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BUSINESS 114

Accounting for Decision Making

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)