generating $12 per Vega  unit sold in revenue.

(i)        Determine the  net financial impact of accepting the manufacturer in Country Z’s offer versus if Nebula Enterprises manufactures the Vega product themselves in-house. Briefly discuss which option is the best. (Ignore the promotional costs). (5 marks)

(ii)       Discuss two potential reputational risks that Nebula Enterprises might face if they decide to outsource the production of the Vega product to the manufacturer in Country Z. (2 marks – 100 words maximum)

(Total for Question 2: 15 marks)

QUESTION 3 – Performance Measurement

ClearWater Ltd is known for its bottled natural spring water. Their premium offering, AquaPure, is marketed  as  being  sourced  from  pristine  mountain  springs,  a  claim  that  appeals  to  a  significant segment of customers who prefer pure and untouched water sources. Every month, they forecast to bottle and sell around 20,000 units of AquaPure.

However, of late, unsettling rumors have been circulating, suggesting that ClearWater Ltd might be compromising its commitment to quality. Allegedly, some batches of AquaPure are being sourced from  non-spring sources,  raising questions  about the authenticity of ClearWater  Ltd’s  claims and potentially misleading its dedicated customer base.

In August, amidst these rumors, the company’s anticipated and actual costs were as follows:

Required:

(a)      Calculate the budgeted cost of producing a single AquaPure unit.

(3 marks)

(b)      Calculate the total flexed budget cost for AquaPure units in August.

(3 marks)

(c)       Ethical and Cost Implications:

(i)   From  an  ethical standpoint,  evaluate the  potential  implications of the  rumors  regarding ClearWater Ltd’s water sourcing. What are the broader moral ramifications of potentially misleading customers about the purity and source of AquaPure?         (2 marks – 100 words maximum)

(ii)  Analyse how these rumors and the ethical concerns they raise might influence ClearWater Ltd’s costs, sales, and overall brand reputation. What potential financial repercussions could ClearWater Ltd face if these rumors are validated?  (2 marks – 100 words maximum)

(d)      Balanced Scorecard Perspectives and Corrective Measures:

(i)   Using   the   balanced   scorecard   approach,   identify   which   two   perspectives   are   most jeopardized by these rumors. How might these perspectives be adversely affected by the circulating speculations?  (2 marks – 100 words maximum)

(ii)   Suggest appropriate measures and actions ClearWater  Ltd should undertake for damage control. How can the company ensure transparency in the future to rebuild trust with its stakeholders? (2 marks – 100 words maximum) (Total for Question 3: 14 marks)