Page 1 of 6 ASSIGNMENT MEMORANDUM SUBJECT : FINANCIAL ACCOUNTING (FA) ASSIGNMENT : 1 st SEMESTER 2010 Markers: Any question found to be copied should only be given 40% of the initial mark awarded. QUESTION 1 Suggested solution [20] 1.1 Cash inflows Sales Royalty Cash outflows Purchases Pemanent staff Temporary staff Admin & logistics Dividend Taxation Depreciation NCF Ignore [-1 if shown] Note Apr May Jun Jul Aug Sep 1 1 379 1 379 1 379 2 259 2 758 2 606 50 50 1 379 1 379 1 429 2 259 2 758 2 656 2 3 45 45 375 45 300 360 1 140 1 140 1 185 2 436 2 361 2 196 Net cash flow 239 239 244 (177) 397 612 Notes 1. Sales Feb Mar Apr May Jun Jul Aug Sep Volume Bad debt 1% Cash in: Discounted Drs 10% x 0,95 Drs 1 month 89% x 0,6 Drs 2 months 89% x 0,4-266 1 495 266 1 495 997 1 200 114 1 495 997 811 1 379 1 379 1 379 2 259 2 758 2 606 Bad debt NCF must not be shown, else - 1 2. Purchases 60% (GP 40%) 1 m prior, pd 2 After + 1 month 720
Page 2 of 6 3. Admin & Logistics Cost Minus: Depreciation Escalated (x 1,30) 150 30 1.2 When the dollar amounts are covered by forward contracts, i.e. the Rand amounts are fixed. 2 18 QUESTION 2 Suggested solution [40] 2.1 2009 2008 GP % 9 159,4 9 022,9 24 755,1 37,0% OP % NPAT % TIE 1 939,8 24 755,1 7,8% 752,1 24 755,1 3,0% 1 939,8 895,2 2,2 times 39,0% 2 689,9 11,6% 1 240,3 5,4% 2 689,9 967,3 2,8 times 8 2.2 To assess, look at the change in turnover/cost and compare to inflation or identify the major change. Turnover growth Admin salaries Logistical exp. LT interest Bad debt % 2008/9 2007/8 2006/7 18 809,4 18 809,4 23% 24 755,1 7,0% 39 555,9 3 697,1 3 697,1 7,0% 2 720,9 2 388,7 2 388,7 13,9% 7,5 m x 11% 825 000 542,8 24 755,1 2,2% 3 697,1 3 330,7 3 330,7 11% 2 388,7 2 194,2 2 194,2 8,9% 7,5 m x 12% 18 809,4 16 945,4 16 945,4 11% (1½) 3 330,7 3 084 3 084 8% (1½) 2 194,2 1 955,4 1 955,4 12,2% 900 000 247,2 1,1% Comment: Turnover increased by more than inflation up to 2008, but then growth slowed to lower as inflation.
Page 3 of 6 Admin salaries were increased by the inflation rates for 2007 & 2008, but a lower rate for 2009. This indicates No compensation for the 2008 performance and cost saving (contraction) for 2009. No trend when compared to inflation, perhaps lagging i.t.o. inflation [bonus]. Cost increases often higher than inflation rates. Bad debt almost doubled from 2008 to 2009, influenced by economic contraction (economy). Interest rate decline in line with rate movement in the market [rate linked to prime? Bonus 1]. Other interest may be on short-term funding or overdraft. Max 14 2.3 Influencing factors: Demand Demand may have declined due to economic contraction. Price per product unit Competition in the market may have restricted price increases. Type of product Luxury or non-necessity not high on client lists. Cost of product Cost of product (manufactured or bought) may have increased by amount greater than inflation and may be unavoidable. Inventory Lower level of inventory than previous year will increase cost of sales and lower GP. Sales/Credit policy Sales on cash will restrict sales during downturn. Credit policy may be too strict and not conducive to sales. Max 10 2.4 It will be interest paid on short-term funding and/or an overdraft or on amounts overdue on credit purchases. 2 2.5 Interest paid will increase. Profit will be impacted negatively. Debt to equity ratio will be impacted negatively. Cost of capital will change, may decrease as debt funding cheaper than equity. In the long-term cash flow will be impacted negatively as the loan must be repaid. If loan funding used for non-current assets/upgrade of facilities, there should be an impacted on turnover. Max 6
Page 4 of 6 QUESTION 3 Suggested solution [40] 3.1 2009 2008 Total asset t/o 51 270 25 500 2,0 times Cost of sales: Opening inventory + Purchases Closing inventory - Inventory turn OR Average 6,8 and 6.2 accepted Debtors days o/s Creditors payment Current ratio Acid test Gearing ratio NAV per share OR 2 400 17 950 () 17 550 17 550 6,27 times 58 days 5 900 x 365 51 270 42 days 3 950 x 365 17 950 80,3 days 10 300 4 700 2,2 : 1 10 300 4 700 1,6 : 1 10 000 10 000 + 10 800 48,1% 10 800 3 000 360 cps R3,60 45 22 900 2,0 times 3 000 16 240 (2 400) 16 16 844 2 400 7,02 times 52 days 6 200 x 365 45 50,2 days 5 400 x 365 16 240 121,4 days 9 900 6 000 1,65 : 1 9 900 2 400 6 000 1,25 : 1 8 000 8 000 + 8 900 47,3% 8 900 3 000 297 cps R2,97 18
Page 5 of 6 3.2 Forecast: Factory equipment Furniture Vehicles [1] Book value NBV [2] Depreciation [3] Acquisition [4] Depreciation (6 months) [5] Depreciation charge [6] [2] + [4] [7] Accumulated depreciation (09) [8] Accumulated depreciation (10) [6] + [7] (10%) 20 000 2 000 2 000 100 2 100 6 000 8 100 (10%) 1 000 580 58 100 5 63 420 483 (20%) 1 200 240 200 20 260 480 740 Book value [1] + [3] [8] 13 900 617 660 Total NCA 15 177 10 Net book value Book value (20 000 + 100 + 1 200). LESS: Accumulated depreciation (6 000 + 420 + 480) of R15 300 given in the statement of financial position. (The difference of R100 (typo) may be ignored.) 3.3 WACC Equity LTD Value 10 800 10 000 20 800 Weight % 51,9 48,1 100,0 Cost,18,12 x,72 Weighted cost 9,34 4,16 13,50 4 3.4 Factory equipment: LT debt or Instalment sale/lease Furniture Cash Vehicle Instalment sale 4
Page 6 of 6 3.5 Offer cash discount to improve cash flow May impact negatively on sales Extend credit to increase sales May increase bad debt Manage days o / s Manage working capital/cash 4