Question 1 (10 Marks)
a) Compare and contrast financial accounting reports from management accounting reports, providing two examples for each. (2 Marks)
b) For a public company whose shares are listed on the stock exchange, answer the following questions.
- Who owns the company? In what ways do they gain ownership? (2 Marks)
- Apart from shareholders, who else might be interested in the contents of financial accounting reports? (2 Marks)
c) For each of the following items, classify them as either;
asset, liability or equity.
- Paid up capital
- Bank loan
- Provision for annual leave
- Brand names and intellectual property
- Accounts receivable
- Prepaid insurance premiums
- Deposit paid by a customer for work yet to be done
- Retained profit
(2 marks)
d) Explain the term 'depreciation expense' using any practical
example. (2 marks)
Question 2 (8 Marks)
a) Explain why cash flow forecast budgets are so important for a manufacturing company? (2 marks)
b) Explain how it is possible for a manufacturing company to earn a profit, while at the same time the company is running out of cash? (2 marks)
c) What are the costs of holding too high a level of inventory? (2 marks)
d) What tactics can a business use to reduce the time of its operating cash cycle? (2 marks)
Question 3 (12 Marks)
The following details concern the business of Helena Beauty, who is worried about the profitability and financial situation of her business at 30 June 2018, especially since the bank is requiring repayment of its overdraft.
30 June XXXXXXXXXXJune 2018
Sales (credit) $60,000 $90,000
Cost of sales 39,000 63,000
All other expenses 12,000 21,000
Cash at Bank 12, XXXXXXXXXX,000)
Inventory 18,000 33,000
Accounts Receivable (net) 12,000 30,000
Non-current assets (net) 24,000 48,000
Accounts Payable 6,000 9,000
Non-current liabilities nil 12,000
Helena Beauty, Capital 60,000 72,000
Inventory at 1 July 2016 was $15,000
Accounts receivable at 1 July 2016 were $10,000
Helena Beauty, Capital as at 30 June 2016, $56,000
a) Calculate the following ratios for 2017 and XXXXXXXXXXmarks each)
- Net profit margin
- Rate of return on owners’ equity
- Current ratio
- Acid test ratio
- Gearing
- Inventory turnover period
b) Write a short report about profitability, short-term liquidity and long-term solvency of the business. (3 marks)
Question 4 (10 Marks)
ACDC Pty Ltd needs a cash budget for the month of September 2019. The following information is available:
- The cash balance on September 1 is $7,500
- Actual sales for July and August, and expected sales for September are:
July August September
Cash sales $5,000 $5,250 $6,500
Credit sales 25,000 30,000 35,000
Total sales 30,000 35,250 41,500
Credit sales are collected over a three-month period in the ratio of 60 percent, 30 percent, 9 percent, with 1 percent uncollectible.
- Purchases of inventory will total $18,000 for September. Seventy percent of a month’s purchases are paid during the month of purchase. Accounts payable for August purchases total $6,150, which will be paid in September.
- Selling and administration expenses are budgeted at $14,000 for September. Of this $5,000 is for depreciation.
- Dividends of $5,000 will be paid during September, and equipment costing $12,000 will be purchased.
- The company must maintain a minimum of cash balance of $5,000. An overdraft facility is available from the company’s bank to bolster the cash position as needed.
Required:
Prepare a cash budget for the month of September showing your supporting calculations and heading. Indicate in the financing section any borrowing that will be necessary during the month.
Question 5 (10 Marks)
You are currently earning profits of $80,000 per year before tax and you need $250,000 to expand your business. You expect that this expansion will generate an additional $50,000 of before tax profit each year forever. You have a couple of alternatives:
1. The bank will give you an interest only loan of 6% each year for five years. At the end of this time, you can pay the $250,000 back or you might be able to roll over the loan.
2. An investor has indicated that they are willing to invest the whole $250,000 but they want a 50% shareholding of your business.
Required:
Using the information above, discuss the advantages and disadvantages of each option and explain your decision on which option you will select. You should show your calculations for each option and use these calculations to support your discussions.