Managing Finances

Wednesday 15 June 2011

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

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 2 marks. 1 Which of the following statements are true/false? Statement 1: The security of local authority bonds is always considered to be as good as that of central government bonds. Statement 2: A bond always offers a fixed rate of interest. A B C D Statement 1 False False True True Statement 2 False True False True

A company is preparing a quotation for a one-off contract. The quotation is being prepared on a relevant cost basis. The labour required for the contract will be 500 hours. Labour costs $4 per hour and variable overheads are $3 per hour. To complete the contract, labour will have to be diverted from another production line, where it earns a contribution of $6 per hour. What is the relevant cost of the labour and overheads to be included in the quotation? A B C D $6,500 $3,500 $4,500 $5,000

Which of the following is NOT a primary bank? A B C D Commercial Bank Retail Bank Merchant Bank Clearing Bank

Which of the following is the best description of a bullet repayment profile for a loan? A B C D At maturity a substantial amount of the loan principal is outstanding, which is then repaid. The entire loan principal is outstanding and paid in full at the end of the loan period. The principal is repaid gradually over the life of the loan. Loan repayments that consist of both interest and principal elements.

The following data has been taken from P Cos 2012 budget: Sales units Sales revenue Variable costs Fixed costs Profit 10,000 $20,000 $8,000 $7,000 $5,000

To the nearest unit, how many units will P Co need to sell in 2012 to make a profit of $8,000? A B C D 12,500 30,000 16,000 5,833

Which of the following statement(s) about contracts is/are true? Statement 1: An offer can be made orally or in writing. Statement 2: An offer can expire after a set period of time. A B C D 1 only 2 only Neither statement Both statements

L Co can only produce one product because labour is limited. Demand for each product is unlimited. Product Sales price per unit Material cost per unit Labour cost per unit (at $2 per hour) Variable overhead cost per unit Fixed cost per unit Which product should L Co produce? A B C D W X Y Z W $25 $4 $6 $4 $10 X $35 $5 $10 $4 $12 Y $40 $8 $10 $8 $2 Z $50 $10 $20 $10 $6

A company has the following information about its inventory: Average usage Average lead time Maximum usage Maximum lead time 60 kg per day 8 days 90 kg per day 10 days

What is the safety inventory (also known as the minimum inventory level) that should avoid stockouts? A B C D 60 kgs 90 kgs 420 kgs 120 kgs

[P.T.O.

Which of the following method(s) of investment appraisal take into account the time value of money? (i) (ii) (iii) (iv) A B C D Accounting rate of return Discounted payback Net present value Internal rate of return (ii) and (iv) only (ii), (iii) and (iv) (i), (iii) and (iv) (i) only

10 An issue of 8% Treasury Stock has a market value of $104, and is redeemable at par in two years time. What is the interest yield? A B C D 77% 80% 40% 38% (20 marks)

Section B ALL FOUR questions are compulsory and MUST be attempted 1 M Co is a company which mixes paints. The company buys in white paint and colour pigments. The colour pigments are added to the white paint and mixed in order to produce a paint that is coloured to customer specification. Sales Sales of the mixed paint are made to two types of customer, companies and individuals. Individuals pay cash at the time of sale. The credit terms given to the companies are payment in the month following sale, however, M Co has poor control over the management of receivables and the recent payment history has been: 50% in the month following sale 45% two months after sale 5% bad debts The popularity of the product has risen and there is now a three month wait for orders to be produced, so sales for April to June can be predicted with certainty: February Actual sales 44 10 March Actual sales 45 15 April May Forecast sales Forecast sales 58 34 14 10 June Forecast sales 53 13

Sales orders from companies $000 Sales orders from individuals $000

Production Costs Production costs are 90% of the sales revenue. No finished good or raw material inventory is held. 60% of the production costs relate to materials and 80% of the material cost is the cost of pigments. The remaining 20% of the material cost is the cost of the white paint. The supplier of the pigments is paid in the month of purchase. This supplier offers a 10% bulk discount for any order totalling $24,000 or more. The discount applies to the whole order. It is M Cos policy to take the discount if possible, but not to increase order sizes above that which is required to meet the production needs of the company. The supplier of the white paint is paid one month in arrears. No bulk purchase discounts are available from this supplier. The remaining 40% of the production cost is labour and overheads, which is paid in the month incurred. Non production overheads Rent and rates for the factory are estimated to be $12,000 per annum, paid quarterly in advance. The last payment was made in January. Depreciation is estimated at $1,000 per month. Other information On the first of April, M Cos bank account is expected to be $5,000 overdrawn. The overdraft limit agreed with the bank is $12,000. Required: (a) Prepare a cash budget for the three months ended June for M Co (work to the nearest $000). (15 marks) (b) Explain the term sensitivity analysis, how it can be used in cash budgeting, and its relevance to M Co both generally and in relation to receipts from trade receivables. (5 marks) (20 marks)

[P.T.O.

B Farm is a fruit farm, which has the opportunity to buy land from the adjacent farm for $100,000, so doubling the size of the farm. Mr B, who owns B Farm, wants to buy the extra land now in order to provide employment for his son who will start work immediately. The value of the land will be $160,000 in five years time. The following information has been provided: Mr Bs existing customer, a fruit drinks manufacturer, has assured him that they will buy all the fruit he can harvest each year at the existing price of $9 per ton. The cost of buying and planting the fruit bushes will be $16,000 which will be paid immediately. For the first two years of operations, there will be no fruit yield, as the bushes need to mature before they can be harvested. Chemical fertilisers and pesticides will need to be applied to the land to ensure the bushes are healthy at a cost of $11,000 each year from the first year. Mr Bs son will take a salary of $15,000 per annum. The fruit harvest is predicted to be: Year Tons harvested 1 0 2 0 3 14,000 4 18,000 5 24,000

Harvesting is a labour intensive process, performed by temporary labourers. The cost of the temporary labour is directly related to the amount of fruit harvested. In year three, the wage cost for the temporary labour is expected to be $12,000. The existing farm has overheads of $31,250 per year. 20% of this relates to the farm office, $10,000 is depreciation and the balance is variable costs. In the first year of operation, variable overheads will increase in proportion to the increased size of the farm, but in subsequent years, efficiencies are expected to arise, causing the variable overheads to reduce at the rate of 5% each year until year three, after which there will be no further reduction. A new tractor and more spraying equipment will be needed for the expanded farm. The old tractor and equipment will be sold immediately for $46,000. The new equipment will be purchased for $150,000, which will be payable in two equal instalments, one immediately and one in a years time. Depreciation will be charged on a straight-line basis. Alternative storage will be required for the new equipment, as the existing barn is too small. The existing barn could be extended at a cost of $40,000. A deposit would be paid immediately to the builders amounting to half of the total cost and the rest would be paid on completion of the work in one years time. Instead of extending the existing barn, a storage unit can be rented from a near neighbour. The rental would be $8,500 per year for five years, payable in advance each year. B Farms cost of capital is 10% per year. Assume that all cash flows occur at the end of each year unless otherwise stated. Required: (a) Using the discount table extracts provided, calculate the net present value of the proposed expansion over a five year time period. On the basis of your answer advise Mr B as to whether or not he should buy the extra land. Note: all workings should be rounded to the nearest $. (11 marks)

(b) Mr B has been told it may not be necessary to purchase the new machinery for cash but that there are different methods of financing available. However, he does not understand the different types of leases that are available or how hire purchase works. Clearly describe each of the following: (i) Finance leases; (3 marks) (3 marks) (3 marks) Annuity factor table extracts Time Factor 10% 1 0909 2 1736 3 2487 4 3170 5 3791 6 4355 (20 marks)

(ii) Operating leases; (iii) Hire Purchase. Discount factor table extracts Time Factor 10% 1 0909 2 0826 3 0751 4 0683 5 0621 6 0564

[P.T.O.

C Co has built up substantial cash balances. The directors of C Co are aware that the ever increasing cash balances they have are an asset which should be earning the company a return, and therefore they need to consider what to do with the cash balances. Required: (a) State and briefly explain the three motives for holding cash according to Keynes. (3 marks)

(b) Briefly explain to the directors of C Co how the factors of return, liquidity, risk and maturity can affect the decision of how to invest surplus cash. Include in your answer any interaction between the factors. (8 marks) (c) Define and explain the following types of investment to the directors of C Co. In your explanation consider the factors of return, liquidity, risk and maturity. (i) Ordinary shares; (5 marks) (4 marks) (20 marks)

(ii) Certificates of deposit (CDs).

Over recent months R Cos receivable days have increased. The receivables ledger now amounts to $200,000 which represents 65 days of sales, despite the credit period allowed being 30 days. Irrecoverable debts have also risen to 2% of sales. Working capital is financed by an overdraft, at an annual cost of 6%. This rate is not expected to change in the foreseeable future. Required: (a) Explain five features of a credit control system which would encourage customers to pay on time. (10 marks) (b) You are provided with the following further information. R Co has approached F Co, a factoring company. F Co offers the following terms: (i) (ii) (iii) (iv) 80% of amounts receivable would be advanced immediately for a fee of 5% of the amount advanced. F Co would bear the cost of bad debts. Receivable days would be reduced to the 30 days customers are allowed. F Co would charge 2% of sales as credit insurance.

If F Cos services are engaged, R Co will no longer employ their credit controller thus saving $13,000 per annum. R Co also believes that sales will fall by $25,000 if the factoring company is used. Annual profits are approximately 60% of sales. Assume 365 days per year. Required: Prepare calculations that show whether F Cos services should be engaged. State your conclusion. (10 marks) (20 marks)

End of Question Paper