Please provide your answers, including calculations, to the following questions. This is not a report so answers are to be presented in order, following each question.
Responding to each question should articulate adequate detail to show how you have approached answering the question and your calculations.
Close date for submission via Moodle submission box is 11:30 pm Sunday 11 August 2019.
1) Purple Ltd has 10 million ordinary shares which were issued at 80 cents each. The shares are currently valued on the stock exchange at $1.60 per share. The directors of Purple Ltd have decided to make a one-for-eight rights issue at $1.50 per share.
a) Calculate the price of a share following the rights issue.
b) Calculate the value of the rights offer on a per share basis.
2.1) Gordon Enterprises usually takes 60 days to pay its suppliers. In order to encourage prompt payment, supplier Y offers Flash Enterprises a 2% discount for payment within 10 days. What is the annual percentage discount forgone if Flash Enterprises does not take up the discount offer?
2.2) A company wishes to reduce the amount of working capital it requires to finance its operations. What actions can management take to reduce working capital requirements?
2.3) A firm has daily credit sales of $100,000, and its average collection period is 45 days. Its average accounts receivable balance is:
2.4) Courtmaster provides superturf for tennis courts. The company has recently investigated investing in a new machine, which will speed up the laying of the superturf. The old machine has a remaining life of 5 years, and the new equipment has a value of $150,000 with a five-year life. The expected additional cash inflows are $35,000 per year. Calculate the internal rate of return for the new machine?
2.5) If the Net Present Value of a project is $1,000 after using a discount rate of 8%, then one can conclude that the Internal Rate of Return is:
3) The following information relates to three mutually exclusive projects.
Project A Project B Project C
Initial cash outlay $40,000 $40,000 $40,000
Net cash inflows:
Year 1 3,000 16,000 12,000
2 7,000 13,000 12,000
3 11,000 10,000 12,000
4 15,000 7,000 12,000
5 19,000 4,000 12,000
Salvage value Year 5 8,000 Nil 2,000
Compute the net present value of each project at a discount rate of 10%.
4.1) The Square Package Group is thinking of buying, at a cost of $220,000, some new packaging equipment that is expected to save $50,000 in costs per year. Its estimated useful life is 10 years and it will have zero disposal value. The required rate of return is 16%. Ignore income tax issues.
Compute the following:
a) Net present value
b) Payback period
4.2) Records of Recycling Ltd contain the following data:
Opening bank balance $35,000
May $60,000 $20,000
June 70,000 30,000
July 80,000 25,000
All sales are on credit. Records show that 80% of the customers pay during the month of the sale, 15% pay in the month after the sale, and the remaining 5% pay in the second month after the sale. Purchases are all paid the following month at a 1% discount. Cash disbursements for operating expenses in July were $8,000.
Prepare a cash budget for July.
5) Bluebird Ltd has provided the estimates below for the July-September quarter in 2017.
July August September
$ $ $
Sales 13,000 14,000 15,000
Purchases 9,400 8,000 10,000
Operating expenses 3,600 6,400 5,000
You are also given the following additional information:
• 35% of sales are cash sales, the remaining 65% credit sales are collected as follows:
o 30% in the month of sale
o 40% in the month after sale
o 28% 2 months after sale
o 2% lost in bad debts
• Sales in the months of May and June were $11,000 and $10,000 respectively.
• Operating expenses include depreciation each month of $900. All expenses and purchases are paid for in the same month they are incurred.
• The firm expects to sell some old machinery for $7,000 in August. New machinery worth $9,500 will be purchased in September.
• The cash balance on 1st July 2017 is $5,700.
a) Prepare a schedule of receipts from accounts receivable showing the collections in the three months July to September.
b) Prepare a cash budget for Bluebird Ltd for the three months July to September.
6.1) A service business expects to incur overheads totalling $20,000 next month. The total direct labour time worked is 1,600 hours and total machine hours are 1,000. During next month, the business expects to do just two large jobs. Information concerning each job is as follows:
Direct Labour hours 700 900
Machine hours 700 300
a) Calculate the overhead recovery rate for the month using direct labour hours.
b) Compute how much of the month's overhead will be charged to each job.
Q6.2 Ace Ltd makes trailers for boats. Management have decided they would like to implement a full cost recovery system as detailed below.
Direct materials and direct labour are the only costs that can be traced directly to jobs. All other costs will be recovered using an overhead recovery rate based on direct labour cost. Profit (mark-up) will be 12% of full costs.
Annual Budget Forecast $
Sales (as per invoices) 230,000
Direct Materials 50,000
Direct Labour 60,000
Variable Overheads 2,400
Advertising for Business 4,000
Rent of Premises 10,000
Administration expenses 12,000
a) Calculate the overhead recovery rate to apply overhead to jobs.
b) Provide a quotation (full cost estimate plus mark-up) for the following job.
An initial examination of the job identifies the following direct costs:
Direct materials $9,000
Direct labour $6,000
7.1 The following information relates to component AHB2 manufactured by Aquarius Electronics.
Internal Manufacturing cost: Direct materials $30 (per unit)
Direct labour $18
Variable manufacturing overhead $9
Fixed manufacturing overhead $17
External acquisition price (per unit) $54
a) Based on the financial data presented, should Aquarius continue to manufacture the part or source it from the external supplier?
b) What other factors need to be taken into account?
7.2) Travel Made Easy Ltd provides three services: International travel, Interstate travel, and Holiday Packages. The results for the year were as follows:
International Interstate Packages Total
Revenue $200,000 $200,000 $100,000 $500,000
Variable costs 50,000 60,000 40,000 _ 150,000
Contribution 150,000 140,000 60,000 350,000
Fixed costs 90,000 90,000 90,000 _ 270,000
Net Profit $60,000 $50,000 ($30,000) $80,000
The Fixed costs have been shared equally between the three functions.
a) Management is contemplating closing the Holiday Packages service; this would involve a cost saving of $40,000 per annum, namely, the variable costs. The fixed costs are not expected to change. The best advice to management is:
b) Assume that Travel Made Easy can sublet the space occupied by the Holiday Packages for $50,000 per annum. The best advice to management is:
8.1) Cameron's Screensavers Ltd
Statement of financial position as at 31 December 2018 (Extracts)
Share capital ($1 shares) 250,000 360,000
Revaluation reserve 20,000 60,000
General reserve 150,000 100,000
Retained profits 66,000 76,000
• There was a bonus issue of 1 bonus share for every 5 existing shares held.
• Land and buildings was revalued by $40,000.
• A profit of $17,000 was earned during the year.
• Dividends of $6,000 were paid during the year that had been provided for in the prior year and $7,000 was provided as a final dividend at the end of the current year.
Show the financing section of the statement of cash flows for Cameron Screensavers for the year ended 31 December 2018.
8.2) Briefly outline the essence of the balance scorecard approach giving short examples.
9) The following information is produced on an accrual basis and relates to Emily's Superior Photo Framers.
Statement of comprehensive income for the year ended 31 December 2018
Less Photo framing supplies used 14,500
Less Other Expenses
Vehicle expenses 5,300
Office expenses 3,500
Rent of premises 20,000
Interest expenses 2,000
Depreciation of equipment 3,600 52,900
Statement of financial position as at 31 December 2018
Current Assets $ $
Cash at bank 20,500 4,030
Accounts receivable 1,500 1,650
Stock of photo framing supplies 5,500 3,500
Photo Framing Equipment 55,700 65,000
Less Accumulated Depreciation 11,200 44,500 14,800 50,200
Creditor owed for vehicle expenses - 1,900
Long Term Liabilities
Loan Finance Co, repayable by 2020 18,000 15,000
Capital - Emily 34,000 34,000
Current account Emily 20,000 8,480
• Emily withdrew $25,000 through the year for her own use.
• No photo framing equipment was sold during the year.
a) Prepare a classified statement of cash flows for the year ended 31 December 2018 from the above information. Show all workings.
b) Prepare a statement reconciling profit with cash flow from operating activities.
c) Comment on what the statement of cash flows reveals about the cash situation of Emily's Superior Photo Framers.
10) The balance sheet for Annabells Pty Ltd as at 30 June 2018 is as follows:
Bank $ 25,900
Accounts receivable $ 128,800
Inventory $ 98,560
Total current assets $ 253,260
Non current assets
Property Plant and Equipment $ 234,000
Depreciation $ 44,000
Total non-current assets $ 190,000
Total Assets $ 443,260
Accounts Payable $ 88,900
Accrued wages $ 2,500
Accrued expenses $ 2,000
Total current liabilities $ 93,400
Non current liabilities
Loan $ 250,000
Total non-current liabilities $ 250,000
Total Liabilities $ 343,400
Net Assets $ 99,860
Equity (200 fully paid up shares)
Shares (100) fully paid $ 200
Retained earnings $ 99,660
Accounts payable represent purchases for June 2018. Accounts receivable represent credit sales for May and June 2018.
80% of Annabells’ sales are on credit. Normal credit terms are to be paid by the end of the month after sale, however, of the credit sales 75% only are paid within this time. 10% of credit sales are paid in the month of sale, 65% before the end of the following month and 25% before the end of the month after the due credit terms. All accounts are paid within these terms.
The directors are seeking bank finance of $1million in order to fund the business and undertake a business expansion. The bank has requested that Annabells produce a monthly cash flow budget for the next 6 months. The planned drawdown of the $1million is for January 2019, however, Annabells existing loan is due to be paid out in November 2018. The bank wants to know how much overdraft facility is needed to carry Annabells through to the loan drawdown.
The monthly profit forecast for July 2018 to December 2018 is below:
July August September October November December
Sales $ 150,000 $ 150,000 $ 185,000 $ 180,000 $ 170,000 $ 165,000
gross margin 20% 20% 22% 22% 23% 23%
wages $ 20,000 $ 20,000 $ 22,000 $ 22,000 $ 18,000 $ 19,000
Rent $ 2,000 $ 2,000 $ 2,000 $ 2,000 $ 2,000 $ 2,000
Utilities $ 1,350 $ 1,350 $ 1,350 $ 1,350 $ 1,350 $ 1,350
Interest @ 5% $ 1,050 $ 1,050 $ 1,050 $ 1,050 $ 1,050 $ 1,050
Other exps $ 3,500 $ 3,500 $ 3,500 $ 3,600 $ 3,600 $ 3,600
Total Expenses $ 27,900 $ 27,900 $ 29,900 $ 30,000 $ 26,000 $ 27,000
Net Profit $ 2,100 $ 2,100 $ 10,800 $ 9,600 $ 13,100 $ 10,950
Closing Inventory required $ 100,000 $ 110,000 $ 110,000 $ 105,000 $ 100,000 $ 100,000
• Sales for the 3 months prior to the end of financial year were $140,000 per month
• At each month end 25% of a month’s wages are outstanding. Wages for June were $20,000.
• Rent is payable quarterly, in advance from a lease commencement 1 January.
• Utilities are paid quarterly in arrears (Sept, Dec). Other expenses in the month incurred.
• New fixed assets worth $80,000 will be delivered in November paid cash on delivery.
• The bank has granted Annabell’s a $50,000 overdraft facility.
• Annabells’ board has declared a dividend of $10 per share to be paid in August 2018.
• Tax of $17,560 is payable as at 31 October 2018.
Produce a cash flow budget for Annabells based on the above information. The cash flow budget should cover the months from July to December 2018.