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  • 15 Marks

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.

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.

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  • 10 Marks

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.

(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.

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  • 15 Marks

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.

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

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  • 20 Marks

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

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

(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.

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  • 7 Marks

FM – L2 – Q109 – Inventory Management

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

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?

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  • 5 Marks

FM – L2 – Q108 – Inventory Management

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

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.

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  • 20 Marks

PSAF – L2 – Q12.3 – International public sector accounting standards

Prepare consolidated financial statements and notes for National Health Services and its hospitals for 2023 per IPSAS.

GHANA HEALTH SERVICE

Statements of Financial Performance for the year ended 31st December 2023

GHS Kolebu Saint H
GHC’000 GHC’000 GHC’000
Revenue
Tax revenue 100,000
GoG receipt 2,000
Non-exchange revenue 100,000 2,000 3,000
Internally generated revenue 5,000 400 200
Exchange revenue 5,000 400 200
Total revenue 105,000 2,400 3,200
Expenses
Compensation for employees 40,000 600 500
Depreciation & amortisation 500 300 200
Goods and services 25,000 600 400
Finance costs 1,600 500 100
Total expenses 67,100 2,000 1,200
Surplus for the period 37,900 400 2,000

Statements of Financial Position for the year ended 31 December 2023

GHS Kolebu Saint H
GHC’000 GHC’000 GHC’000
Assets:
Cash & cash equivalent 25,000 800 500
Receivable: GHS 900
Receivable: Others 62,000 700 400
Inventories 12,000 300 200
Current assets 99,000 2,700 1,100
Property, plant & equipment 140,000 40,000 67,100
Investment- Saint H 60,000
Non-current assets 200,000 40,000 67,100
Total Asset 299,000 42,700 68,200
Liabilities
Payable: Kolebu 900
Payable others 60,000 8,000 3,000
Current borrowings 90,000 2,000
Current liabilities 150,900 10,000 3,000
Borrowing 45,000 10,000 5,000
Non-current liabilities 45,000 10,000 5,000
Total liabilities 195,900 20,000 8,000
Net asset (liabilities) 103,100 22,700 60,200

Net Asset/Equity:

GHS Kolebu Saint H
GHC’000 GHC’000 GHC’000
Contribution from owners 60,000
Accumulated Surplus (deficit) 103,100 22,700 200
Total Asset/Equity 103,100 22,700 60,200

Additional information
(i) The Ghana Health Services (GHS) is a government agency responsible for overseeing the health sector. The Kwadwo Teaching Hospital is funded through government appropriations and internally generated funds approved by Parliament. The GHS appoints most of the hospital’s board members on behalf of the government. All employees at Kwadwo receive their salaries from the Consolidated Fund.
(ii) On July 1, 2023, the GHS established the Blessed Hospital to provide high-quality healthcare services in the country. The GHS has fully funded the hospital’s operations through equity and debt guarantees and has also appointed the hospital’s governing board.
(iii) The appropriations to Kwadwo cover employee compensation and goods and services expenses at a ratio of 60% to 40%, respectively.
(iv) At the end of the reporting period, the GHS owed Kwadwo GHC900,000 for services rendered to its staff. The GHS has committed to paying this amount by the end of the second quarter of the following year.
(v) The separate financial statements of the GHS, Kwadwo, and Blessed Hospital are prepared using the same accounting policies.

Required:
Prepare in accordance with the relevant IPSASs:
(a) A consolidated statement of financial performance for the year ended 31 December 2023.
(b) A consolidated statement of financial position as at 31 December 2023.
(c) Note to the accounts.

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  • 10 Marks

FM – L2 – Q107 – Inventory Management

Evaluate if Kweku Ltd should accept a foreign supplier's discount offer for groundnut orders, comparing EOQ and special order costs.

Kweku Ltd, a manufacturer of groundnut paste, is evaluating whether to continue with its economic order quantity (EOQ) or accept a special order from a foreign supplier for groundnut purchases. The relevant financial data is provided below:

Description Value
Purchase price per bag of groundnut GH¢360
Holding cost per annum (10% of the cost of a bag of groundnut) GH¢36
Ordering cost per order GH¢7.70
Annual demand of groundnut paste 6,240 bags
Normal usage per month 520 bags
Minimum usage per month Not specified
Maximum usage Not specified

Required:
The foreign supplier offers an 8% reduction in the price per bag of groundnut if Kweku Ltd orders 3,000 bags each time. Advise Kweku Ltd on whether to accept the supplier’s offer.

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  • 20 Marks

FM – L2 – Q106 – Inventory Management

Calculate EOQ, costs, and order frequency for Nana Kofi Ltd; explain stock motives and EOQ relevance

NANA KOFI LIMITED
(a) What are the two most relevant costs for determining the economic order quantity? Give THREE (3) specific examples in each case.

(b) Examine the THREE (3) motives for holding stocks.

(c) Explain economic order quantity and discuss TWO (2) of its relevance.

(d) Nana Kofi Limited purchases and sells CDs. The company has been experiencing stock shortages and excess stocks at certain times in the year. The manager is concerned about the impact of overstocking and understocking and is therefore requesting you to assist in determining the most Economic quantity of CDs to order.
He has made the following information available to you to enable you to recommend an appropriate stock to order and hold.

GH¢
Sales per annum 20,000,000
Units of items sold 200,000 units
Mark up on cost of purchases is 25% of purchase price
The ordering cost is GH¢200 per order whilst holding cost per unit is 5% of unit price.

Required:
(i) Determine the economic order quantity.

(ii) What is the annual ordering cost?

(iii) Determine the annual holding cost

(iv) How many times in a year will the company order for goods?

(v) What is the purchase value per order quantity?

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  • 20 Marks

PSAF – L2 – Q12.2 – International public sector accounting standards

Assess if a local authority can apply IPSAS 35 to consolidate a housing association's activities.

(a)  A local authority has a policy that, where it holds land that is surplus to its requirements, consideration should be given to making the land available for affordable housing. The local authority establishes terms and conditions to ensure that the housing provided remains affordable and available to meet local housing needs. In accordance with this policy, the local authority sold part of a site to a housing association for GH₵10 million to provide 20 affordable homes. The remainder of the site was sold at open market value to a private developer. The contract between the authority and the housing association specifies what the land can be used for, the quality of housing developments, ongoing reporting and performance management requirements, the process for return of unused land, and dispute resolution. The land must be used in a manner consistent with the local authority’s policy for affordable housing. The agreement also has requirements regarding the housing association’s quality assurance and financial management processes. The housing association must demonstrate that it has the capacity and authority to undertake the development. It must also demonstrate the added value that can be achieved by joining the local authority’s resources with that of the housing association to address a need within a particular client group in a sustainable way. The Board of the housing association is appointed by the members of the housing association. The local authority does not have a representative on the Board.

Required:
Assess whether the local authority could apply IPSAS 35 Consolidated Financial Statement to the activities of the Housing Association.

(b) A national museum is governed by a board of trustees who are chosen by the government department responsible for funding the museum. The trustees have freedom to make decisions about the operation of the museum. The department has the power to appoint the majority of the museum’s trustees.

Required:
Discuss whether the government department has the power over the activities of the museum.                                                                                                                                                                                                                                                                                                                (c)

In a recent workshop, a senior fellow of a civil society organisation asserts that the efforts of the Financial Controller to prepare consolidated financial statements of the authority is an exercise in futility. It further noted that the exercise is a waste of public resources.

Required:
Discuss the merit and demerit of the view of the Senior Fellow in light of IPSAS 35.

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