Instructions

Delta Oil Company uses the successful-efforts method to account for oil exploration costs. Delta started business in 2014 and prepared the following income statements:

Question not attempted.

The company chose to change to the full-cost method at the beginning of 2016. Under the full-cost method, Delta capitalizes all exploration costs of the Oil and Gas Properties asset account on its balance sheet. It determines the exploration and amortization expense amounts under the full-cost method to be as follows:

In addition, Delta reported revenue of $9,000,000 and other expenses of $4,200,000 in 2016. With the 2016 financial statements, the company issues comparative statements for the previous 2 years.

Required:

What is the difference between Cash Flow and Profit?

• A. Cash Flow is the cash collected and paid in a company’s core operations. Profit tracks the revenue from customers and the costs of doing business.

• B. Profit tracks the cash collected and paid in a company’s core operations. That’s why it’s called the bottom line. Cash Flow is the change in cash and cash equivalents from one year to the next.

• C. Cash flow is found on the balance sheet while profit is measured on the income statement.

• D. There is no difference, just different names.

IMT Co. reported the following selected information for 2010:

Sales revenue ..........................................................................................    $865,000

Cost of goods sold..................................................................................      360,000

Depreciation expense .............................................................................        43,000

Salaries & wages expense ……………………………………………...     178,000

Rent Expense …………………………………………………………..       95,000

                                                                                          Beginning of Year        End of Year

Accounts receivable .....................................                $ 15,000                 $ 35,000

Prepaid rent ...................................................                   21,000                    15,000

Salaries & wages payable .............................                   33,000                    18,000

Required:Use the above information to calculate:

The cash collected from customers

ii)The cash paid for depreciation

iii)The cash paid to employees

iv)The cash paid for rent

1. If a firm has two groups of customers whose elasticities of demand are different, how does it determine what prices to charge each group?

a. Sets the price (P) equal to marginal revenue (MR) equal to marginal cost (MC) in each market.

b. Sets the MR in each market equal to the firm’s MC and sets the price for each group by finding the prices on each group’s demand curve above where MR=MC.

c. Sets MC equal to P in each market.

d. None of the above.

Part 1: Pricing Strategy

Briefly describe pricing for your product or service for non for profit youth program. How does this compare to competitors, assuming competitors are at or near break-even point with their pricing? Analyze pricing alternatives and make recommendations about pricing going forward based on the following:

• How sensitive are your customers to changes in price?
• What revenue do you need to break even and achieve profitability?

• What does the price say about your product in terms of value, quality, prestige, etc.?

What is good data? What is meant by bad data? A term that you may have already encountered is "GIGO". This term refers to Garbage In, Garbage Out. In other words, if incorrect/bad data is entered into a database, the same useless data will be extracted. This results in poor decisions, lost revenue, and unhappy customers. Have you ever been the victim of bad data?

Discuss the importance of queries and good/bad data as they relate to database reports. Describe the impact on business of erroneous reports generated by bad data or faulty queries.

A plane delivers two types of cargo between two destinations. Each crate of cargo I is 3 cubic feet in volume and 137 pounds in weight, and earns $30 in revenue. Each crate of cargo II is 3 cubic feet in volume and 274 pounds in weight, and earns $45 in revenue. The plane has available at most 270 cubic feet and 14,248 pounds for the crates. Finally, at least twice the number of crates of I as II must be shipped. Find the number of crates of each cargo to ship in order to maximize revenue. Find the maximum revenue.

The Star Entertainment Group.

Company Description (up to 600 words)

a) What is/are the main source of business (the main source of revenue)?

b) What is the ownership structure of your company?

Background Information

Newcastle Airlines Limited has been an audit client of Sydney Accountants since 2015.

You are an audit partner in Sydney Accountants involved in the planning of the 2019 audit of Newcastle Airlines.

The following circumstances relevant to the current financial year have come to your attention:

➢ The impact of fuel prices and intense competition in the airline industry.

➢ Along with new entrants like the budget airlines in the markets and an increased passenger capacity, airline companies have been lowering their airfares to capture more customers.

➢ Airlines will end up accepting very low prices while operating with very high costs.

➢ Take Emirates for instance. Emirates operates with a young fleet, meaning more fuel efficiency, lower maintenance costs, and the ability to fit more into each plane (which lowers the marginal costs of each passenger). Being based in Dubai means there are low taxes, no unions to battle with, and an abundance of cheap labour from nearby countries. Emirates’ competitive advantage is also in their reputation for excellence in service which Emirates can charge high prices for.

You reviewed Newcastle’s significant accounting policies and found that revenue and depreciation costs are material income statement accounts. Extract of the accounting policies for Revenue and Depreciation costs, together with additional relevant information, are included below:

Item 1: Revenue recognition policy

Passenger, freight, and tours and travel sales are credited to revenue received in advance and subsequently transferred to revenue in the income statement, when passengers or freight are uplifted or when tours and travel air tickets and land contentare utilised.

Your review of the prior year’s financial statements indicates revenue from passengers represents 80% of total revenue. Newcastle’s latest financial information shows a 6% fall in revenue from passengers and an 11% decrease in revenue from passengers in advance.

Item 2: Aircraft maintenance costs policy

The standard cost of major airframe and engine maintenance checks is capitalised and depreciated over the shorter of the scheduled usage period to the next major inspection or the remaining life of the aircraft.

Newcastle’s latest financial figures show the aircraft and engines at cost (including major maintenance costs) to be at a similar level as last year while depreciation costs have decreased by 5%.

You have read articles in the financial press which suggest an increased incidence of fraud due to the competitive environment, and that the majority of these frauds are committed by company directors and senior managers. In your study of corporate governance you realised that Newcastle Airline may be facing similar problems.

Required:

a) Explain why the revenue from passenger accounts in the income statement is at significant risk of fraudulent financial reporting by management.

b) Describe a relevant and practical internal control to address the fraud risk described in (a) above. Explain how the internal control will minimise the risk of fraud.

c) With reference to Item 1 and Item 2 in the Background Information, explain why each of the two income statement accounts Revenue and Depreciation costs may represent a significant risk of material misstatement

In December 2006, Bob Prescott, the controller for the Blue Ridge Mill, was considering the addition of a new on-site longwood woodyard. The addition would have two primary benefits: to eliminate the need to purchase shortwood from an outside supplier and create the opportunity to sell shortwood on the open market as a new market for Worldwide Paper Company (WPC). The new woodyard would allow the Blue Ridge Mill not only to reduce its operating costs but also to increase its revenues. The proposed woodyard utilized new technology that allowed tree-length logs, called longwood, to be processed directly, whereas the current process required shortwood, which had to be purchased from the Shenandoah Mill. This nearby mill, owned by a competitor, had excess capacity that allowed it to produce more shortwood than it needed for its own pulp production. The excess was sold to several different mills, including the Blue Ridge Mill. Thus adding the new longwood equipment would mean that Prescott would no longer need to use the Shenandoah Mill as a shortwood supplier and that the Blue Ridge Mill would instead compete with the Shenandoah Mill by selling on the shortwood market. The question for Prescott was whether these expected benefits were enough to justify the $18 million capital outlay plus the incremental investment in working capital over the six-year life of the investment. Construction would start within a few months, and the investment outlay would be spent over two calendar years: $16 million in 2007 and the remaining $2 million in 2008. When the new woodyard began operating in 2008, it would significantly reduce the operating costs of the mill. These operating savings would come mostly from the difference in the cost of producing shortwood on-site versus buying it on the open market and were estimated to be $2.0 million for 2008 and $3.5 million per year thereafter. Prescott also planned on taking advantage of the excess production capacity afforded by the new facility by selling shortwood on the open market as soon as possible. For 2008, he expected to show revenues of approximately $4 million, as the facility came on-line and began to break into the new market. He expected shortwood sales to reach $10 million in 2009 and continue at the $10 million level through 2013. Prescott estimated that the cost of goods sold (before including depreciation expenses) would be 75% of revenues, and SG&A would be 5% of revenues. In addition to the capital outlay of $18 million, the increased revenues would necessitate higher levels of inventories and accounts receivable. The total working capital would average 10% of annual revenues. Therefore the amount of working capital investment each year would equal 10% of incremental sales for the year. At the end of the life of the equipment, in 2013, all the net working capital on the books would be recoverable at cost, whereas only 10% or $1.8 million (before taxes) of the capital investment would be recoverable. Taxes would be paid at a 40% rate, and depreciation was calculated on a straight-line basis over the six-year life, with zero salvage. WPC accountants had told Prescott that depreciation charges could not begin until 2008, when all the $18 million had been spent, and the machinery was in service. You have been approached by Prescott with a request to evaluate the project.

If the required rate of return is 9.65%, what are the payback period, profitability index, net present value, and internal rate of return for the investment project? Should WPC implement the investment project?