Question Tag: Profit measurement

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  • 11 Marks

FR – NOV 2016 – L2 – Q2c – Conceptual Framework for Financial Reporting

Question tests understanding of capital maintenance concepts and their practical application in profit measurement under different concepts.

i. The conceptual framework states that there are two concepts of capital. Explain these two concepts. (4 Marks)

ii. Perfect World Limited commenced business on January 1, 2015 with a single item of inventory which costs N120,000. During the year it sold the item for N180,000 in cash. Also, during the year, general inflation was 10% but the inflation specific to the item was 12%. Calculate the profit under each concept of capital maintenance and show the effect on the Equity of the Company. (7 Marks)

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  • 20 Marks

PM – May 2019 – L2 – Q2 – Divisional Performance Measurement

Discuss the benefits of EVA and calculate it for Tees Nigeria Ltd based on provided financial data.

Peter Drucker opined that “until a business returns a profit that is greater than its cost of capital, it operates at a loss.” Therefore, experts have challenged accounting profit as a good measure of business value increase and proposed economic value added (EVA) as a better measure.

Tees Nigeria Limited has presented the following financial data for the year ended 31 December 2018:

Income Statement 2018:

Item ₦000
Profit before interest and tax 75,000
Interest cost (9,000)
Profit before tax 66,000
Tax at 30% (19,800)
Profit after tax 46,200
Dividends paid (30,000)
Retained profit 16,200

Statement of Financial Position 2018:

Item ₦000
Non-current assets 305,000
Net current assets 190,000
Total assets 495,000
Shareholders’ funds 395,000
Long-term debt 100,000
Capital employed 495,000

Notes:
(i) Capital employed at the beginning of the year was ₦420 million.
(ii) The company had non-capitalised leased assets of ₦24 million.
(iii) The estimated cost of equity was 10%, and the cost of debt was 7%.
(iv) The company’s target capital structure is 60% equity and 40% debt.
(v) Other non-cash expenses were ₦16 million.
(vi) Depreciation is equal to economic depreciation.

Required:
a. Discuss the perceived benefits of using EVA to measure business performance. (10 Marks)
b. Calculate the real economic profit of Tees Nigeria Limited using EVA. (10 Marks)

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  • 4 Marks

MA – April 2022 – L2 – Q5B – Introduction to management accounting

Explain four reasons why organizations need to measure costs, including valuation, profit measurement, decision making and control.

Cost measurement reflects the relationships between inputs and outputs. It is designed to provide more accurate information about production, support activities and product cost so that management can focus its attention on the products and processes with the most leverage for increasing profits.

Required:

Explain FOUR (4) reasons why organisations need to measure cost. (4 marks)

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  • 11 Marks

FR – NOV 2016 – L2 – Q2c – Conceptual Framework for Financial Reporting

Question tests understanding of capital maintenance concepts and their practical application in profit measurement under different concepts.

i. The conceptual framework states that there are two concepts of capital. Explain these two concepts. (4 Marks)

ii. Perfect World Limited commenced business on January 1, 2015 with a single item of inventory which costs N120,000. During the year it sold the item for N180,000 in cash. Also, during the year, general inflation was 10% but the inflation specific to the item was 12%. Calculate the profit under each concept of capital maintenance and show the effect on the Equity of the Company. (7 Marks)

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  • 20 Marks

PM – May 2019 – L2 – Q2 – Divisional Performance Measurement

Discuss the benefits of EVA and calculate it for Tees Nigeria Ltd based on provided financial data.

Peter Drucker opined that “until a business returns a profit that is greater than its cost of capital, it operates at a loss.” Therefore, experts have challenged accounting profit as a good measure of business value increase and proposed economic value added (EVA) as a better measure.

Tees Nigeria Limited has presented the following financial data for the year ended 31 December 2018:

Income Statement 2018:

Item ₦000
Profit before interest and tax 75,000
Interest cost (9,000)
Profit before tax 66,000
Tax at 30% (19,800)
Profit after tax 46,200
Dividends paid (30,000)
Retained profit 16,200

Statement of Financial Position 2018:

Item ₦000
Non-current assets 305,000
Net current assets 190,000
Total assets 495,000
Shareholders’ funds 395,000
Long-term debt 100,000
Capital employed 495,000

Notes:
(i) Capital employed at the beginning of the year was ₦420 million.
(ii) The company had non-capitalised leased assets of ₦24 million.
(iii) The estimated cost of equity was 10%, and the cost of debt was 7%.
(iv) The company’s target capital structure is 60% equity and 40% debt.
(v) Other non-cash expenses were ₦16 million.
(vi) Depreciation is equal to economic depreciation.

Required:
a. Discuss the perceived benefits of using EVA to measure business performance. (10 Marks)
b. Calculate the real economic profit of Tees Nigeria Limited using EVA. (10 Marks)

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  • 4 Marks

MA – April 2022 – L2 – Q5B – Introduction to management accounting

Explain four reasons why organizations need to measure costs, including valuation, profit measurement, decision making and control.

Cost measurement reflects the relationships between inputs and outputs. It is designed to provide more accurate information about production, support activities and product cost so that management can focus its attention on the products and processes with the most leverage for increasing profits.

Required:

Explain FOUR (4) reasons why organisations need to measure cost. (4 marks)

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