7/27/2019 c5_1998_dec

1/5

Question Paper

T ime allowed 3 hours

ALL FOUR questions are compulsory and MUST beanswered

ACCAAccounting Technician Examination

Level C

Managing FinancesDecember 1998 Thursday Morning

p

ape

r

C5

Do not open this paper until instructed by the supervisor

This question paper must not be removed from theexamination hall

Th e A sso c ia t io n o f C h a rte re d C e rt ifie d A c c o u n t a n t sTh e A s so c ia tio n o f C h a rt e r e d C e rtifie d A c c o u n t a n tsTh e A sso c ia t io n o f C h a rte re d C e rt ifie d A c c o u n t a n t sTh e A s so c ia tio n o f C h a rt e r e d C e rtifie d A c c o u n t a n tsTh e A s so c ia tio n o f C h a rte re d C e rt ifie d A c c o u n t a n t s

7/27/2019 c5_1998_dec

2/5

2

ALL FOUR questions are compulsory and MUST be answered.

1 FramesLtd isa small wholesaler of building materials. The company sellson credit to a wide variety of building contractors.

You have recently been appointed to the newly created position of credit manager to implement credit control proceduresin order

to avoid potential bad debts.

Extractsfrom the companysmost recent accountsare asfollows:

Balance sheet as at 30 June 1998

000 000 000

Fixed assets

Land and buildingsat cost 600

Lessaccumulated depreciation 200 400

Fixturesand fittingsat cost 200

Lessaccumulated depreciation 75 125

525

Current assets

Stocks 400

Trade debtors 400

Bank 2

802

Creditors:(A mountsfalling due in lessthan 1 year )

Trade creditors 346

Taxation 30 376 426

951

Creditors:(Amountsfalling due after 1 year)

Term loan (10% ) 300

651

Capital and reserves

Called up share capital (50p par value) 100

Share premium 200

Revenue reserves(retained profit) 351

651

Profit and loss account for the year ended 30 June 1998

000 000

Sales 2,000

LessCost of sales

O pening stock 400

Purchases 1,400

1,800

LessClosing stock 400 1,400

G rossprofit 600

A dministration expenses 200

Selling expenses 270

Finance expenses 30 500

Pre-tax profit 100

Taxation 30% 30

Profit after taxation 70

7/27/2019 c5_1998_dec

3/5

3 [P.T.O .

N otes:

1. A ll salesand purchasesare on credit.

2. The managing director isconsidering increasing the credit period given to customersby 15 days. It isanticipated that:

(a) T hiswill increase annual salesby 20% .

(b) To cope with the increase in sales, stocks will be increased by 10% effective immediately, and are forecast to remain

constant at thisincreased level.(c) G rossprofit margin on the additional saleswill be the same asat present ( i.e. 30% ) .

(d) Credit period received from supplierswill remain unchanged.

(e) A dministration and selling expensesare not expected to change.

3. To finance any extra working capital requirement the company intendsto increase itsterm loan effective immediately. Interest

on thisterm loan iscurrently 10% per annum. (Any increase in the term loan will result in an increase in the finance expenses

in the profit and lossaccount) .

Required:

(a) (i) Explain the term net working capital (cash operating) cycle. (2 marks)

(ii) Calculate the existing cash operating cycle to the nearest day.(Use 30 June 1998 year end figures). (6 marks)

(iii) If the proposed credit policy change is implemented, calculate the increase or decrease in each of

the following:

Cash operating cycle to the nearest day

Net investment in stock, debtors and creditors to the nearest 000.

Net profit after tax to the nearest 000.

(Use 30 June 1999 year end figures) (14 marks)

(b) It has been suggested that Frames Ltd., considers factoring and/or invoice discounting to finance the

expansion of the business. You are required to explain threeways in which factoring differs from invoice

discounting. (6 marks)

(c) (i) Identify and briefly discuss four factors which need to be taken into account when assessing the

credit worthiness of new customers. (8 marks)

(ii) Briefly outline four reasons why small companies like Frames Ltd., may find the management of

debtors a particular problem. (4 marks)

(40 marks)

7/27/2019 c5_1998_dec

4/5

4

2 Toyz Ltd isa medium sized company engaged in the manufacture of a range of educational toys. T he businessisgrowing rapidly

and the company isexperiencing some cash flow difficulties. T he companystoysare sold to a number of retail outletsthroughout

the country. Prior to departing for an extended Christmasholiday, the financial controller had prepared a cash flow forecast for the

managing director for the period January to M arch 1999.

The managing director hasreviewed the cash flow forecast and isconcerned with the trend exhibited in the cash position. He has

asked you, asassistant accountant, to prepare the profit and lossaccount for the period January to M arch 1999 using the information

on which the financial controller had based the cash flow forecast. You have been given the financial controllersworking paperswhich include the following information:

January 99 February 99 March 99

Inflows

Receiptsfrom debtors 200,000 125,000 125,000 N ote 1

Rental income 40,000 N ote 2

Total inflows 200,000 125,000 165,000

Outflows

Paymentsto creditors (55,000) (45,000) (35,000) N ote 3

W ages& salaries (55,000) (55,000) (55,000) N ote 4

O verheads (30,000) (30,000) (30,000) N ote 5

D ividends (90,000) N ote 6

Production machinery (50,000) N ote 7

Total outflows (140,000) (220,000) (170,000)

N et cash flow 60,000 (95,000) (5,000)

O pening cash balance N il 60,000 (35,000)

C losing cash balance 60,000 (35,000) (40,000) N ote 8

N otes:

1. D ebtorstake an average of 3 monthsto pay. Salesin the period January to M arch 1999 are forecast to be 650,000 and

no bad debtsare expected.2. Rental income from sub-letting of warehouse space isreceivable quarterly in arrears.

3. Toyz Ltd takesan average of 3 monthsto pay creditors. Raw material purchasesin the period January to M arch 1999 are

budgeted to be 250,000.

4. W agesand salariesare paid in the month incurred.

5. O verheadsare paid in the month incurred.

6. T he dividendspaid in February are the annual dividend for year ended 31 December 1998.

7. The payment in M arch relatesto the acquisition of a new production machine which will be commissioned ( installed) in M arch.

A ll fixed assetsare depreciated at 10% per annum commencing in the month following commissioning. D epreciation on

assetsheld at January 1 is budgeted to be 50,000 for the next year.

8. T he companysoverdraft limit is30,000.

9. There isno opening or closing raw material or work-in-progress, but finished goodsare expected to be 80,000 higher at the

end of M arch than asat January 1 1999.

10. The companysyear end is31 D ecember.

Ignore taxation.

Required:

(a) (i) Prepare the forecast profit and loss account for Quarter 1 1999 to identify the profit after deprecia-

tion. (10 marks)

(ii) Calculate the forecast closing debtors and trade creditors figures as at the end of March 1999.

(2 marks)

(b) Briefly outlinefour

possible actions which could be considered by Toyz Ltd, in an attempt to improve thecash position. (8 marks)

(20 marks)

7/27/2019 c5_1998_dec

5/5

5 [P.T.O .

3 Q uick Freeze Foodsplc producesa range of convenience processed foodsfor a number of supermarket chain stores. Itssuccess

hasbeen based on the expertise and customer-driven emphasisof itsresearch and development team.

The R& D team hasidentified three mutually exclusive projectswhich could be undertaken. The finance director hasrecruited you

asassistant accountant to carry out a financial evaluation of each project.

D etailsof the three projects cash flowsare shown below:

Cash Flow Timing Indian range Chinese range Italian range

Initial O utlay (80,000) (20,000) (20,000)

1 26,500 5,000 12,000

2 26,500 6,000 8,000

3 26,500 8,000 6,000

4 26,500 10,000 N il

Ignore taxation and inflation. A ssume that cash flowsoccur at the endsof each of the yearsshown.

N ote: T he present value of 1 in n years isasfollows:

n (year) at 10 % at 15 %

1 0909 08702 0826 0756

3 0751 0658

4 0683 0572

Required

(a) Using each of the following appraisal methods rank the projects in order of their investment potential.

(i) Net present value (NPV) at 10% (7 marks)

(ii) Approximate internal rate of return (IRR) (7 marks)

(b) (i) Critically compare each of the above investment appraisal methods. (4 marks)

(ii) Explain which method you regard as the most useful for project appraisal and which project you

would recommend. (2 marks)

(20 marks)

4 Sparx Ltd isa rapidly expanding chain of retail outletsspecialising in electrical goods. The board of directorshasrecently decided

to implement improvementsin internal controlsand to investigate the possibility of creating an internal audit function.

Required:

(a) (i) Briefly describe the concept of internal control. (2 marks)

(ii) Identify and briefly describefour fundamental requirements in the design of internal controls which

may help Sparx Ltd to prevent or detect errors or fraud. (8 marks)

(b) (i) Briefly outline threeadvantages to Sparx Ltd of having an internal audit function. (6 marks)

(ii) Briefly outline two main differences between the internal and external audit functions. (4 marks)

(20 marks)

End of Question Paper