PROFESSIONAL PROGRAM – Page 66

FM – L2 – Q104 – Working Capital Management

Analyze Peak Enterprises Limited's financial statements to determine if it is overtrading and discuss its implications.

Question

Peak Enterprises Limited is a small manufacturing company. Its summarized accounts for the last two years are presented below:

Statements of Financial Position as at 31st March

	Year 5 (GH¢’000)	Year 6 (GH¢’000)
Fixed Assets	1,130	1,080
Current Assets
Inventory	210	260
Trade Receivables	120	160
Cash	30	–
Total Current Assets	360	420
Total Assets	1,490	1,500
Equity and Liabilities
Equity Shares of GH¢0.25	200	200
Accumulated Profits	680	500
Total Equity	880	700
Medium-Term Bank Loan	200	150
Current Liabilities
Bank Overdraft	140	250
Trade Payables	200	280
Other Payables	70	120
Total Current Liabilities	410	650
Total Equity and Liabilities	1,490	1,500

Statements of Profit or Loss for the Year Ending 31st March

	Year 5 (GH¢’000)	Year 6 (GH¢’000)
Sales	1,800	2,900
Gross Profit	210	260
Profit Before Tax	120	160
Taxation	(30)	(40)

Required
(a) Comment on whether there is any evidence that Peak Enterprises Limited is overtrading.
(b) Discuss the implications of overtrading for Peak Enterprises Limited.

Answer

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Tags: Bank Overdraft, Cash Flow, Equity financing, Financial Ratios, Inventory Management Civilian Financial Statements, Overtrading, Trade Payables, Trade Receivables, Working Capital
Level: Level 2

Topic: Working capital management

PSAF – L2 – Q12.1 – International public sector accounting standards

Assess if Zamunda government controls Zamunda Transport Agency per IPSAS 35.

Question

Zamunda Transport Agency
(a) (i) A government has established a Zamunda Transport Agency. The Zamunda Transport Agency has assumed many responsibilities previously held by the government. The agency is responsible for the regional transportation network in the metro and regional areas of the jurisdiction, including public transport and major roads and bridges. The agency receives approximately 2/3rds of its funding for operations from a share of the government’s fuel taxes and general tax revenues. The remainder of the revenue for operations comes from non-government sources such as fares, advertising, and property development. The government contributes toward rapid transit projects. The agency has raised capital through significant borrowings that are guaranteed by the government. The agency is allowed to operate autonomously; however, the agency’s mandate is established by legislation, and the government sets the regional transportation vision. The government has the power to appoint and remove a majority of the members of the board of directors of the Zamunda Transport Agency. The government has never exercised this power. The agency’s board of directors is responsible for hiring, compensating, and monitoring the performance of the management and for providing oversight of the agency’s strategic planning, finances, major capital projects, and operations. The government has the power to veto operating and capital budgets, including fares and capital financing plans.

Required:
In line with IPSAS 35 Consolidated Financial Statements, assess whether the government has control over the Zamunda Transport Agency. (ii)Discuss the procedures you will follow in preparation of the financial statements, given that control has been established in question (a). (b)

Zamunda Transport Agency

(b) Explain the following terms used in the IPSAS:

(i) Equity method of accounting;

(ii) Joint arrangement;

(iii) Economic entity view of financial reporting; and

(iv) Associate.

Answer

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Tags: Consolidation, Consolidation Procedures, Financial Statements, IPSAS 35, Public Sector, Transport Agency
Level: Level 2

Topic: International Public Sector Accounting Standards

FM – L2 – Q103 – Working capital management

Calculate the working capital cycle length for Entity N over three years using provided financial data.

Question

The working capital (or cash operating) cycle of a business is the length of time between the payment for purchased materials and the receipt of payment from selling the goods made with the materials.
The table below gives information extracted from the annual accounts of Entity N for the past three years.

Entity N – Extracts from annual accounts

	Year 1	Year 2	Year 3
	GH¢	GH¢	GH¢
Inventory:
Raw materials	108,000	145,800	180,000
Work in progress	75,600	97,200	93,360
Finished goods	86,400	129,600	142,875
Purchases	518,400	702,000	720,000
Cost of goods sold	756,000	972,000	1,098,360
Sales	864,000	1,080,000	1,188,000
Trade receivables	172,800	259,200	297,000
Trade payables	86,400	105,300	126,000

Required
(a) Calculate the length of the working capital cycle (assuming 365 days in the year).

(b) List the actions that the management of Entity N might take to reduce the length of the cycle.

Answer

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Tags: Cash Operating Cycle, Credit Management, Inventory Management, Payables Management, Working Capital Cycle
Level: Level 2

Topic: Working capital management

FM – L2 – Q102 – Treasury management

PrimeCare Inc supplies medical goods to HealthBridge Ltd in Ghana, addressing credit and currency risks in a $3M contract.

Question

PrimeCare Inc, a company in the USA, has agreed a contract to supply medical supplies to HealthBridge Ltd, a large hospital group based in Ghana. The price of the contract is $3 million.
There is currently no existing relationship between the two companies and PrimeCare has no other customers in Ghana.

Required:
Explain how PrimeCare Inc can manage the credit risk and currency risk associated with this international transaction.

Answer

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Tags: Credit risk, Currency hedging, Foreign Exchange Risk, Forward Contract, International payments, Letter of credit, Treasury management
Level: Level 2

Topic: Treasury Management

PSAF – L2 – Q11.4 – Preparation and presentation of financial statements for central government

Prepare the cash flow statement for Zamunda Central Government for 2024 with reconciliation notes.

Question

The Central Government of Zamunda: Cash flows statement for the year ended 31st December 2024

Prepare the cash flow statement for the Central Government of Zamunda for the year ended 31st December 2024, based on the following data:

Cash flows from operating activities	GHC million
Corporate income tax	38,000
Custom and excise duties	43,000
Value added taxes	45,000
Multilateral grants	16,000
Income tax (PAYE)	15,000
Fee and charges for services	10,000
Dividend and other investment income	7,000
Bilateral grants	12,000
Fines, penalties and forfeitures	9,000
Established post salaries	(22,000)
Non-established post salaries	(20,000)
13% SSF contribution for staff	(7,000)
Staff allowances	(8,000)
Administrative cost	(15,000)
Seminar and workshops	(12,000)
Training and capacity building	(6,000)
Foreign travelling cost	(5,000)
Repair and maintenance	(8,000)
Domestic debt interest paid	(12,000)
External debt interest paid	(12,000)
Payments for subsidies on utilities	(12,000)
Payment for subsidies on fuel	(12,000)
Community empowerment program	(12,000)
Support for social protection of aged widows	(12,000)
Statutory transfers	(12,000)
Other expenses	(12,000)

Cash flows from investing activities	GHC million
Recoveries of loans and advances	8,000
Payment for property, plant and equipment during year	(18,000)
Payments for infrastructure during year	(20,000)
Loans and advances granted during the year	(13,000)

Cash flows from financing activities	GHC million
External borrowing during the year	30,000
Domestic borrowing during the year	20,000
Repayment of external borrowing during the year	(10,000)

Additional information for notes:

Surplus of revenue over expenses for the year ending 2024: GHC 23,200 million
Depreciation charged for the year: GHC 3,500 million
Increase in inventories: GHC (1,500) million
Taxes recoverable: GHC (16,200) million
Accrued expenses: GHC 11,000 million

Prepaid rent: GHC (5,000) million

W1 Taxes recoverable	GHC million
Corporate income taxes	3,000
Customs & excise duties	5,000
VAT	6,000
Personal Income Tax	4,000
Total taxes receivable	18,000
Less amount estimated as irrecoverable	1,800
Taxes recoverable	16,200

W2 Accrued expenses	GHC million
Domestic debt interest	3,000
External debt interest	4,000
Accrued salaries	4,000
Total accrued expenses	11,000

W3 Prepaid Rent	GHC million
Prepaid Rent	5,000

Include a reconciliation note for surplus/deficit to cash flows from operating activities.

Answer

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Tags: Cash Flow Statement, Central Government, Financial Statements, Financing Activities, Investing Activities, Operating Activities, Public Sector, Surplus Reconciliation
Level: Level 2

Topic: Preparation and Presentation of Financial Statements for Central Government

FM – L2 – Q101 – Hedging with options

Calculate min net interest rate cost for a company borrowing $5m using options with a strike price of 94.50.

Question

It is May and a company intends to borrow $5m for 3 months commencing in September. Options are available on 3 month Canadian interest rate futures with a strike price of 94.50 and are quoted as follows:

Expiry month	Calls	Puts
June	0.10	0.31
September	0.46	0.67
December	0.63	0.84

The contract size of the 3-month Canadian interest rate future is $1 million.
Required
Calculate the minimum net interest rate cost for the company if it hedges using options with a strike price of 94.50.

Answer

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Tags: Borrowing, Currency Risk, Effective interest rate, Financial Risk Management, Futures, Hedging, Interest rate options, Options pricing, SOFRA, Treasury management
Level: Level 2

Topic: Hedging with options

FM – L2 – Q100 – Hedging with futures, Hedging with options

Firestone Ltd plans to borrow $5M and hedge interest rate risk using futures and options, calculating effective borrowing rates.

Question

Firestone Ltd, a Nigerian company, needs to borrow in US dollars to fund its US operations, but the chief financial officer is concerned that interest rates may be volatile given the current US political and economic environment.
It is now March and Firestone intends to borrow $5 million for a period of three months commencing in September.
Futures and options quotes for 3-month US secured overnight financing rate (SOFRA) are given below. Assume that Firestone can borrow at the three-month SOFRA rate.

3 month SOFRA futures price – contract size = $1,000,000

June	September
93.55	93.28

Traded options on 3-month SOFRA futures – contract size = $1,000,000 (premiums quoted are annual rates)

Strike	June (Calls)	September (Calls)	June (Puts)	September (Puts)
93.25	0.437	0.543	0.083	0.187
93.50	0.276	0.387	0.168	0.282
93.75	0.163	0.263	0.302	0.407

Required:
a) Discuss the relevant considerations to be considered when deciding between futures and options to hedge the company’s interest rate risk. (5 marks)
b) Assume that in September 3 month SOFRA is 7% and at that point in time September futures are quoted at 93.96.

Calculate the effective borrowing rate using a futures hedge
Calculate the effective borrowing rate when hedging with options using each of the three available strike prices

Answer

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Tags: Borrowing, Currency Risk, Effective borrowing rate, Financial Risk Management, Futures, Hedging Strategies, Interest rate hedging, Options, SOFRA, Treasury management
Level: Level 2

Topic: Futures and hedging with futures

FM – L2 – Q99 – Hedging with futures

Recommend futures/options to hedge interest rate risk for a company's loan, tender bid, and deposit scenarios.

Question

Three-month euro interest rate futures are available on a derivative exchange. Available delivery months for the future are March, June, September, and December, and the contract size for the future is €1,000,000.

Provide a justified recommendation for the most appropriate futures or options transaction in order to hedge interest rate risk in the following situations:

a) A company, Starlight Ltd, is taking out a loan of €3 million for 6 months from June to fund working capital for a new venture.

b) A company, BrightFuture Ltd, has tendered for a large government project. If it is the successful bidder, it will need to borrow €12 million for three months starting in September to cover initial costs.

c) It is June, a company, Horizon Enterprises, has €7 million on deposit with a bank for one year at 3-month money market rates. The company has become concerned about the possibility that money market interest rates may fall dramatically.

Answer

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Tags: Currency Risk, Derivative exchange, Euro interest rates, Financial Risk Management, Futures, Hedging Strategies, Interest rate hedging, Options, Risk Mitigation, Treasury management
Level: Level 2

Topic: Futures and hedging with futures

PSAF – L2 – Q11.3- Preparation and presentation of financial statements for local government

Prepare the statement of financial performance for Kweku District Assembly for 2024.

Question

(a) Kweku District Assembly: Statement of financial performance for the year ended 31st December 2024

Prepare the statement of financial performance for Kweku District Assembly for the year ended 31st December 2024, based on the following data:

Revenue	GHC’ million
Decentralised transfers	30,091
Internally generated funds	56,639
Grants	21,945

Expenses	GHC’ million
Compensation	23,942
Use of goods and services	24,494
Social benefits	473
Other expenses	6,366
Consumption of fixed capital	15,650

(b)

Kweku District Assembly: Statement of financial position as at 31st December 2024

Prepare the statement of financial position for Kweku District Assembly as at 31st December 2024, based on the following data:

Current assets	GHC’ million
Cash and bank	7,564
15% Fixed deposits	4,550
Advances and loans to staff	9,561
Prepaid rent expenses	450
Property rates receivable	2,250
Closing stock of waste bins	1,500
Closing inventories of consumables and fertilizer	1,000

Non-current assets	GHC’ million
Land	5,000
Buildings	15,750
Market infrastructure	19,600
Furniture, fixtures & fittings	5,500

Current liabilities	GHC’ million
Payables	13,745
Contract retention	5,520
Accruals	4,400

Non-current liabilities	GHC’ million
Deferred grants	810

Accumulated fund	GHC’ million
Accumulated fund	48,250

(c)

Kweku District Assembly: Statement of changes in net assets for the year ended 31st December 2024

Prepare the statement of changes in net assets for Kweku District Assembly for the year ended 31st December 2024, based on the following data:

Accumulated Fund	GHC’ million
Balance b/f	10,500
Surplus	37,750

Answer

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Tags: Accumulated fund, Financial Statements, Local Government, Statement of Changes in Net Assets, Surplus
Level: Level 2

Topic: Preparation and Presentation of Financial Statements for Central Government

FM – L2 – Q98 – Foreign exchange risk and currency risk management

Accra Food and Beverage Co hedges USD189,000 net liability using forward and money market methods.

Question

Accra Food and Beverage Co has recently imported raw materials from Japan with an invoice value of US$264,000 payable in three months’ time. Due to the company’s efficient production capacity, it has finished products and exported finished products to France. Consequent to this, the French customer has been invoiced for US$75,000 payable in three months’ time. Below is the current spot and forward rates for the transactions:

USD/GHS	Spot	3 Months Forward
	0.9850-0.9870	0.9545-0.9570

Current money market rates per annum are as follows:

Currency	Borrowing	Deposits
US$ (USD)	11% – 13.2%	2.7%
GH₵ (GHS)	12.7% – 14.3%	Not provided

Required:
Demonstrate with relevant calculations how Accra Food and Beverage Co can hedge its exposure to foreign exchange risk using:
(a) The forward markets
(b) The money market

Answer

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Tags: Currency hedging, Foreign Exchange Risk, Forward Markets, Forward Rates, Interest rates, Money Markets, Net Exposure, Spot Rates, Transaction risk, USD/GHS
Level: Level 2

Topic: Foreign exchange risk and currency risk management

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FM – L2 – Q104 – Working Capital Management

Analyze Peak Enterprises Limited's financial statements to determine if it is overtrading and discuss its implications.

PSAF – L2 – Q12.1 – International public sector accounting standards

Assess if Zamunda government controls Zamunda Transport Agency per IPSAS 35.

FM – L2 – Q103 – Working capital management

Calculate the working capital cycle length for Entity N over three years using provided financial data.

FM – L2 – Q102 – Treasury management

PrimeCare Inc supplies medical goods to HealthBridge Ltd in Ghana, addressing credit and currency risks in a $3M contract.

PSAF – L2 – Q11.4 – Preparation and presentation of financial statements for central government

Prepare the cash flow statement for Zamunda Central Government for 2024 with reconciliation notes.

FM – L2 – Q101 – Hedging with options

Calculate min net interest rate cost for a company borrowing $5m using options with a strike price of 94.50.

FM – L2 – Q100 – Hedging with futures, Hedging with options

Firestone Ltd plans to borrow $5M and hedge interest rate risk using futures and options, calculating effective borrowing rates.

FM – L2 – Q99 – Hedging with futures

Recommend futures/options to hedge interest rate risk for a company's loan, tender bid, and deposit scenarios.

PSAF – L2 – Q11.3- Preparation and presentation of financial statements for local government

Prepare the statement of financial performance for Kweku District Assembly for 2024.

FM – L2 – Q98 – Foreign exchange risk and currency risk management

Accra Food and Beverage Co hedges USD189,000 net liability using forward and money market methods.

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Analyze Peak Enterprises Limited's financial statements to determine if it is overtrading and discuss its implications.

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Assess if Zamunda government controls Zamunda Transport Agency per IPSAS 35.

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Calculate the working capital cycle length for Entity N over three years using provided financial data.

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PrimeCare Inc supplies medical goods to HealthBridge Ltd in Ghana, addressing credit and currency risks in a $3M contract.

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Prepare the cash flow statement for Zamunda Central Government for 2024 with reconciliation notes.

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Calculate min net interest rate cost for a company borrowing $5m using options with a strike price of 94.50.

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Firestone Ltd plans to borrow $5M and hedge interest rate risk using futures and options, calculating effective borrowing rates.

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Recommend futures/options to hedge interest rate risk for a company's loan, tender bid, and deposit scenarios.

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Prepare the statement of financial performance for Kweku District Assembly for 2024.

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Accra Food and Beverage Co hedges USD189,000 net liability using forward and money market methods.

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