Financial and Management Accounting

Principles of Accounting

Financial Management

Question One

Alm  Limited  is a  consultancy  company that operates in  London. It provides financial services packages. The company products are mainly three: Basic, Miscellaneous and Posh.

The company has established at the beginning of the year with an amount of £45,000 shares corresponding to £45,000 of cash at hand.

The management of the company for this first year of activity has planned the following activities.

Telephone, electricity and gas are £2,500 for each quarter. At the end of the year the fourth quarter amount is pending and will be paid in the following year.

Rent is 1,200 per month and is paid in cash every month.

The admin expenses for the year are £8,000 and paid in cash.

At the end of the year there will be the following amount of receivables and payables corresponding to the following percentages on yearly sales and purchases:

During the year the company will spend:

•   £8,000 for computer

•   £15,000 for equipment

Both of them will be paid in cash. Depreciation is 20% for computer and 15% for equipment. The taxes for the year are £5,000 and will be paid during the year.

You are required:

1.    Prepare a sales budget (2 marks)

2.    Prepare labour usage, cost budget and determination of receivables, receivables and payments (8 marks)

3.    Prepare a cash budget (10 marks)

4.    Prepare an Income Statement (10 marks)

5.    Prepare a Balance Sheet (10 marks)

6.    What are the different approaches used when preparing budgets? Illustrate the pros and cons of each (10 marks)

Total 50 marks

Question Two

Flash Speedforce Ltd is a manufacturer of high-end running equipment. Their two main products are running shoes: the "Flash Reverse" model and the "Grodd Air" model. Currently both these models are their top selling products to sports retail stores. The rubber mixture of both shoes’ soles contain the same specific types of rubber mixes. The direct materials used within production are manufactured in-house from a different department. You are provided with the following information relating to the two products:

Maintenance costs are 30% variable. The cost of labour per hour is £22.

Additional information for the cost of one unit of each rubber mix is also available:

All  of Flash  Speedforce's  customers  order both products  from them.  Currently,  Flash Speedforce is working to maximum production capabilities.

You are required:

1.    Produce a marginal profit statement (with contribution figure) on a per-unit basis for both products when there are no limitations in capacity. (16 marks)

2.   Due to a new competitor opening a warehouse nearby and offering higher salaries, you have lost highly skilled employees that are very difficult to replace. Human Resources Department have informed you that it will be at least a year before they can advertise for new staff. This has resulted in the labour hours being restricted to 8,500,000 hours per year. Calculate the most profitable production plan under these circumstances.   How much contribution would be achieved at this production mix? (12 marks)

3.    Customer satisfaction is very important to your company, therefore you do not want to disappoint your customers by not being able to supply their demand. A local competitor has offered to produce the product you are short of for the next year.

i.      What is the maximum price you would be prepared to pay your competitor to produce the product, subject to the constraint you have? You must clearly state your reasons, using relevant cost arguments in the process. (6 marks)

ii.      From a customer satisfaction point of view, would you be prepared as a business to pay even more than the maximum price in (i)? If yes, why, if no, why not? (6 marks)

4.    The concept of relevant cost is crucial to understand in limited factor analysis. Using examples, explain whether variable andfixed costs are decision-relevant in the short run or not, and provide detail on the terms sunk cost and opportunity cost.

(10 marks) Total 50 marks

Question Three

Right  Account  Plc  develops  advanced  accounting  solutions  for  small  and  medium businesses. The company is currently considering various investment projects that could help improve their service offering. They have shortlisted three projects and asked you to recommend  the  best  option.  They  have  provided  you  with  the  following  information regarding the projects:

▪ Project I will last for 3 years. The initial expenditure is £450,000 and the expected cash flow originating from the project is £200,000 for the first 2 years of the project and £100,000 in the last year of the project life.

▪ Project II will last for 3 years. The initial outlay is £350,000 and the expected annual cash flow originating from the project is £100,000 in the first year, £200,000 in the second year and £100,000 in the last year.

▪ Project III will last for 4 years. The outlays are estimated £400,000 and the expected cash flow originating from the project is £150,000 in the first year, £50,000 in the second year and £200,000 in the last two years.

Current cost of capital is 9%.

You are required:

1.         Evaluate the three projects using:

(i)  Payback Period (12 marks)

(ii) Net Present Value (NPV) (16 marks)

2.         Explain, which projects should be accepted and why:

(i)   Using both Payback Period and NPV (3 marks)

(ii)  If the projects were mutually exclusive, and the company has £1 million to invest. (3 marks)

3.         Right Account Plc has asked you why they should use Net Present Value to evaluate the project instead of using Payback Method or Internal Rate of Return. Present the advantages and disadvantages of Net Present Value, Payback Method and Internal Rate of Return.

(16 marks) Total 50 marks

Question Four

Barber  Ltd  provides  hair products  to  the  hairdressing  industry  and  in  recent  months, suppliers (trade payables) to Barber Ltd have been pressing for payment, as it has been rumoured that the company may be experiencing some trading issues. The chief accountant has therefore decided to reduce their level to an average of 40 days outstanding to provide some confidence to the market. To achieve this, she has decided to approach the bank with a view to increasing the overdraft (note, the short-term borrowings comprise only a bank overdraft).

The business is currently paying 5% per year interest on all long-term borrowings and 12% on short-term borrowings.

She therefore provides you with the following set of recent accounts:

Statement of financial position as at the end of the year

ASSETS £m

Non-current assets

Land & buildings                                                                                                            7.6

Equipment                                                                                                                       1.8

Motor vehicles 1.0

10.4

Current assets

Inventories                                                                                                                       7.6

Trade receivables                                                                                                            7.2

Cash at bank 0.2

15.0

Total assets 25.4

EQUITY AND LIABILITIES

Equity

Share capital                                                                                                                    4.0

Retained earnings 3.6

7.6

Non-current liabilities

Loan notes (secured on property) 7.0

Current liabilities

Trade payables                                                                                                                3.6

Short-term borrowings 7.2

10.8

Total equity and liabilities 25.4

Income statement for the