BUSINESS 114

Accounting for Decision Making

SEMESTER ONE 2024

EXAM S1 2024

SECTION A: MULTIPLE CHOICE QUESTIONS – Professionals and Advisors

QUESTION 1

Vince, an experienced investment advisor and accountant, has a regular phone-in show on local radio. In  his  show,  he  frequently  gives  investment  advice  to  callers.  One  day  in  response  to  a  caller’s questions, he advises investing in TGO Ltd. Mandy, a listener, hears the broadcast and, acting on the advice, invests in TGO Ltd. TGO Ltd. subsequently goes into liquidation. Mandy threatens to sue Vince for her losses.

As Vince’s advisor, what advice would you give?

(a)  Mandy is likely to win this claim, subject to proof that she relied on Vince’s advice.

(b)  Mandy is not likely to win this claim as there is no special relationship with Vince - Mandy is too far removed as a member of the general public.

(c)   Mandy is likely to win if she relied on the advice, unless Vince failed to give a disclaimer at the start of the radio programme.

(d)  Mandy is likely to win this claim as Vince is a professional and will be held to account for losses suffered by the world at large under the principles of Hedley Bryne v Heller.

(Total for question 1: 1 mark)

QUESTION 2

Which of the following is potentially a complete defence in an action for negligent misstatement?

i.       An effective disclaimer.

ii.       Contributory negligence.

iii.       The fact that no duty of care was owed by the statement-maker to its recipient.

iv.       The fact that the statement-maker has made a simple miscalculation, which would be easy to correct.

(a)  Only statements (i) and (iii) are correct.

(b)  Only statements (i), (ii) and (iii) are correct.

(c)  Only statements (i), (iii) and (iv) are correct.

(d)  All statements are correct.

(Total for question 2: 1 mark)

QUESTION 3

Which of the following will always involve the exercise of agency powers?

i.       A financial advisor recommending investment schemes to a client.

ii.       A lawyer drafting a complicated contract for a client.

iii.       A loan officer for a bank, witnessing customers signing mortgages.

iv.       An employee at a restaurant, whose job involves buying supplies every morning at a market on the restaurant’s account.

(a)  Only statements (ii) and (iv) are correct.

(b)  Only statements (ii) and (iii) are correct.

(c)  All statements are correct.

(d)  Only statement (iv) is correct.

(Total for question 3: 1 mark)

QUESTION 4

Gem has a house in Christchurch. She is going for an extended trip overseas and will be away for at least 6 months.  She was hoping to sell her house before she left, but has not been able to do so, so she asks her friend Melissa to sell the house for her in her absence.  Melissa agrees and they enter into a written agreement, giving Melissa authority to act on Gem’s behalf.  Gem has had the house valued at $1 million and makes it clear to Melissa that this is the minimum price she would accept.

Whilst managing the house sale, Melissa finds out that a prospective buyer, Nathan, is willing to pay $1.2 million for the house and is very keen to purchase as it is near his children’s school.  Melissa sees an opportunity here, so she emails Gem, saying, “I’m sorry, I can’t find a buyer, but I’ll buy your house myself for $1 million.”  Gem agrees and the house is duly sold to Melissa for $1 million.

A few weeks later, Melissa sells the house to Nathan for $1.2 million.  When Gem returns from her trip, she finds out what has happened.

Which of the following statements is correct?

(a)  Melissa does not need to pay anything to Gem because although Melissa is in breach of her fiduciary duties, Gem has not suffered any loss as a result of the breach - after all, the market

value of the house was $1 million, and she gets $1 million. (b)  Melissa must pay Gem $200,000 to account for her profit.

(c)   Melissa is just doing her friend Gem a favour, and therefore does not owe any fiduciary duties to Gem.

(d)  Melissa owes fiduciary obligations to Gem but is not in breach of any of those obligations.

(Total for question 4: 1 mark)

QUESTION 5

Matt has a house in Auckland. He signs a document authorising Terry to sell the house and sign the sale contract on his behalf. Jane is keen to buy it. Terry shows Jane the written authorisation. After some negotiations, Jane (as the purchaser) and Terry sign a contract for the sale and purchase of the house. Terry signs in his own signature but also puts '(on behalf of Matt)' beside his signature.

However, now Matt refuses to transfer the title to Jane, which is a breach of contract. Matt says: 'Well,

look at the signature. It's certainly not mine.' Who is liable to Jane for breach of contract?

(a)  Matt only. (b)  Terry only.

(c)   Both Matt and Terry.

(d)  Neither Matt nor Terry.

(Total for question 5: 1 mark)

QUESTION 6

Commonly, fiduciary relationships are owed by:

i.       The two parties to a contract, and doctors to their patients.

ii.       Company directors to shareholders, and accountants to their clients.

iii.       Employers to their employees, and agents to principles.

iv.       Accountants to their clients, and trustees to beneficiaries. Which of the following statements is correct?

(a)  Only statements (ii), (iii) and (iv) are correct. (b)  Only statements (ii) and (iv) are correct.

(c)  Only statement (i) and (ii) are correct.

(d)  Only statement (iv) is correct.

(Total for question 6: 1 mark)

QUESTION 7

Aroha is the office manager for an accountancy firm.  As part of her role, she has authority to make purchases for office supplies up to a value of $5,000.  If Aroha makes an order for office supplies which exceeds this $5,000 cap:

i.       Her employer may be bound to honour the purchase if the supplier does not know about the budget cap.

ii.       Aroha has implied actual authority to make the purchase due to the nature of her role.

iii.       Aroha may have apparent authority to make the purchase due to the nature of her role.

iv.       Her employer will only be bound to honour the purchase if the supplier knows about the budget cap.

Which of the following statements is correct?

(a)  Only statements (i) and (iii) are correct.

(b)  Only statements (i) and (ii) are correct.

(c)  Only statements (iii) and (iv) are correct.

(d)  Only statements (ii) and (iv) are correct.

(Total for question 7: 1 mark)

QUESTION 8

Select the best definition of “an agent” from the list below:

(a)  An agent is a person engaged by a third party for any purpose. (b)  An agent is a person who sells commodities for a third person.

(c)  An agent  is  a  person  engaged for the  purpose  of  bringing  another  person  into  contractual relations with third persons.

(d)  An agent is a person engaged for the purpose of doing any work for another person.

(Total for question 8: 1 mark)

QUESTION 9

The following are some statements about agency:

i.       The  concept  of agency is necessary for the existence and operation of corporations, as corporations can only act through human agents.

ii.       Agents must be in a position of power and control over their principal.

iii.       Agency  relationships  always  arise  from  a  contractual  relationship,  such  as  the  retainer between lawyer and client.

iv.       The agency relationship is fiduciary in nature.

Which of the following statements is correct?

(a)  Only statements (i) and (iii) are correct.

(b)  Only statements (ii) and (iii) are correct.

(c)  Only statements (i) and (iv) are correct.

(d)  Only statements (i) and (ii) are correct.

(Total for question 9: 1 mark)

QUESTION 10

Jonty, an experienced accountant, is approached by a small business owner, Hiromo, seeking advice on  managing  her  company’s  finances.  Hiromo  explains  her  financial  situation,  and  seeks  Jonty’s professional opinion on whether she should take advantage of certain tax deductions to minimise her company's tax liabilities. Jonty, after reviewing the financial documents provided by Hiromo, advises her to claim deductions for certain expenses that he believes are eligible for tax relief, assuring her that it is a legitimate tax-saving strategy.

However, after following Jonty's advice and claiming these deductions on her company's tax return, Hiromo receives a notice of audit from the tax authorities. During the audit, it is discovered that some of the expenses claimed by Hiromo were not actually eligible for tax deductions, leading to penalties and fines imposed on her company. Hiromo discovers that Jonty had failed to thoroughly analyse the eligibility of the expenses for tax deductions and had provided negligent advice.

Which  of  the  following  statements  regarding  Jonty's  liability  in  negligent  misstatement  is  most accurate?

(a)  Jonty cannot be held liable for negligent misstatement because he is an experienced accountant, and his advice carries a certain level of professional immunity.

(b)  Jonty may be held liable for negligent misstatement if it can be proven that he owed a duty of care to Hiromo, breached that duty, and as a result, Hiromo suffered foreseeable losses.

(c)  Jonty  is  automatically exempt from any  liability  in  negligent  misstatement  because  Hiromo ultimately made the decision to follow his tax advice.

(d)  Jonty’s liability in negligent misstatement depends solely on Hiromo’s ability to prove that he intentionally misled her with false information.

(Total for question 10: 1 mark)

SECTION B

QUESTION 11 – Balance Sheet, Income Statement, and Financial Statement Analysis

Brew Crafters, a boutique New Zealand brewery, operates under accrual accounting principles but prepares a cash flow statement to provide insights into its cash position. Below is its balance sheet as at the end of March 2024.

Brew Crafters – Balance Sheet as at 31 March 2024

During the quarter ending in March 2024, Brew Crafters engaged in the following additional financial transactions:

1.    Brew  Crafters  launched  a  limited-edition beer series,  resulting in $12,000  in sales,  half of which was collected immediately, and the rest was to be collected over the next quarter. The sale of this series incurred costs amounting to $7,500.

2.    Brew Crafters decided to pay 25% of the Bank Loan at the end of March. The interest for the quarter has already been paid.

3.   The company paid $2,000 in cash for utilities expenses.

Required:

(a)  Analyse the impact of each transaction on the financial statements by providing the requested details in the table below:

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

•    Impact on the Balance Sheet, Income Statement and Cash Flow Statement - use the drop- down menu to  indicate whether there is an  Increase,  Decrease, or  No  impact  on the statement.

•    Cash Flow Category – select one of the following from the drop-down menu: Operating, Investing, Financing, or No impact.

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

(8 marks)

(b)  Calculate Brew Crafters’ gross profit margin for the additional transactions detailed in part (a) of this question for the quarter ended 31 March 2024. Express your answer as a percentage rounded to two decimal places. (2 marks) (Total for question 11: 10 marks)

QUESTION 12 – Cost Understanding

Luna has recently been hired as the marketing manager by Starlet Inc. Luna proposes that Starlet Inc. should launch a major new promotion in July with a limited time offer. The promotion offers a free concert ticket for each unit of Starlet Inc.'s products sold. Starlet Inc.'s budgeted income statement for July, based on sales of 8,000 units without introducing the new promotion, was as follows:

Starlet Inc. - Budgeted Income Statement

Luna has conducted some market research and concluded that the new promotion would increase sales to 12,000 units per month with the same unit selling price. The additional fixed costs for this promotion would be $3,500, and a concert ticket would cost $12.

Required:

(a)       Calculate the breakeven point in sales revenue and the margin of safety as a percentage (round to two decimal places) based on Starlet Inc.'s budgeted income statement for July without the new promotion.

NOTE: In determining your answer of the breakeven sales revenue or margin of safety, round up your breakeven volume to the nearest unit – for example, 1,306.28 or 1,306.73 would both be rounded to 1,307 units and then use the rounded figure to calculate the breakeven sales revenue or margin of safety. (3 marks)

(b)      Explain briefly why the company might find it useful to know its breakeven point and margin of safety. (2 marks - 100 words maximum)

(c)       (i)     Calculate the breakeven point in sales revenue and profit if Starlet Inc. implements the promotion suggested by Luna.

NOTE:  In  determining  your  answer  of  the  breakeven  sales  revenue,  round  up  your breakeven volume to the nearest unit – for example, 1,306.28 or 1,306.73 would both be rounded to 1,307 units, and then use the rounded figure to calculate the breakeven sales revenue.  (3 marks)

(ii)     Calculate the units Starlet Inc. would need to sell to achieve July’s budgeted profit of $75,000 if Starlet Inc. implements the promotion (round up your answer to the nearest unit - for example, 1,306.28 or 1,306.73 would both be rounded to 1,307 units).  (1 mark)

(iii)    Comment on Luna’s marketing proposal, considering the expected impact on profits and the breakeven point, including operating risk. State any assumptions you need to make.  (3 marks – 150 words maximum)

(d)       (i)     Calculate the operating leverage for July if the promotion is implemented (round to two decimal places).  (2 marks)

(ii)     If  the  operating  leverage  before  implementing  the  promotion  was  20%,  discuss  the reason that causes the change in the operating leverage according to your calculation in part (d)(i) of this question. Also, explain the relationship between operating leverage and Starlet Inc.'s operating risk. State any assumptions you need to make.

(2 marks – 100 words maximum) (Total for question 12: 16 marks)