Managing Finances

Wednesday 16 December 2009

Time allowed Reading and planning: Writing:

15 minutes 3 hours

This paper is divided into two sections: Section A ALL 10 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 10 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 in this section is worth 2 marks. The following information relates to questions 1 & 2 Annual sales Costs as a percentage of sales: Raw materials Direct labour Production overheads Working capital statistics: Average raw materials holding period Average finished goods holding period Average receivables collection period Average payables collection period $2,500,000 10% 15% 5% 4 2 6 8 weeks weeks weeks weeks

All finished goods values include raw materials, direct labour and production overheads. Assume there are 52 weeks in the year.

How much working capital is required to finance finished goods inventory, to the nearest $? A B C D $28,846 $9,615 $57,962 $24,038

How much working capital is required to finance receivables? A B C D $384,615 $86,538 $115,385 $288,462

Which of the following are ALL money market instruments? A B C D cheques, certificates of deposit, deposits bills, certificates of deposit and cash bills, certificates of deposit and deposits cash, cheques and bills

Assumption 1: Amounts of cash required in future periods can be predicted with certainty. Assumption 2: The opportunity cost of holding cash is known and it does not change over a period of time. Which of the above, if either, is an assumption on which Baumols model of cash management is based? A B C D BOTH Assumption 1 and Assumption 2 Assumption 1 ONLY Assumption 2 ONLY NEITHER Assumption 1 NOR Assumption 2

Which of the following statements about systematic and unsystematic risk is correct? A B C D NEITHER systematic NOR unsystematic risk can be diversified away ONLY systematic risk can be diversified away ONLY unsystematic risk can be diversified away BOTH systematic AND unsystematic risk can be diversified away

A company purchases a non-current asset with a useful economic life of ten years for $125 million. It is expected to generate cash flows over the ten year period of $250,000 per annum before depreciation. The company charges depreciation over the life of the asset on a straight-line basis. At the end of the period it will be sold for $250,000. What is the accounting rate of return for the investment (based on average profits and average investment)? A B C D 20% 15% 33% 25%

Bee Co is deciding whether to make components X and Y or buy them in from an outside supplier. The supplier would charge $50 per unit of X and $55 per unit of Y. Production cost ($ per unit) Direct material Direct labour Variable overhead Fixed overhead X 12 25 8 7 Y 13 27 7 6

Which of the components, if any, should be bought in from outside. A B C D X ONLY Y ONLY BOTH X and Y NEITHER X nor Y

A company has material B in its inventory, which it purchased in error at a cost of $800. The company is deciding whether to: (i) use it as a substitute for material A which would cost $500 to buy in; or (ii) sell material B for $510 cash LESS selling costs of $20; or (iii) use it in another contract. If the company decides to use the material in another contract, what is its relevant cost? A B C D $800 $510 $500 $490

[P.T.O.

Statement 1: Simple payback period takes into account the time value of money and uses cash flows rather than profits. Statement 2: Internal rate of return takes into account the time value of money and uses cash flows rather than profits. Which of the above statements is/are true? A B C D Statement 1 only Statement 2 only Both statement 1 and statement 2 Neither statement 1 nor statement 2

10 Statement 1: Positive covenants are promises by a borrower to do something. Statement 2: Quantitative covenants are promises to keep within financial limits set by the lender. Which of the above statements is true/false? A B C D Statement 1 False False True True Statement 2 True False False True

(20 marks)

Section B ALL FOUR questions are compulsory and MUST be attempted 1 Choc Co is a recently established company in the confectionery business. It has a keen and flexible workforce. It makes a range of organic chocolate bars. Its main customers are supermarkets, petrol stations and newsagents. The purchase patterns of Choc Cos customers vary slightly. The supermarkets tend to order large amounts at varying times throughout the year. The petrol stations make regular weekly orders for smaller amounts and the newsagents have no regular pattern for their order size or frequency at all. The companys chocolate bars are becoming increasingly popular, with demand peaking at 5,000,000 bars over the last year. The two key ingredients for Choc Cos products are cocoa and sugar. Both of these ingredients are bought from different suppliers. Over the last year, the company has used 100,000 kg of sugar for its production. It currently orders 5,000 kg of sugar at a time, at regular intervals throughout the year. The cost of placing an order is $35 and the cost of storing 1 kg of sugar is $020 per annum. Choc Co does not hold any safety inventories of sugar since it has always found its supplier to be very quick and reliable when Choc Co places an order. Cocoa is the more expensive of the two ingredients; therefore Choc Cos purchasing policy in relation to this has already been established. It is bought from a very reliable supplier with whom it has good relationships. The current ordering policy for cocoa (i.e. total ordering and holding costs) costs the company in the region of $10,000 per annum. Note: Economic order quantity is given by the formula: EOQ = 2CO D CH

Required: (a) Calculate the annual cost of the current ordering policy for sugar. Ignore finance costs. (2 marks)

(b) Calculate the annual cost if the economic order quantity is used to determine the optimum order size for sugar. Ignore finance costs. (3 marks) (c) Describe three costs associated with running out of sugar. (3 marks)

(d) Briefly explain how a just-in-time system for inventory procurement works and its effect on inventory levels. Briefly discuss whether or not it would be suitable for Choc Cos business. (6 marks) You are provided with the following further information, relating to part (e) only. Choc Co pays $075 for each kilogram of sugar. Choc Cos suppliers provide 60 days credit, which Choc Co always takes but never exceeds. Its suppliers have now offered Choc Co a discount of 2% for payment within 14 days. Choc Co has a short-term cost of finance of 10% per annum. (e) Calculate the net gain or loss from accepting the discount. (6 marks) (20 marks)

[P.T.O.

Motor Co has recently developed a new environmentally friendly motor home. It has prepared two sets of figures for its forecast for the next year since it is currently undecided on its production level and selling price. The company is trying to decide whether it is more profitable to produce 400 or 500 motor homes, since a clear link between price and demand has been identified. An extract from the coming years forecast is as follows: Units produced and sold Revenue Materials Labour Overheads (1) Note (1) Overheads include both a fixed and a variable element which can be calculated from the above data. Required: (a) Calculate the contribution per unit at each sales level. (b) Calculate the break-even point in units at each sales level. (4 marks) (3 marks) 400 $000 34,000 13,600 8,400 9,000 500 $000 37,500 17,000 10,500 10,500

(c) Calculate the margin of safety as a percentage at each sales level and explain what the margin of safety is. (3 marks) (d) Calculate the budgeted profit at each sales level. (2 marks)

(e) Using the graph paper provided, draw and label a break-even chart for the motor homes at a sales level of 400 units, showing activity levels between 0 and 400 units. (6 marks) (f) State four assumptions on which break-even analysis is based. (2 marks) (20 marks)

Educate Co is a fast-growing company specialising in the provision of adult education. It currently has ten language schools and three information technology schools. It is estimated that the education sector will grow by 15% over the next five years. The company is keen to take advantage of the opportunities which are available and is seeking to raise funds to finance its growth. Since the company is highly geared its advisors have suggested that it should seek to raise funds through some sort of share capital issue, rather than a loan. Educate Co wants to know what kind of groups invest in share capital, other than private individuals seeking profit. As part of this process, Educate Co is considering whether it would be beneficial to float the company on the stock exchange. Required: (a) Describe FOUR groups of institutional investors that specialise in providing capital in order to make a return. (8 marks) (b) Explain FOUR reasons why a company might seek a stock exchange listing. (8 marks)

(c) Explain the meaning of the term highly geared and why it is important to a company trying to raise extra finance. (4 marks) (20 marks)

Clear Co specialises in the production of UPVC windows and doors. It is considering whether to invest in a new machine with a capital cost of $4 million. The machine would have an expected life of five years, at the end of which it would be sold for $450,000. If the new machine were to be purchased, the existing machine could be either sold immediately for $250,000, or hired out to another company at a rental amount of $100,000 per annum, payable in advance, for three years. If the machine is hired out rather than sold, it will have no residual value at the end of the three year period. The existing machine generates annual revenues of $8 million and its running costs are $840,000 per annum. If the new machine is purchased, revenues are expected to increase by 20%. In addition to this, however, machine running costs are also expected to increase. Estimates have shown that, in the first year with the new machine, running costs will increase by 18%. In every subsequent year thereafter, running costs will continue to be 18% higher than each previous years costs. The companys cost of capital is 10%. All workings should be in $000. Required: (a) Using the discount tables provided, calculate the net present value of the proposed investment, over five years and state with reasons whether the machine should be purchased. (10 marks) (b) Calculate the internal rate of return of the investment. (c) Explain what capital expenditure is and how it should be treated in the accounts of a business. (d) Explain why control of capital expenditure is so important within an organisation. Discount factor table extracts Time Factor 10% 1 0909 2 0826 3 0751 4 0683 5 0621 Annuity factor table extracts Time Factor 10% 1 0909 2 1736 3 2487 4 3170 5 3791 (20 marks) (5 marks) (3 marks) (2 marks)

Factor 20% 0833 0694 0579 0482 0402

End of Question Paper