PROFESSIONAL PROGRAM – Page 75

PSAF – L2 – Q1.3- Public Sector Fiscal Planning and Budgeting

Discuss four general principles of fiscal policy objectives under the Public Financial Management Act 2018 (Act 750).

Question

Fiscal policy making is an essential aspect of planning as it provides not only fiscal direction to the economy but guides the entire budget preparation process. Thus, serious attention should be given to the fiscal policy making processes.

Required:
(a) Discuss four general principles of fiscal policy objective under the Public Financial Management Act 2018 (Act 750).

(b) Explain the guiding principles in formulating fiscal policy objective in the following areas:

(i) revenue;

(ii) spending;

(iii) borrowing; and

(iv) fiscal risk.

Answer

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Tags: Accountability, Fiscal Management, Fiscal Policy, PFM Act, Sustainability
Level: Level 2

Topic: Public sector fiscal planning and budgeting

PSAF – L2 – Q1 – Concept of Public Financial Management

Explain the concept of Public Financial Management in the context of resource management and public service delivery.

Question

(A) Explain the concept of Public Financial Management.

(B) Explain the elements of public financial management process.

Answer

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Tags: PFM Cycle, Public Financial Management, Public Service, Resource Management
Level: Level 2

Topic: The context of public financial management

FM – L2 – Q46 – Economic and regulatory environment

Explain the constitutional provision on taxation in Zamunda.

Question

GOVERNMENT SOURCES OF REVENUE

A critical task of government in public financial management is raising revenues for development as the success of government’s programmes and projects depends large on the availability of funds. The central government raises money from taxes, non-tax revenues and grants.

Required:

(a) Explain the Constitutional provision on Taxation.

(b) Explain FOUR objectives of taxation other than for revenue mobilisation.

Answer

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Tags: Consumer Behavior, Economic Management, Fiscal Policy, Taxation, Wealth Redistribution
Level: Level 2

Topic: Economic and regulatory environment

FM – L2 – Q45 – Economic and regulatory environment

Explain five differences between public and private sector entities in an economy.

Question

(A). Explain FIVE differences between public sector entities and private sector entities.

(B). Explain the differences between public goods and services and private goods and services.

(C). Explain the distinguishing features of public enterprises.

Answer

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Tags: Autonomy, Government Business Enterprises, Profitability, Public Enterprises
Level: Level 2

Topic: Economic and regulatory environment

L2 – Q73 – Cash Budgets and Master Budgets

Prepare a cash budget for Ministry of Commerce for April–June 202X, showing monthly and quarterly totals.

Question

On 31st March 202X the bank balance in the books of the Ministry of Commerce was GHC 900,000. The department provides you with the information below.

Month	IGF GHC’000	Govt releases GHC’000	Donations GHC’000	Salaries GHC’000	Goods and services GHC’000	Office equipment GHC’000	Advances GHC’000
Jan	4,100	2,000		1,200	1,000	600	50
Feb	900	500		320	300		40
March	1,300	500	400	320	400		50
April	1,200	600	200	620	320		40
May	1,000	600		550	220		60
June	1,000	600	200	660	420	500	50

Relevant notes to the data:
(i) The Internally Generated Funds (IGF) are made up of 70% cash receipts and 30% receivables. The receivables are collected as follows: 60% in the month following the service delivery and remaining 40% in the second month following the service delivery. The department is entitled to retention of 80% of the IGF collected and the remaining 20% is payable into the National Treasury (the central government fund) in the month in which the money is collected.
(ii) The department also enjoys budget allocation and Government promises to follow schedule.
(iii) The department anticipates some donations as shown in the table above. It is expected that 30%, 40%, and 70% of donations in March, April, and June respectively will be in cash. The remaining portions are expected to come in the form of materials.
(iv) The staff salaries will be paid at the end of each month.
(v) Goods and services are paid for one month in arrears.
(vi) The office equipment acquired in January will be paid for in the third month following the purchase, and the one to be acquired in June will be paid for immediately.
(vii) The office equipment is to be depreciated at 2.5% per month.
(viii) From January 20X0, staff of the department will be granted advances under an advance scheme approved by the government. The advances will be recovered in four equal monthly instalments, beginning in the month following the month in which the advances are granted (i.e. advances in January will be repaid in four equal monthly instalments beginning in February). Estimated advances are shown in the table above.

Required:
(a) Prepare a cash budget for the department for the Second Quarter of 202X (April – June 202X) showing the cash forecast for each individual month and the total for the quarter as a whole.

(b) Advise management based on the outcomes obtained in question (a) above.

Answer

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Tags: Advances, Budget Allocation, Cash Budgeting, Cash Flow, Consolidated Fund, Donations, Payments, Public Sector Accounting, Receivables, Short-Term Investments
Level: Level 2

Topic: Cash budgets and master budgets

MA – L2 – Q72 – Performance Analysis

Analyze Nexus Enterprises' financial performance using ratios and metrics for Years 1, 3, and 4 (forecast).

Question

The financial performance of Nexus Enterprises is summarised below. ‘Now’ is the end of Year 3.

	Year 1	Year 3	Year 4 (forecast)
Cost of sales/Sales	63%	70%	70%
Marketing costs/sales	9%	6%	5%
Distribution costs/sales	13%	8%	6%
Administration costs/sales	2%	2%	2%
Interest charges/Sales	0%	4%	8%
Operating profit/sales	13%	10%	9%
Loans/Sales revenue	0%	50%	67%
Inventory/Sales	10%	14%	18%
Sales/Non-current assets	4.7 times	1.9 times	1.2 times
Average sales per employee	600,000	1,032,000	686,000,000
Average sales per product	281,000	185,000	234,000
Average sales per supplier	750,000	726,000	651,000

Required:
Use this information to evaluate the financial performance of Nexus Enterprises.

Answer

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Tags: Borrowing, Cost Management, Employee Productivity, Financial Ratios, Inventory Management, Non-current Assets, Operating Profit, Performance Analysis, Profitability, Supplier Management
Level: Level 2

Topic: Performance Analysis

MA – L2 – Q71 – Divisional performance

Assess GSO's financial performance in Years 4 and 5, focusing on Primeland and Seconland contributions.

Question

Trading in Primeland in Year 1, and in Year 3 it opened a similar operation in a neighboring country, Scanland. The divisional managers in Primeland and Scanland have the authority to make most operational decisions, but decisions relating to acquisitions and financing are reserved for the board of directors of GSO.

Financial data is shown below for both divisions, for the years ending 31st December Year 4 and Year 5.

Actual results	Year 4			Year 5
	Primeland GH₵000	Seconland GH₵000	Total GH₵000	Primeland GH₵000	Seconland GH₵000	Total GH₵000
Revenues	4,300	950	5,250	4,500	1,200	5,700
Salaries and fees	1,400	580	1,980	1,500	600	2,100
Other direct costs	1,450	430	1,880	1,480	430	1,910
	2,850	1,010	3,860	2,980	1,030	4,010
Marketing	240	70	310	290	95	385
Depreciation/amortization	330	45	380	330	95	425
Interest cost			110			95
	570	115	800	620	190	905
Total costs	3,420	1,125	4,660	3,600	1,220	4,915
Profit/(loss)	880	(175)	590	900	(20)	785

Summary statements of financial position
Year 4

	Primeland GH₵000	Scanland GH₵000	Total GH₵000
Non-current assets	2,610	240	2,850
Net current assets	710	140	850
	3,320	380	3,700
Loan stock			1,400
			2,300
Capital and reserves			2,300

Year 5

	Primeland GH₵000	Scanland GH₵000	Total GH₵000
Non-current assets	2,600	480	3,080
Net current assets	1,250	190	1,440
	3,850	670	4,520
Loan stock			1,200
			3,320
Capital and reserves			3,320

Required:
(a) Assess the financial performance of GSO in Year 4 and Year 5, and the contribution of the operations in Primeland and Scanland to the overall performance.

(b) Suggest, with reasons, four additional items of information that you would require in order to provide a more comprehensive financial analysis of performance.

(c) Suggest, with reasons, four factors that should be taken into consideration when comparing performance in Primeland and Seconland.

Answer

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Tags: Competitor analysis, Market factors, Operational factors, Performance comparison
Level: Level 2

Topic: Divisional performance

FM – L2 – Q40 – Capital structure

Calculate optimal gearing level and WACC for a company given varying costs of debt, ungeared equity beta, and tax rate.

Question

A company has estimated that its cost of debt capital varies according to the level of gearing, as follows:

Gearing	Cost of debt
20	5.0
30	5.4
40	5.8
50	6.5
60	7.2

Gearing is measured as the market value of the company’s debt as a proportion of the total market value of its equity plus debt.
The rate of tax is 30%. The ungeared equity beta factor for the company is 0.90. The risk-free rate of return is 4% and the return on the market portfolio is 9%.

Required:
Identify the optimal gearing level and WACC.

Answer

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Tags: Capital structure, CAPM, Cost of Equity, Financial Risk, Gearing, Optimal capital structure, Tax shield, Weighted Average Cost of Capital
Level: Level 2

Topic: Capital structure

FM – L2 – Q39 – Cost of capital

Calculate change in EPS for Kwadu Cocoa Plc after introducing a new production process with increased fixed costs and reduced variable costs, financed by debentures.

Question

Kwadu Cocoa Plc produces and sells a single product. The company has issued share capital of 800,000 equity shares of GH₵1 each. For the year ended 31st March Year 4, the company sold 60,000 units of the product at a price of GH₵30 each.

The statement of profit or loss for the year to 31st March Year 4 is as follows:

	GH₵’000	GH₵’000
Sales		1,800
Variable costs	720
Fixed costs	360
		1,080
Net profit before interest and tax		720
Minus interest payable		190
Net profit before tax		530
Tax at 35%		186
Net profit after tax		344

The company has decided to introduce a new automated production process, in order to improve efficiency. The new process will increase annual fixed costs by GH₵120,000 (including depreciation) but will reduce variable costs by GH₵7 per unit. There will be no increase in annual sales volume.

The new production process will be financed by the issue of GH₵2,000,000 12.5% debentures.

Required:
(a) Calculate the change in earnings per share if the company introduces the new production process.

(b) Assume that the company introduces the new production process immediately on 1st April Year 5. Calculate for the year to 31st March Year 5:

(i) the degree of operating gearing

(ii) the degree of financial gearing

(iii) the combined gearing effect.

Answer

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Tags: Capital structure, Combined gearing, Financial gearing, Financial Risk, Operating gearing
Level: Level 2

Topic: Capital structure

FM – L2 – Q38 – Cost of capital

Calculate cost of equity and WACC for Akomo Plastics Plc's investment in chemicals manufacturing using CAPM and given beta data.

Question

Akomo Plastics Plc is engaged in plastics manufacture. It is now considering a new investment that would involve diversification into chemicals manufacture, where the business risk is very different from the plastics manufacturing industry.
Research has produced the following information about three companies currently engaged in chemicals manufacturing, in the same part of the industry that Akomo Plastics Plc is planning to invest.

Company	Equity beta	Financed by:
A	2.66	40% equity capital, 60% debt capital
B	1.56	75% equity capital, 25% debt capital
C	1.45	80% equity capital, 20% debt capital

Akomo Plastics Plc is financed by 60% equity capital and 40% debt capital, and would intend to maintain this same capital structure if the new capital investment is undertaken.
The risk-free rate of return is 5% and the return on the market portfolio is 9%. Tax is at the rate of 25%. You should assume that the debt capital of Akomo Plastics Plc and Companies A, B and C is risk-free.

Required
(a) Calculate a suitable cost of equity for the proposed investment by Akomo Plastics Plc in chemicals manufacturing.

(b) Suggest a weighted average cost of capital that should be used to carry out an investment appraisal (NPV calculation) of the proposed project.

Answer

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Tags: Asset beta, Capital structure, CAPM, Chemical manufacturing, Cost of Equity, Equity beta, Financial Risk, investment appraisal, Tax shield, WACC
Level: Level 2

Topic: Cost of capital

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PSAF – L2 – Q1.3- Public Sector Fiscal Planning and Budgeting

Discuss four general principles of fiscal policy objectives under the Public Financial Management Act 2018 (Act 750).

PSAF – L2 – Q1 – Concept of Public Financial Management

Explain the concept of Public Financial Management in the context of resource management and public service delivery.

FM – L2 – Q46 – Economic and regulatory environment

Explain the constitutional provision on taxation in Zamunda.

FM – L2 – Q45 – Economic and regulatory environment

Explain five differences between public and private sector entities in an economy.

L2 – Q73 – Cash Budgets and Master Budgets

Prepare a cash budget for Ministry of Commerce for April–June 202X, showing monthly and quarterly totals.

MA – L2 – Q72 – Performance Analysis

Analyze Nexus Enterprises' financial performance using ratios and metrics for Years 1, 3, and 4 (forecast).

MA – L2 – Q71 – Divisional performance

Assess GSO's financial performance in Years 4 and 5, focusing on Primeland and Seconland contributions.

FM – L2 – Q40 – Capital structure

Calculate optimal gearing level and WACC for a company given varying costs of debt, ungeared equity beta, and tax rate.

FM – L2 – Q39 – Cost of capital

Calculate change in EPS for Kwadu Cocoa Plc after introducing a new production process with increased fixed costs and reduced variable costs, financed by debentures.

FM – L2 – Q38 – Cost of capital

Calculate cost of equity and WACC for Akomo Plastics Plc's investment in chemicals manufacturing using CAPM and given beta data.

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Discuss four general principles of fiscal policy objectives under the Public Financial Management Act 2018 (Act 750).

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Explain the concept of Public Financial Management in the context of resource management and public service delivery.

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Explain the constitutional provision on taxation in Zamunda.

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Explain five differences between public and private sector entities in an economy.

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Analyze Nexus Enterprises' financial performance using ratios and metrics for Years 1, 3, and 4 (forecast).

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Assess GSO's financial performance in Years 4 and 5, focusing on Primeland and Seconland contributions.

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Calculate optimal gearing level and WACC for a company given varying costs of debt, ungeared equity beta, and tax rate.

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Calculate change in EPS for Kwadu Cocoa Plc after introducing a new production process with increased fixed costs and reduced variable costs, financed by debentures.

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Calculate cost of equity and WACC for Akomo Plastics Plc's investment in chemicals manufacturing using CAPM and given beta data.

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