10_2010_dec_q

Managing Finances Wednesday 15 December 2010

Time allowed Reading and planning: Writing:

15 minutes 3 hours

This paper is divided into two sections: Section A – ALL TEN questions are compulsory and MUST be attempted Section B – ALL FOUR questions are compulsory and MUST be attempted Do NOT open this paper until instructed by the supervisor. During reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet until instructed by the supervisor. This question paper must not be removed from the examination hall.

The Association of Chartered Certified Accountants

Paper T10

Certified Accounting Technician Examination Advanced Level

This is a blank page. The question paper begins on page 3.

2

Section A – ALL TEN questions are compulsory and MUST be attempted Please use the space provided on the inside cover of the Candidate Answer Booklet to indicate your chosen answer to each multiple choice question. Each question is worth two marks. 1

A company has the following non-current assets: 20X5 $200,000

Non-current assets at closing net book value

20X6 $250,000

Depreciation for the 20X6 income statement is $30,000. No disposals were made in the period. What is the correct figure for cash purchases of non-current assets during 20X6? A B C D

2

$50,000 $80,000 $250,000 $20,000

An investment of $100,000 is made in a project. The scrap value is expected to be $15,000 at the end of the project. Four equal annual cash inflows of $35,000 will arise from the project, the first of which arises two years after the initial investment. What is the payback period and the accounting rate of return (based on initial investment) of the project? A B C D

3

Payback 3·9 years 3·9 years 2·9 years 2·9 years

Accounting rate of return 11% 28% 11% 28%

Which of the following statements is/are true with respect to investment appraisal methods? (i) The accounting rate of return takes into account the timing of the cash inflows and outflows. (ii) Shareholders should benefit if a project is accepted which has a positive net present value. (iii) The internal rate of return calculation will always produce a unique answer. A B C D

4

(i) and (ii) (ii) only (i) and (iii) (ii) and (iii)

Which of the following would usually be considered to be the least liquid asset? A B C D

Accounts receivable Short-term investments Inventory Cash at Bank

3

[P.T.O.

5

Company X has been offered a 2% discount if they pay their creditors within 10 days of the invoice. Payments are usually made after 30 days. What is the compound annual cost of not taking the discount to the nearest percentage point? A B C D

6

24% 28% 45% 27%

A company sells inventory for cash. What will be the effect on the quick ratio (acid test) and the accounts receivable payment period? A B C D

7

Accounts receivable payment period Decrease No change Increase No change

Which of the following is the first stage in a bankruptcy procedure? A B C D

8

Quick ratio Increase Decrease No change Increase

A A A A

trustee in bankruptcy is appointed bankruptcy order is granted statutory demand for payment is issued petition is made to the court

A company sells goods on credit and is expecting the following sales: March April May June

$ 20,000 15,000 25,000 30,000

The following are the expected payments from accounts receivables: 50% in the month of sale 30% one month after sale 15% two months after sale 5% are bad debts What is the expected cash inflow in May? A B C D

9

$18,250 $20,000 $19,375 $25,000

What is risk that can be diversified away known as? A B C D

Systematic risk Market risk Unsystematic risk Inherent risk

4

10 A company is preparing a quotation for a project, based on relevant costing principles. The project will require 100kg of material X. The following information about material X is available: Units already in inventory 50kg

Original cost price per kg $6

Net realisable value per kg $7

Current purchase price per kg $8

The material is used frequently by the company. What is the relevant cost of the material to be included in the quotation? A B C D

$750 $700 $600 $800 (20 marks)

5

[P.T.O.

Section B – ALL FOUR questions are compulsory and MUST be attempted 1

Mr Food owns a café and currently sells hot drinks and food such as sandwiches, crisps and cakes. Annual net income is currently $200,000. He wants to offer cooked meals and plans to extend his buildings and build a kitchen and a restaurant. In the new buildings, Mr Food will be able to incorporate a kitchen which will meet the necessary hygiene standards and have a restaurant which will be able to seat up to 60 people. Architect’s fees of $8,000 have already been incurred in drawing up the plans and the building work is expected to take one year. Building work The total cost of building is estimated to be $200,000. This will be paid 25% at the beginning of the project and 75% on completion of the building work, one year later. Depreciation will be charged over 25 years on a straight-line basis. The building work will cause disruption, which will cause some of the existing clients to leave. Mr Food estimates that the effect of this will be to reduce the current annual net income from the café by 10% for the duration of the building work. Mr Food believes that the current annual net income from the café will return to 95% of its original level once the building work is completed, and will remain at this level. Running costs (these will arise only when new operations commence in year two) Cleaners will be employed costing $8,000 for each year the restaurant is open to diners. Chefs will need to be employed, each earning $10,000 per year. The number of chefs employed will depend on the estimated number of weekly diners and will be calculated using the following table. Number of weekly diners 0–150 151–250 251–350 351–450

Number of chefs to be employed 1 2 3 4

The minimum number of chefs will be employed. Waiting staff will be employed, costing $5,000 per year per member of waiting staff. The number of waiting staff required is estimated to be two in the first year the restaurant is open to diners, and then three in each subsequent year. Cash overheads are currently $30,000 per year. Mr Food estimates that the expansion will cause overheads to increase by 8% in the first year the restaurant is open to diners and that they will then continue at this level. Net income from the new operations (i.e. revenue less food costs) People who frequent the restaurant Friday–Sunday are estimated to generate a net income of $10 per diner per day, whereas those frequenting the restaurant Monday–Thursday are estimated to generate a net income of $7 per diner per day. The estimated number of diners per week: Year 2 3 4 5

Friday–Sunday per day 40 50 60 60

Monday–Thursday per day 20 30 35 35

6

Required: (a) Using the discount tables provided, calculate the net present value of the restaurant project over a five-year period. On the basis of your calculation conclude whether the expansion should take place (assume 52 weeks in a year). Ignore tax in your calculation. (12 marks) (b) Briefly explain what a relevant cash flow is. Illustrate your points with examples from part (a).

(5 marks)

(c) Explain how inflation affects the required rate of return of the investor, illustrating your answer with a numerical example. (3 marks) Discount factor table extracts Time Factor 10% 1 0·909 2 0·826 3 0·751 4 0·683 5 0·621 Annuity factor table extracts Time Factor 10% 1 0·909 2 1·736 3 2·487 4 3·170 5 3·791 (20 marks)

7

[P.T.O.

2

Expand Co’s production has suddenly increased from 10,000 units per annum to 50,000 units per annum. This rise in production was not planned, but arose due to an increase in demand when a competitor went out of business unexpectedly. Inventory of finished goods remain negligible. Due to the unplanned nature of the increase, inputs have had to be sourced from many different suppliers at different prices and this has resulted in reduced production efficiency. Production levels are expected to stay at 50,000 units per annum for the foreseeable future, and the owners are concerned that they need to control working capital. They are specifically concerned about raw material inventory. Required: (a) The owners have heard about a just in time inventory management system (JIT). (i)

Explain the concept of JIT inventory management;

(ii) State three requirements for JIT inventory management to operate;

(2 marks) (3 marks)

(iii) Advise, with reasons, whether or not JIT inventory management would be suitable for Expand Co in the circumstances outlined above. (2 marks) (b) Expand Co is keen to source the main raw material component from a single supplier (Wam Co). Two units of the raw material component are required for each unit of final output. Wam Co is willing to supply Expand Co and the following information is available: The cost is $1·50 per unit, but a discount of 5% is offered on orders of 20,000 units or more. Expand Co estimates that the ordering costs are $300 per order and the holding cost of one item for one year will be 20% of the purchase price. Calculate the order size to minimise total costs. Clearly show all workings. Note: the economic order quantity is given by the formula EOQ =

2CO D CH

(10 marks)

(c) State three factors, other than price, that should be considered before selecting a new supplier.

(3 marks) (20 marks)

8

3

Bake Co is a family owned company that makes and sells homemade cakes and confectionery under its own brand name. Its main customers are local supermarkets and shops. Bake Co has built up a reputation for quality, and revenue has increased over recent years to $2 million per year. This increase in sales revenue is expected to continue, and the family are keen to expand and install new equipment in the factory. The cost of re-equipping the factory will be high, estimated to be possibly as great as 25% of the present value of the company. The company has no debt. Required: Explain each of the following methods of raising finance, and discuss the usefulness of each for Bake Co’s expansion plans. (a) Overdraft

(4 marks)

(b) Venture capital

(4 marks)

(c) Term loan

(4 marks)

(d) Equity

(4 marks)

(e) Trade credit

(4 marks) (20 marks)

9

[P.T.O.

4

Joe, a fisherman, lives in a coastal village which has recently become a favourite with tourists. He is considering giving up fishing and converting his boat to take tourists on coastal tours. Each tour will last approximately 45 minutes. He is aware of the uncertain nature of the tourism business and is concerned that he may not have enough clients in years with poor weather, to break even. Based on information obtained from similar tour providers, Joe estimates that the following data will apply to this business: 1. 2. 3. 4.

The average number of tourists taken on trips in a year is 15,000. The average total costs incurred in a year when 10,000 tourists were taken on trips was $45,000. The average total costs incurred in a year when 25,000 tourists were taken on trips was $67,500. Fee per tourist is $4·00.

Required: (a) (i)

Calculate the breakeven point (number of tourists) and margin of safety (using the average number of tourists taken); (7 marks)

(ii) In an average year, Joe makes a profit of $6,000 from fishing. How many tourists would Joe need to take on trips in order to make the same profit? (2 marks) (iii) Comment on your calculations in (i) and (ii) from the point of view of margin of safety.

(2 marks)

(b) Using the graph paper provided illustrate your results from (a)(i) and (a)(ii) on a profit-volume chart. Clearly label the axes, show the fixed costs, breakeven point and profit of $6,000. (4 marks) (c) Joe is concerned that due to the increased popularity of the village and the subsequent rise in private boats owned by holiday makers using the harbour, the costs of storing his boat safely when not in use will increase next year. This would increase fixed costs by $7,000. Sales and variable costs would not change. (i)

Briefly explain how this would affect your profit-volume line and show the effect of this on your graph (no further calculations are necessary); (2 marks)

(ii) From your graph estimate the new breakeven point and briefly interpret this for Joe (no further calculations are necessary). (3 marks) (20 marks)

End of Question Paper

10