25300

Fundamentals of Business Finance

Tutorial 1
Assumed Knowledge and basic
principles

IMPORTANT SEMESTER QUIZZES

20% of your marks for FBF will come from 3 quizzes each worth
10% for a total possible mark of 20. Students may attempt 2 or
all 3 quizzes and their best 2 marks will be taken into account.
Quiz Date

Covering lectures

24 Aug (week 5)

Lectures 1, 2, 3

14 Sept (week 8)

Lectures 4, 5

19 Oct (week 11)

Lectures 6, 7, 8

The quizzes will be 30 minutes in duration and commence at the

very beginning of the tutorial. You must attend the tutorial you are
enrolled in. No extra time will be given for late arrivals.
The quizzes are closed book and a formula sheet will be provided.
Calculators are required for the quizzes and EVERY tutorial. Mobile
phones are not acceptable in tutorial classes, quizzes or exams.

Question 1
List some reasons why a basic understanding of finance
principles is important to you.
So you can understand and manage your personal
finances
such as home loans and superannuation

A sound knowledge of finance is important in your

work life, whether you choose to be a finance industry
professional, are self-employed or an employee
The impact of the finance industry on the economy
such as the global financial crisis

Question 2
Classify each of the following items into one of the five
categories: Asset, Liability, Equity, Revenue or Expense. Do
these items appear on the Income Statement or on the Balance
Sheet?
Item

Account category

Statement category

Depreciation expense

Asset
Expense

Rent received

Revenue

Balance sheet
Income statement
Income statement

Bank overdraft

Liability
Equity
Liability
Asset

Balance sheet
Balance sheet
Balance sheet
Balance sheet

Liability
Asset
None

Balance sheet

Account receivables

Retained profits
Trade payables
Stock on hand
Provisions

Brand names
Dividend paid

Balance sheet
Neither

Question 3
Prepare a balance sheet as at 30/6/15 based on the following:
Cash $197,000
Patents $863,000
Accounts payable $288,000
Accounts receivable $265,000
Inventory $563,000
Notes payable $190,000
Retained earnings $2,804,000
Long term debt $1,980,000
Net fixed assets $5,300,000
Ordinary shares ???

Balance Sheet as at 30 June 2015

Assets

Liabilities and owners equity

Current assets

Current liabilities

Cash

197,000 Accounts payable

Accounts receivable

265,000 Notes payable

Inventory

563,000

288,000

190,000
Total $478,000

Total $1,025,000 Long-term debt

$1,980,000
4,730,000 2,804,000

Fixed assets
Net fixed assets
Patents

5,300,000 Owners equity

863,000 Ordinary shares
Total $6,163,000 Retained earnings

7,188,000 - 478,000 - 1,980,000

Total assets

$1,926,000
2,804,000

Total $4,730,000
$7,188,000 Total liabilities and $7,188,000
owners equity

Question 4
a) What is depreciation?

A non-cash expense that represents an allocation of a

non-current assets cost over its useful life.

It is calculated for accounting purposes and is also a

tax deduction.
The depreciation charged to the accounts may be
different to the amount claimed as a tax
deduction.

b) Where does depreciation appear on the balance sheet?

It is an expense on the Income Statement.

Accumulated depreciation is recorded as an offset

against non-current assets on the Balance Sheet.

Question 4 continued

Assume straight-line

c) Machinery costing $150,000 is being depreciated over

15 years.

Annual depreciation expense = asset cost/life

= $150,000/15
= $10,000
i. What is the machinerys book value (or written down
value) after 6 years?

BV (or WDV) = Cost accumulated depreciation

= 150,000 (10,000 x 6)
= $90,000

Question 4 continued
ii. If the machinery is sold for $65,750 after 8 years is
there a gain or loss on disposal?
BV (or WDV) = $150,000 (10,000 x 8)
= $70,000
Loss on sale of $70,000 65,750 = $4,250

Question 5
a) What is working capital and net working capital?
Working capital is the firms current assets and
current liabilities.
Net working capital is calculated as:
current assets current liabilities

Question 5 continued
b) Given the following information, calculate net working capital:
Total equity = $16.7m
Total assets = $38.4m
Total non-current liabilities = $15.6m
Current assets = $5.6m

Total liabilities = Total assets Total equity

= 38.4m 16.7m = 21.7m
Current liabilities = Total liabilities Non-current liabilities
= 21.7m 15.6m = 6.1m
Net working capital = current assets current liabilities

= 5.6m 6.1m = -$0.5m

Question 6

earnings per share

Calculate EPS given the following information:

EBIT = $975,000
earnings before
interest and tax
Sales = $3,560,000
Tax rate = 30%
Number of shares outstanding = 250,000
Interest expense = $256,000

EBIT interest 1 tax rate

EPS
number of shares

975,000 256,000 1 0.3

250,000

$2.01

Question 7
Explain what is meant by a tax deduction.
A cost that is incurred in the generation of income
and is allowed as a tax deduction by the ATO.
These costs reduce the firms profits and therefore
reduce the amount of tax payable.

Question 8
A company has the following operating results for
2015:
Sales $23,730
Cost of goods sold $16,780
Dividends paid $616
Depreciation expense $2,840
Interest expense $414
If the tax rate is 30%, what is net income for 2015?

Question 8 continued
Income statement
Sales
Cost of goods sold
Depreciation
EBIT
Interest expense
Taxable income
Taxes (30%)
Net income

$23,730
16,780
2,840

$4,110
414
$3,696
1,109
$2,587

Question 9
a) What is 21% of 492?
0.21 x 492 = 103.32
b) Increase 1258 by 75.5%.
1258 x (1 +.755) = 2207.79

Question 10
Solve the equation 5x 7 = 132(1.0157)6
5x - 7 = 144.9327878
5x = 151.9327878
x = 30.3866

Question 11
Substitute i = 0.025 into the equation
1 (1 i)14 and simplify.
PV 45

1 (1.025)14
PV 45

0.025

0.292272804
45

0.025

526.09

Question 12
X 5 5.5X 15
Solve the equation:

720
320

320(X + 5) = 720(5.5X - 15)

320X + 1600 = 3960X - 10800

12400 = 3640X
X = 3.4066

just one
of many
ways to
solve