ACCA Accounting Technician Examination Level C

Managing Finances
December 1999 Thursday Morning
Question Paper Time allowed 3 hours

ALL FOUR questions are compulsory and MUST be answered

paper C5

ALL FOUR questions are compulsory and MUST be attempted 1 Noke plc is a manufacturer of sports footwear and is proposing to start a new range called Zoomer. It is expected that the Zoomer range will have a life of four years from the start of year 2000 to the end of 2003. Production and sales of the new Zoomer range will cease at the end of 2003. You have recently joined the companys accounting and finance team and have been provided with the following information relating to the project: Capital expenditure A feasibility study which cost 50,000 has just been completed. This study recommended that the company buy new plant and machinery costing 1,500,000 to be paid for at the start of the project. The machinery and plant would be depreciated at 20% of cost per annum and sold for 300,000 receivable at the end of 2003. As a result of undertaking the proposed project it is also recommended that an existing machine be sold for cash at the start of the project for its current book value of 25,000. This machine had been scheduled to be sold for cash at the end of 2001 10,000. Sales and purchases relating to the new Zoomer range: 2000 000 Sales revenue 1,000 Debtors (at year end) 100 Purchases 400 Creditors (at year end) 40 Payments to sub contractors 50 Fixed overheads and advertising With the Zoomer range Without the Zoomer range

2001 000 1,250 125 500 50 100

2002 000 1,500 150 600 60 100

2003 000 1,750 175 700 70 100

1,300 1,200

1,100 1,000

1,000 900

900 800

Labour costs From the start of the project, two employees currently working in another department and earning 12,500 per annum each will be transferred to work on the new product line. Another employee currently earning 20,000 per annum will be promoted to work on the new line at a revised salary of 25,000 per annum. If the project is not undertaken, these employees will immediately have to be made redundant at a cost of a full years salary each. In any event, when the new project ceases at the end of 2003, they will be made redundant on similar terms. These labour and redundancy costs have not been included in the above figures. Material costs Recycled nylon for which the company has no other use is already in stock and cost the company 10,000 last year. It can be used in the manufacture of the new product range. If it is not used, it would have to be disposed of at a cost to the company of 5,000 at the end of 2000. Recycled rubber is also in stock and can be used on the new product range. It cost the company 15,000 some years ago. The company has no other use for it, but could sell it on the open market for 10,000 at the end of 2000. These cash flows associated with the nylon and rubber have not been included in the above purchases figures.

Other information Note 1. The year-end debtors and creditors are received and paid during the following year. Note 2. The net tax liabilities payable on 31 December each year, as a direct consequence of this project, are as follows: 2001 000 20 2002 000 46 2003 000 84 2004 000 109

The net tax payable has taken into account the effect of all relevant costs, any capital allowances and the one year time-lag in the payment of tax. (Note: Capital allowances are tax allowable depreciation). Note 3. The companys cost of capital is a constant 10% per annum. The present value of 1 in n years at 10% is as follows: n(year) 1 2 3 4 5 Present value at 10% 0909 0826 0751 0683 0621

Assume that cash flows occur at the end of each respective year apart from those stated to occur immediately. Required: (a) (i) Calculate the net present value (NPV) of the new Zoomer range project to the nearest 000 assuming it is now the beginning of 2000. (22 marks) (ii) Give TWO reasons, with a brief explanation, why NPV is considered superior to other methods of evaluating capital expenditure projects. (2 marks) (b) Write a short report to the board of directors which: (i) advises whether or not to accept the project on financial grounds. (2 marks)

(ii) explains why certain figures which were provided in the question were excluded from the net present value calculations. (6 marks) (ii) identifies and briefly explains FOUR other factors which would need to be considered before a final decision is reached. (8 marks) (40 marks)

[P.T.O.

Books Ltd owns a chain of 10 bookshops selling books and magazines. At the beginning of January 2000 the company is expected to have an overdraft of 30,000 and the bank has requested that it be eliminated by the end of June 2000. As a result of this request, the finance director has asked you, as assistant accountant, to review the financial position, to determine if the banks request can be complied with. You have been provided with the following information: 1999 Dec. 000 200 150 50 20 5 2000 Jan. 000 250 200 60 26 5 Feb. 000 350 150 70 30 5 10 Mar. 000 250 100 60 26 30 5 30 April 000 150 76 50 20 5 20 May 000 126 76 50 16 5 June 000 100 50 50 16 5

Sales revenue Purchases Administration expenses Selling expenses Taxation due Loan repayments (principal & interest) Capital expenditure

Notes: 1. Opening stocks at 1 January 2000 are estimated at 150,000. 2. 3. 4. Suppliers allow two months credit. Purchases in November were 100,000. The gross profit margin is 50%. 50% of sales revenue is for cash. 25% of sales revenue is on credit payable in the month following sale 5% of which is not recovered and is therefore written off as bad debts. 25% of sales revenue is paid by credit card on which the credit card company charges 2% of credit card sales value. (This is additional to the selling expenses outlined above). The credit card company pays Books Ltd credit card sales revenue net of their 2% charge in the month following the sale. 5. 6. The loan repayments comprise 60% capital repayment and 40% interest. Administration expenses include a monthly depreciation charge of 10,000. This depreciation charge incorporates any depreciation in relation to capital expenditure during the period. All other administration expenses are paid in the month incurred. 50% of selling expenses are paid in the month incurred, the remainder being paid in the following month.

7.

Required: (a) (i) Prepare a monthly cash flow forecast to the nearest 000 for each of the six months to June 2000, showing the cash balance at the end of each month. (12 marks) (ii) Comment briefly on the results obtained. (b) Prepare a draft profit and loss account for the 6 months to 30 June 2000. (3 marks) (5 marks) (20 marks)

Expander Ltd has recently decided to set up a new factory so it can enter as both a manufacturer and wholesaler into the rapidly expanding mobile telephone market. Expander Ltd will manufacture a single type of mobile telephone and sell it to a variety of retail outlets. The retail outlets have been categorised into three distinct groupings: 1. 2. 3. Mobile telephone shops. Chain stores specialising in a variety of telecommunications equipment. Internet service providers who include mobile telephones which can be linked to the internet as part of their product range.

The new telephone will be launched on 1 January 2000. Forecast sales data for the first year are as follows: Sales price per unit () 50 40 30 January 2000 sales volume (units) 2,000 5,000 5,000 Monthly compound % sales volume growth 5% 5% 10% Credit period allowed (months) 1 3 3

Customer type Mobile phone shops Specialist chain stores Internet service providers

All sales to retail outlets are on credit and are invoiced at month end, except for 10% of mobile telephone shop sales, which will be for cash. The company is currently experiencing liquidity difficulties due to the rate of expansion being undertaken. The recently appointed financial controller is concerned about the financial implications of launching the new product, particularly in light of the fact that at present there is no credit control function in the company. This is a new market sector for the company and there will be a need to assess the credit-worthiness of new customers. Required: (a) (i) Prepare three aged debtors schedules, one for each of the first three months of 2000. These schedules should show the amount outstanding for each customer type, and the business as a whole appropriately aged. (12 marks) (ii) Briefly comment on the results obtained. (2 marks)

(b) Identify and briefly discuss FOUR factors which need to be considered when assessing the creditworthiness of new customers. (4 marks) (c) Briefly explain ONE method by which Expander Ltd could raise finance, using its trade debtors. (2 marks) (20 marks)

[P.T.O.

Ten years ago, three business acquaintances, Tom, Dick and Harry, jointly formed an ice-cream manufacturing and distribution company TDH Ltd. Since its inception it has been very successful and has grown to become one of the countrys major icecream companies, with six manufacturing outlets and over ten retail units in various shopping centres. Its turnover is now approaching 10 million per annum. Tom recently attended a business conference entitled Fraud and its prevention. The conference has made him concerned about the risk of fraud in TDH Ltd, as there is no internal audit function and neither himself, Dick nor Harry has any expertise in accounting or auditing. As a result, he has proposed that a review of internal control procedures be undertaken and that consideration be given to the establishment of an internal audit function. Required: (a) Identify and briefly describe FOUR different types of fraud which may occur within a business such as TDH Ltd. (8 marks) (b) (i) Briefly explain TWO ways in which an internal audit function could help prevent or detect fraud. (2 marks) (ii) Briefly explain FOUR features on an internal control system, which could help prevent or detect fraud. (6 marks) (iii) Briefly outline TWO ways in which the personnel department could help prevent or reduce fraud. (4 marks) (20 marks)

End of Question Paper