Level 2 – Page 19

PSAF – L2 – Q13.2 – Financial Statements Discussion and Analysis

Explain the relevance of financial statement discussion and analysis for a public healthcare facility.

Question

The management of a Central Healthcare Facility demands that the Director of Finance should ensure that the financial statements of the entity are laid before the oversight board together with financial statement discussion and analysis. However, some members of the board question the relevance of the request.

Required:
(a) As the Director of Finance, explain the relevance of the request to the healthcare facility.

(b) Discuss the five limitations of financial statement discussion and analysis.

Answer

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Tags: Accountability, Budgetary Control, Financial Reporting, Public Sector, RPG 2, Transparency
Level: Level 2

Topic: Financial Statements Discussion and Analysis

FM – L2 – Q115 – Management of receivables and payables

Evaluate if a new credit policy with early settlement discounts increases profitability for Tamale Transport Ltd.

Question

Tamale Transport Ltd has annual sales revenue of GH¢6 million, and all sales are on 30 days’ credit, although customers on average take ten days more than this to pay. Contribution represents 60% of sales, and the company currently has no bad debts. Accounts receivable are financed by an overdraft at an annual interest rate of 7%.
Tamale Transport Ltd plans to offer an early settlement discount of 1.5% for payment within 15 days and to extend the maximum credit offered to 60 days. The company expects that these changes will increase annual credit sales by 5%, while also leading to additional incremental costs equal to 0.5% of turnover. The discount is expected to be taken by 30% of customers, with the remaining customers taking an average of 60 days to pay.

Required:
(A) Evaluate whether the proposed changes in credit policy will increase the profitability of Tamale Transport Ltd.

(B) Salaga Enterprises, a subsidiary of Tamale Transport Ltd, has set a minimum cash account balance of GH¢7,500. The average cost to the company of making deposits or selling investments is GH¢18 per transaction, and the standard deviation of its cash flows was GH¢1,000 per day during the last year. The average interest rate on investments is 5.11%.

Required:
Determine the spread, the upper limit, and the return point for the cash account of Salaga Enterprises using the Miller-Orr model and explain the relevance of these values for the cash management of the company.

(D) Discuss the key factors to be considered when formulating a working capital funding policy.

Answer

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Tags: Funding Policy, Long-term Finance, Matching Principle, Risk Management, Short-term Finance, Working Capital
Level: Level 2

Topic: Working capital management

FM – L2 – Q113 – Management of receivables and payables

Evaluate the impact of extending credit period on Kofi Oil Mill Limited’s profit, considering sales increase and working capital costs.

Question

The summarised budget of Kofi Oil Mill Limited for the year to 31 December 20X8 is as follows:

	GH¢’000	GH¢’000
Budgeted sales		20,000
Budgeted variable costs	18,400
Budgeted fixed costs	800
		19,200
Budgeted profit		800

The sales manager has proposed that the period of credit allowed to customers should be increased from one month to two months. It is believed that this would increase sales by 15%. All sales are on credit and the cost of capital is 13%. Assume fixed costs will remain constant.

Required
(a) Briefly outline for management the implications of the sales manager’s proposal.

(b) List FOUR factors which should be taken into consideration in determining a policy for the control of credit extended by a company.

Answer

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Tags: Credit Policy, Customer Credit, Financial Risk, Receivables Management
Level: Level 2

Topic: Management of receivables and payables

PSAF – L2 – Q13.1 – Financial statements discussion and analysis

Discuss four general considerations for financial statement discussion and analysis per RPS 2.

Question

(a) Discuss the four general considerations of financial statement discussion and analysis under the RPS 2.

(b) Discuss the typical content of financial statement discussion and analysis in line with RPS 2.

Answer

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Tags: Accountability, Discussion and analysis, Financial Statements, Public sector reporting, Qualitative characteristics, RPS 2, Transparency
Level: Level 2

Topic: Financial Statements

FM – L2 – Q112 – Management of receivables and payables

Calculate the profit impact of using a debt factor for Nsawkaw Tech Solutions Limited and comment on the findings.

Question

Nsawkaw Tech Solutions Limited is a software business owned and managed by computer software specialists. Although sales have remained stable at GH¢40,000,000 per annum in recent years, the level of trade receivables has increased significantly. A recent financial report submitted to the owners indicates an average settlement period of 60 days for trade receivables compared with an industry average of 40 days. The level of bad debts has also increased in recent years, and the company now writes off approximately GH¢40,000 in bad debts each year.
The recent problems experienced in controlling credit have led to a liquidity crisis for the company. At present, the company finances its trade receivables by a bank overdraft at an interest rate of 14% a year. However, the overdraft limit has been exceeded on several occasions in recent months, and the bank is now demanding a significant decrease in the size of the overdraft.
To meet this demand, the owners of the company have approached a factor who has offered to make an advance payment equivalent to 85% of trade receivables, based on the assumption that the level of receivables will be in line with the industry average.
The factor will charge a rate of interest of 12% a year for this advance. The factor will take over the sales records of the company and, for this service, will charge a fee based on 2% of sales. The company believes that the services offered by the factor should eliminate bad debts and lead to administrative cost savings of GH¢52,000 per year.

Required
(a) Calculate the effect of employing a debt factor on the profit of Nsawkaw Tech Solutions Limited. Comment on your findings.

Note: You may assume 360 days in a year.

(b) State FIVE potential advantages and TWO disadvantages of using the services of a debt factor by a business organisation.

Answer

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Tags: Advantages, Business Operations, Credit Control, Debt Management, Disadvantages, Factoring
Level: Level 2

Topic: Management of receivables and payables

FM – L2 – Q111 – Management of receivables and payables

Calculate the annual interest cost of offering a 2% settlement discount for payment within 7 days, given a 90-day credit period.

Question

(A). A business entity offers its customers trade credit of 90 days. It is considering whether to offer a settlement discount of 2% for payment within seven days.

Required

Calculate the cost of offering the discount, as an annual interest cost.

(B). Entity K has monthly sales of GH₵100,000. A factor has offered to take over the administration of Entity K’s trade receivables, on a non-recourse basis (or without recourse basis). It would charge a fee of 4% of the value of invoices processed. If the factor takes over this work, Entity K would save monthly administration costs of GH₵2,000 and would avoid its bad debts, which are 0.75% of sales.

Entity K has been informed by the factor that the average collection period (the time between issuing an invoice and receiving payment from the customer) will be reduced from 2 months to 1 month.

The factor will also provide finance by lending 80% of the value of unpaid invoices, charging interest at an annual rate of 8% on the cash that it lends. At the moment, Entity K finances its trade receivables with bank overdraft finance at 9% per year interest.

Required

Calculate the net effect on annual profits of Entity K if the factor took over the administration of the trade receivables and provided finance on the terms described above.

Answer

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Tags: Bad Debts, Cost-benefit analysis, Credit administration, Factoring, Interest cost, Non-recourse factoring, Trade Receivables
Level: Level 2

Topic: Management of receivables and payables

L2 – Q110 – Trade Receivables Management

Calculate the effect of reducing credit period on Entity N's annual profit, considering sales reduction, bad debts, and overdraft costs.

Question

Entity N is reviewing its credit policy. It is estimated that if the period of credit allowed to customers is reduced to 60 days, there will be a 25% reduction in annual sales, but bad debts would be reduced by GH¢30,000 each year. It would also be necessary to spend an extra GH¢20,000 each year on credit control. Entity N has cash flow difficulties and relies on overdraft finance, for which the interest rate is 9%.

Required
Calculate the effect of these changes on the annual profit. Base your answer on the level of sales in Year 3, and assume that purchases and inventory would be reduced in the same proportion as the reduction in sales.

Entity N – Extracts from annual accounts	Year 3
Inventory	GH¢
Raw materials	180,000
Work in progress	93,360
Finished goods	142,875
Purchases	720,000
Cost of goods sold	1,098,360
Sales	1,188,000
Trade receivables	297,000
Trade payables	126,000

Answer

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Tags: Bad Debts, Credit Control, Credit Policy, Overdraft Finance, Profit Impact, Sales Reduction, Trade Receivables, Working Capital
Level: Level 2

Topic: Management of receivables and payables

PSAF – L2 – Q12.4- International Public Sector Accounting Standards

Explain the elements of control for consolidated financial reporting under IPSAS 35.

Question

(A) CONTROL

Explain the elements of control for consolidated financial reporting purposes. (B)

CONTROL

Discuss the circumstance in which a controlling entity does not have to prepare consolidated financial statements under IPSAS 35.

Answer

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Tags: Benefits, Consolidation, Control, Financial Reporting, Governance, IPSAS 35, Power, Public Sector
Level: Level 2

Topic: International Public Sector Accounting Standards

FM – L2 – Q109 – Inventory Management

Calculate the EOQ for an item with given demand, costs, and holding expenses to minimize annual costs.

Question

Entity G uses 105 units of an item of inventory every week. These cost GH₵150 per unit. They are stored in special storage units and the variable costs of holding the item is GH₵4 per unit each year plus 2% of the inventory’s cost.

Required
(a) If placing an order for this item of material costs GH₵390 for each order, what is the optimum order quantity to minimise annual costs? Assume that there are 52 weeks in each year.

(b) Suppose that the supplier offers a discount of 1% on the purchase price for order sizes of 2,000 units or more. What will be the order size to minimise total annual costs?

Answer

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Tags: Cost Optimization, Discount Analysis, Economic Order Quantity, Inventory Management
Level: Level 2

Topic: Inventory Management

FM – L2 – Q108 – Inventory Management

Calculate the average stock level for a component based on usage and lead time data.

Question

Ravens Limited (RV) imports a high-value component for its manufacturing process. The following data, relating to the component, has been extracted from RV’s records for the last twelve months:

Maximum usage in a month	300 units
Minimum usage in a month	150 units
Average usage in a month	225 units
Maximum lead time	6 weeks
Minimum lead time	2 weeks

Required
Calculate the average stock level for the component.

Answer

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Tags: Inventory Management, Lead Time, Reorder Level, Stock Levels, Usage Rates
Level: Level 2

Topic: Inventory Management

Level (SQ): Level 2

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PSAF – L2 – Q13.2 – Financial Statements Discussion and Analysis

Explain the relevance of financial statement discussion and analysis for a public healthcare facility.

FM – L2 – Q115 – Management of receivables and payables

Evaluate if a new credit policy with early settlement discounts increases profitability for Tamale Transport Ltd.

FM – L2 – Q113 – Management of receivables and payables

Evaluate the impact of extending credit period on Kofi Oil Mill Limited’s profit, considering sales increase and working capital costs.

PSAF – L2 – Q13.1 – Financial statements discussion and analysis

Discuss four general considerations for financial statement discussion and analysis per RPS 2.

FM – L2 – Q112 – Management of receivables and payables

Calculate the profit impact of using a debt factor for Nsawkaw Tech Solutions Limited and comment on the findings.

FM – L2 – Q111 – Management of receivables and payables

Calculate the annual interest cost of offering a 2% settlement discount for payment within 7 days, given a 90-day credit period.

L2 – Q110 – Trade Receivables Management

Calculate the effect of reducing credit period on Entity N's annual profit, considering sales reduction, bad debts, and overdraft costs.

PSAF – L2 – Q12.4- International Public Sector Accounting Standards

Explain the elements of control for consolidated financial reporting under IPSAS 35.

FM – L2 – Q109 – Inventory Management

Calculate the EOQ for an item with given demand, costs, and holding expenses to minimize annual costs.

FM – L2 – Q108 – Inventory Management

Calculate the average stock level for a component based on usage and lead time data.

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Explain the relevance of financial statement discussion and analysis for a public healthcare facility.

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Evaluate if a new credit policy with early settlement discounts increases profitability for Tamale Transport Ltd.

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Evaluate the impact of extending credit period on Kofi Oil Mill Limited’s profit, considering sales increase and working capital costs.

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Discuss four general considerations for financial statement discussion and analysis per RPS 2.

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Calculate the profit impact of using a debt factor for Nsawkaw Tech Solutions Limited and comment on the findings.

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Calculate the annual interest cost of offering a 2% settlement discount for payment within 7 days, given a 90-day credit period.

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Calculate the effect of reducing credit period on Entity N's annual profit, considering sales reduction, bad debts, and overdraft costs.

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Explain the elements of control for consolidated financial reporting under IPSAS 35.

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Calculate the EOQ for an item with given demand, costs, and holding expenses to minimize annual costs.

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