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
2
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
3
Which of the following is NOT a primary bank?
A
B
C
D
4
$6,500
$3,500
$4,500
$5,000
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.
2
5
The following data has been taken from P Co’s 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
6
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
7
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
W
$25
$4
$6
$4
$10
X
$35
$5
$10
$4
$12
Y
$40
$8
$10
$8
$2
Z
$50
$10
$20
$10
$6
Which product should L Co produce?
A
B
C
D
8
W
X
Y
Z
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
3
[P.T.O.
9
Which of the following method(s) of investment appraisal take into account the time value of money?
(i)
(ii)
(iii)
(iv)
Accounting rate of return
Discounted payback
Net present value
Internal rate of return
A
B
C
D
(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
7·7%
8·0%
4·0%
3·8%
(20 marks)
4
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:
Sales orders from companies $’000
Sales orders from individuals $’000
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
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 Co’s 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 Co’s 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)
5
[P.T.O.
2
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 B’s 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 B’s 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 year’s 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 year’s 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 Farm’s 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 $.
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(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)
(ii) Operating leases;
(3 marks)
(iii) Hire Purchase.
(3 marks)
Discount factor table extracts
Time
Factor
10%
1
0·909
2
0·826
3
0·751
4
0·683
5
0·621
6
0·564
Annuity factor table extracts
Time
Factor
10%
1
0·909
2
1·736
3
2·487
4
3·170
5
3·791
6
4·355
(20 marks)
7
[P.T.O.
3
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)
(ii) Certificates of deposit (CDs).
(4 marks)
(20 marks)
4
Over recent months R Co’s 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 Co’s 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 Co’s services should be engaged. State your conclusion.
(10 marks)
(20 marks)
End of Question Paper
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