Posted: October 5th, 2013
Managing Financial Resources and Decisions
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You are a tutor employed by a local Enterprise Agency to design and deliver a training package to medium enterprise organisations in the local area. The participants have been invited to attend by the local council, as they have indicated the need for support in the area of business finance.
You have been asked by the Director of the Enterprise Agency to design and develop the two day training programme in the form of a report to these organisations. Your report must address the following:
- An outline of the various (at least 8) sources of finance that participants may choose from. (AC 1.1 Identification of the sources of finance available to a business)
- The legal, dilution of control and bankruptcy implications of the various sources of finance identified (AC 1.2 Assessment of the implications of the different sources)
- An analysis of the financial implications (e.g. tangible and opportunity costs), and tax effects of using the various sources of finance that you outlined in AC1.1 and AC1.2 above (AC 2.1 Analyse the costs of different sources of finance)
- An approach that will assist participants in their choice of appropriate sources to finance various projects. Use relevant examples such as building expansion, working capital financing needs, etc… to justify your answer. (AC 1.3 Evaluation of appropriate sources of finance for a business project)
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Note: This task consists of two parts (A and B)
Part A: AC 2.2 Explain the importance of financial planning and AC 2.3 Assess the information needs of different decision makers
As a management consultant for a manufacturing company, you are required to prepare a memorandum report for the attention of the management accountant explaining the importance of financial planning and the need to effectively disseminate information to various decision makers.
Your report should specifically highlight the need to identify shortages and surpluses (e.g. cash budgeting), the implications of failure to finance adequately; and an outline of the various decision makers within the organisation, with information requirements.
Part B: AC 2.4 Explain the impact of finance on the financial statements
The following is the balance sheet of R Riggs as at 28 February 2007
R Riggs Ltd
Balance Sheet as at 28 February 2007
£ £
Fixed assets 5,020
Current Assets 35,974
Less current liabilities 5,657 30,317
Net current assets 35,337
Less long term liabilities –Net assets 35,337
Financed by
Capital
Share Capital (par value £1 per share) 11,400
Add net profit 23,937
35,337You are required to identify the effects and related changes (if any) that obtaining the following sources of finance would have had on R Riggs Ltd balance sheet during the year. Provide illustrations and make reference to R Riggs profit and loss statement where appropriate.
Note: Each transaction is to be treated independently
(a) Obtaining a 2-year interest free loan of £5,000 from the A Alex Ltd
(b) Obtaining a 5-year loan of £10,000 at 10% interest per annum
(c) Obtaining a 1-year line of credit with a major supplier for purchase amounting £1,500
(d) Issuing additional 1,000 shares at £3.50 per share
(e) Selling some office furniture worth £2,000 at their net realisable value, with no profit made on disposal
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Note: This task consists of 3 parts (A, B and C)
PART A: AC 3.1 Analyse budgets and make appropriate decisions
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Yuri, a cutlery manufacturer, produces spoons. The market in which the business operates is highly competitive, as there is a shortage of steel of adequate quality. There is a good availability of labour, but not of those who are experienced in cutlery manufacture.
Required:
Outline the budgetary control cycle and review the variance analysis of Yuri’s budget. Suggest reasons for the results.
Budget Actual Variance
Units sold 100,000 75,000 (25,000)
Materials £ 15,000 22,500 (7,500)
Direct labour £ 22,500 24,375 (1,875)
Material (£) Labour (£)
Price/rate variance (4,500) 3,750
Usage/efficiency variance (3,000) (5,625)
Total variance (7,500) (1,875)
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PART B: AC 3.2 Explain the calculation of unit costs and make pricing decisions using relevant information
A printing company receives an order for 100,000 leaflets of A5 size printed in black ink. The cost estimator has prepared the following estimate of resources required to do the job.
Direct costs:
Paper – 204 reams of A4 at £3 per reams
Ink – 2 litres at £9 per litre
Labour time – 2 hours at £15 per hour
Indirect costs:
Production overheads and machine utilization – 2 hours at £55 per hour
Selling, distribution and administration overheads are recovered by charging £20 per hour and the company requires a 10% mark-up on selling price.
You are require to
1. Explain how you would arrive at the total cost for the job and the cost per leaflet.
2. Calculate the total production cost
3. Calculate the price that the company must quote for the job
4. Re-estimate the price that the company must quote if
i. The budgeted number of hour that the job requires is readjusted to 2.5 hours
ii. The budgeted number of hour that the job requires is readjusted to 1.5 hours
PART C: AC 3.3 Assess the viability of a project using investment appraisal techniques
The following data relate to two investment projects, only one of which may be selected:
Project A Project B £ £
£
£
Initial Investment 50000 50000
Cash inflows year 1 35000 20000
2 30000 20000
3 25000 24000
4 20000 36000
At the end of year 4, project A and B will each have a resale value of £10,000. The cost of capital is 10%.
You are required to:
1. Calculate for each project:
i. The average annual rate of return on average capital invested (Accounting rate of return)
ii. The payback period
iii. The net present value
iv. The profitability index
2. Define the internal rate of return
3. Briefly discuss the relative advantages and disadvantages of the four methods of evaluation mentioned in (1) above
4. Explain which project you would recommend for acceptance
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Note: This task consists of 3 parts (A, B and C)
PART A: AC 4.1 Discuss the main financial statements
“The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions” (International Accounting Standards Board, 2007).
Financial statements are intended to be understandable by readers who have “a reasonable knowledge of business and economic activities and accounting, and who are willing to study the information diligently”. They may be used by different users for different purposes.
You are required to discuss the main financial statements i.e. Profit and Loss account, Balance Sheet, Cash Flow Statement and Notes by explaining for each statement:
1. Its purpose for the various users, e.g. investors, government (tax authority), etc…;
2. Any changes, to reporting requirements under International Accounting Standards (IAS); e.g. ‘Statement of Comprehensive Income’ replacing ‘Profit and Loss account’. Provide reference to standards where appropriate (e.g. inventory – IAS2; Cash flow statement – FRS1)
PART B: AC 4.2Compare appropriate formats of financial statements for different types of business
R Riggs and J & B Associates are two retailers in the fashion industry whose final drafts of financial statements are represented below.
(a) What type of business are R Riggs and J & B Associates operating (e.g. Limited Liability Company, etc…)? For each business, justify your answer by identifying at least 3 factors that motivated your choice.
(b) Which business appears to be the most profitable? Justify your answer.
(c) Which business appears to be less liquid? Justify your answer.
R Riggs
Profit and Loss Account for the year ended 28 February 2007
£ £
Sales 157,165
Less Cost of goods sold:
Opening stock 4,120
Add Purchases 92,800
96,920
Less Closing stock 2,400 94,520Gross profit 62,645
Add discounts received 160 62,805
Less Expenses:
Wages and salaries 31,740
Rent 3,170
Discounts allowed 820
Van running costs 687
Bad debts 730
Doubtful debt provision 91
&nb
sp; Depreciation 1,630 38,868
sp; Depreciation 1,630 38,868
Net Profit 23,937
R Riggs
Balance Sheet as at 28 February 2007
£ £ £
Fixed assets
Office furniture 2,900
Less depreciation 380 2,520 Delivery van 3,750
Less depreciation 1,250 2,500
5,020
Current Assets
Stock 2,400
Debtors 12,316
Less provision for doubtful debts 496 11,820 Prepaid expenses 230
Cash at bank 4,100
Cash in hand 324 18,874
Less current liabilities
Creditors
5,245
5,245
Expenses owing 412 5,657
Net current assets 13,217Net assets 18,237
Financed by
Capital
Opening balance 11,400
Addnet profit 23,937 35,337
Less drawings 17,100 18,237
J & B Associates
Profit and Loss Account for the year ended 30 March 2007
£ £
Sales 363,111
Less Cost of goods sold:
Opening stock 62,740
Add purchases 210,000
272,740
Less closing stock 74,210 198,530Gross profit 164,581
Add Reduction in provision for doubtful debt 150 164,731
Less Expenses:
Salaries 58,529
Office expenses 4,975
Carriage outwards
3,410
3,410
Discounts allowed 620
Bad debts 1,632
Loan interest 3,900
Depreciation 5,600 78,666
Net Profit 86,065Add Interest on drawings: J 900
B 600 1,500 &nbs
p; 87,565
p; 87,565
Less Interest on capital: J 5,000
B 3,750 8,750
Salary: J 30,000 38,750
48,815
Shared: J 29,289
B &nb
sp; 19,526 48,815
sp; 19,526 48,815
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J & B Associates
Balance Sheet as at 30 March 2007
£ £ £
Fixed assets
Buildings 155,000
Fixtures 3,400 158,400Current assets
Debtors
60,150
60,150
Stock 74,210
Bank 6,130 140,490
Current liabilities
Creditors 26,590
Accruals 935 27,525
Net current assets 112,965 271,365
Less loan from P Prince 65,000
Net assets 206,365Financed by
Capital accounts: J 100,000
B 75,000 175,000 Current accounts: J B
Opening balance 4,100 1,200
AddInterest on capital 5,000 3,750
Salary 30,000 –
Balance of profit 29,289 19,526 68,389 24,476
Lessdrawings 31,800 28,200
Interest on drawings 900 600
35,689 (4,324) 31,365 206,365
PART C: AC 4.3 Interpret financial statements using appropriate ratios and comparisons, both internal and external.
Jane has £40 000 to invest and is considering buying some ordinary shares in Staton plc.
The current market price of the ordinary shares is 80p.
The following information has been extracted from the published accounts of Staton plc. for the year ended 30 April 2008.
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£
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Operating profit for the year 1,144,000
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Interest payable 394,000
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Net profit for the year 750,0
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Total dividends for the year 200,000
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Fixed assets: net book value 13,800,000
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Stock 478,600
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Other current assets 597,680
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Creditors: amount falling due within one year 1,187,600
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Creditors: amounts falling due after more than one year 7,880,000
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Issued ordinary shares of £1 each fully paid 5,000,000
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Reserves 808,680
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Additional information:
The following ratios relate to Staton plc for the year ended 30 April 2007.
Gearing 68.65%
Earnings per share 12p
Dividend per share 3.75p
Dividend yield 6.25%
Dividend cover 3.2 times
Price/earnings ratio 5
(a) You are required to calculate the following ratios for the year ended 30 April 2008. State the formulae used.
(i) Gearing
(ii) Earnings per share (EPS)
(iii) Dividend per share
(iv) Dividend yield
(v) Dividend cover
(vi) Price/earnings ratio
(b) Write a brief report to Jane advising, with reasons, whether or not she should invest in Staton plc
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