Question Tag: Working Capital

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  • 20 Marks

CML – OCT 2022 – L3 – Q1 – Lending to Iron Rod Manufacturing Company

Evaluate a request for GHC 3.0 million working capital finance from a long-term customer manufacturing iron rods, aiming to supply government projects, considering eroded profits and provided financials.

Joojo Metals Ltd… has been your customer for the past twenty years. The company manufactures iron rods used in the construction of roads and houses and supplies wholesalers in Accera, Akim Oda, Nkawkaw, Nsawam and its environs.

The company sources its raw materials of iron scraps and ingons both locally and abroad, withThe company hasThe company has has been its profits eroded in 20221 due to the rapidly depreciating exchange rate of the cedi against foreigni currencies. The company has also faced increasing competition from other producers in Accera and Takorardi as well as cheaper imports from China China.

Joojo Banful owns $60%$ of the shares of the the company, whilst the remaining $ 40%$ is held by his childhood friend Fifii Awotwe who takes no active part in the management of the company.

Joojo serves as the CEO and General Manager of the company, whilst his wife, Mama Nelson, a chartered accountant serves as the Finance Director of the company. His factory Manager is Jonas Dadzzie, aged 62, a vastly experienced factory manager he recruited only a year ago. In addition, he has a pool of twenty skilled workers many of whom were poached from other companies.

The principal shareholder of the company, Joojo Banful is a noted supporter of the ruling government though he persistently denies that he has provided funding for the government.

The company’s factory is located at Tema in the Greater Accera Region of the country on a wide expanse of land. It is fitted with three huge warehouses, which are well stocked at all times. The company also has three articulator trucks which it uses for its supplies.

Jonas comes to you with a business proposition involving the provision of working capital finance for the supply of of iron rods to major government building construction projects running across the country. He tells you that this could give the business a major breakthrough and bring gains also to your bank. He is asking for working capital finance of GHC 3.0 million for this major expansion in scope of operations.

How would you respond to this proposition with respect to the provided financial statements and ratios on pages 3.4 & 5?

Profit and Loss Extracts for the year ending 30 Dec

Ratios

2019

2020

2021

[30 Marks]

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  • 20 Marks

FRPA – APRIL 2023 – L3 – Q5 – Cash Budget Preparation for Impact Limited

Prepare a cash budget for Impact Limited for the months of May, June, and July based on provided sales, wages, materials, and overheads data and additional information.

The following information relates to Impact Limited; a retailing outfit located in the Eastern region of Ghana. Month Sales (GHs’m) Wages incurred (GHs’m) Materials purchased (GHs’m) Overheads (GHs’m) January 70 12 40 25 February 90 14 45 20 March 120 20 50 32 April 100 18 70 28 May 140 24 60 36 June 120 20 50 32 July 100 18 50 28 August 100 18 60 28

The following additional information has been provided: a. It is expected that the cash balance on April 30, will be GH¢50m. b. Wages may be assumed to be paid within the month in which they are incurred. c. It is company’s policy to pay creditors for materials three months after receipts of the materials. d. Debtors are expected to pay two months after delivery to them. e. Included in the overhead figures is GH¢4m per month which represents depreciation on two cars and one delivery van. f. There is a delay in paying the overheads expenses by one month. g. 10% of the monthly sales are for cash and 90% are on credit. h. A commission of 5% is paid to agents on all sales on credit but this is not paid until the month following the sales to which it relates; this expense is not included in the overhead figures shown. i. It is intended to repay a loan of GH¢50m on June 30. j. Delivery is expected in May of a new machine costing GH¢85m of which GH¢25m will be paid on delivery and GH¢30m in each of the immediately following successive two months. k. Assume that overdraft facilities are available if required.

You are required to: Prepare a Cash budget for each of the three months of May, June and July.

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  • 30 Marks

CML – APRIL 2024 – LEVEL 3 – Q1 – BA Brazil Nuts Ltd Lending Proposition

Critically examine a request from BA Brazil Nuts Ltd for an overdraft increase to GHC10 million and a USD 500,000 term loan for new equipment, considering their financials, operations, and recent challenges like a fire outbreak.

Your valued customers of twenty years, BA Brazil Nuts Ltd was established twenty-six years ago by Herbert Obeng, aged 62 and his wife Martha Obeng, aged 58, both graduates in Agricultural Engineering from the University of Science, Industry and Technology. They also have MBA certificates in Marketing. Prior to this, they both worked with the Gold Coast Food Production and Distribution Service, a State Corporation engaged in the cultivation, purchase and distribution of food supplies. Herbert serves as both Board Chairman and CEO of the company. He is also in charge of Farming Operations. The Farm Managers at the company’s farms report directly to Herbert. Martha serves as the CFO and Executive in charge of Marketing. She is supported by an Accounts Clerk, Jones Pino, aged 25 who has just completed his professional examination in Accounting. ICA (Ghana). The company also has a pool of skilled workers poached from other reputable industrial establishments.

The company is located at Ekumfi Swedru in the Central Region of the country and boasts of a state of the art Brazil nut production plant and a five storey office building. The company has two articulator trucks which are used in the carting of the Brazil nuts to the ports for export. The company is engaged in the production, roasting, packing and export of processed Brazil nuts primarily to the EU and Great Britain which take 60% of its products. The rest is sold locally (20%) and to other parts of the world (20%) including Australia and the US.

The company has operated an impressive account over the years until a year ago when you saw a sharp dip in the company’s turnover. In your interaction with Herbert, you learnt that there had been a fire outbreak which affected a significant part of the company’s farm holdings in the Bono Region of the country. He had to replenish his stock of Brazil nuts at a higher cost from his colleagues who also have farms in this part of the country. Your latest investigations show that the company has replanted the burnt area with Brazil nut seedlings.

In one of your visits, it came to your attention that Herbert was building a new factory at Winneba about eighty (80) kilometers away. When you queried him, he told you he was anticipating expanding his market in US and Australia.

The company’s Overdraft Facility of GHC 5,000,000.00 is showing a hard core at around GHC 3,000,000.00. The company is requesting for:

  1. An increase in the Overdraft Facility to GHC10 million in support of Working Capital.
  2. A Term Loan of USD 500,000 for the purchase of new Brazil Nut Roasting and Packaging Plant for the new factory. GHS/USD = GHS 13.5/USD1

Critically examine this proposition. [30 MARKS] BA Brazil Nuts Ltd. Profit and Loss Extracts for the year ending 31 Dec

2021 2022 2023
GHC GHC GHC
5,750,000 6,900,000 7,690,000
472,610 534,100 758,420
3,150,000 4,142,000 4,605,800
3,622,610 4,676,100 5,364,220
534,100 758,420 985,400
3,088,510 3,917,680 4,378,820
2,661,490 2,982,320 3,311,180
690,000 779,700 991,580
405,000 417,400 777,400
1,566,490 1,785,220 1,542,200
439,600 574,000 684,500
1,126,890 1,211,220 857,700
281,723 302,805 214,425
845,167 908,415 643,275

BA Brazil Nuts Ltd. Balance Sheet as at 31 Dec

Ratios 2021 2022 2023 Sales Growth

20.00%

11.45%

Receivable Days

98

112

141

Payable Days

90

75

78

Inventory Turnover Days

63

71

82

Gross Margin

46%

43%

43%

Overhead %

12%

11%

13%

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  • 10 Marks

FM – Nov 2024 – L2 – Q5a – Management of Receivables

Evaluate the financial implications of different strategies for managing Abaa LTD's accounts receivable.

Abaa LTD, a company that manufactures and sells electronic appliances, has been facing challenges with its accounts receivable management. Currently, the company allows its customers 60 days of credit. Due to the highly competitive market, Abaa LTD has been experiencing an increasing amount of bad debts and delayed payments, which has adversely affected its cash flow and profitability. To address these issues, the company’s Finance Manager is considering several strategic changes:

  1. Reduction in Credit Period: Reducing the credit period from 60 days to 45 days. It is estimated that this change could reduce sales by 5% due to the stricter credit terms, but it would also decrease the bad debt ratio from 4% to 2% of sales.
  2. Offering Early Payment Discounts: Introducing a 2% discount for customers who pay within 30 days. The company anticipates that 30% of its customers will take advantage of this discount, which would improve cash flow and reduce the average collection period by 15 days.
  3. Engagement of a Factor: The company is also considering engaging a factoring company to manage its receivables. The factor would advance 80% of the invoice value upon the sale of goods at 200 basis points below the company’s cost of capital and charge a 3% fee on all sales. The factor is expected to reduce the bad debt ratio to 1% of sales and further reduce the average collection period by 20 days. Engaging the factor will lead to annual administrative savings of GH¢90,000.

Abaa LTD’s current annual sales are GH¢20 million, and the variable cost of sales is 60% of sales. The company’s cost of capital is 12% per annum.

Required:
Evaluate the financial implications of the following:
i) Reduction in Credit Period
ii) Offering Early Payment Discounts
iii) Engagement of a Factor
iv) Recommend the appropriate method to manage the credit sales

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  • 20 Marks

CR – Nov 2018 – L3 – SB – Q4 – Statement of Cash Flows (IAS 7)

Preparation of Happy Plc’s statement of cash flows and analysis of revaluation and financing adjustments.

Happy is a publicly listed company. Its financial statements for the year ended July 31, 2017, including comparatives, are shown below:

Notes:

  1. On November 1, 2016, Happy acquired an additional plant under a finance lease with a fair value of ₦3 million. The property was also revalued upward by ₦4 million, with ₦1.3 million of the revaluation reserve transferred to deferred tax. No disposals occurred during the period.
  2. Depreciation on property, plant, and equipment amounted to ₦1.8 million, and amortization of deferred development expenditure was ₦0.4 million.

Required:

Prepare the statement of cash flows of Happy Plc for the year ended July 31, 2017, in accordance with IAS 7, using the indirect method. (20 Marks)

 

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  • 30 Marks

PM – May 2023 – L2 – SA – Q1 – Working Capital Management

Calculate Vestapricy Ltd's cost of goods sold, analyze the working capital cycle, and apply decision rules for inventory management in Owerri.

Vestapricy and Company Limited is a manufacturing outfit located in Port Harcourt. It produces a tracking device that is attached to motor vehicles. The device is designed to help locate the whereabouts of stolen motor vehicles within the country. The company’s capital (or cash operating cycle) 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 Vestapricy and Company Limited for the past three years.

Extracts from Vestapricy and Company Limited annual accounts for 31st December 2020 to December 2022:

2020 2021 2022
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
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

Other information is as follows:

  1. All purchases and sales are on credit.
  2. Direct wages:
    • 2021: ₦300,000
    • 2022: ₦250,000
  3. Production expenses:
    • 2021: ₦72,600
    • 2022: ₦171,995
  4. The company’s policy is that any data that will be used from the statement of financial position in determining the working capital cycle period will be average based.

Required:

a.
i. Compute the cost of goods sold for 2021 and 2022. (3 Marks)
ii. Calculate the length of the working capital cycle (assuming 365 days in the year) for 2021 and 2022. (7 Marks)
iii. List the actions that the management of the company might take to reduce the length of the working capital cycle. (5 Marks)

b. In 2023, the company (Vestapricy) decided to open a new small apple shop in Owerri to be managed by a shopkeeper. The shopkeeper is deciding on the number of boxes of special apples it hopes to buy each day. A box of apples earns a contribution of ₦400 and costs ₦250.

Demand for apples is uncertain and could vary from 30 boxes to 10 boxes. Any apple that is purchased but not sold will be thrown away at the end of the day.

The shopkeeper has decided that he will buy 10 boxes, 20 boxes or 30 boxes each day, and these are the only three options he wants to consider.

Required:

i. Construct the Pay-off table for this business in Owerri. (7 Marks)
ii. How many boxes should the storekeeper purchase if the decision is based on:

  • The Maximax decision rule.
  • The Maximum decision rule.
  • The Minimax regret decision rule.
    Give reasons for your decisions. (8 Marks)

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  • 20 Marks

FR – Nov 2019 – L2 – Q5 – Financial Instruments (IAS 32, IFRS 9)

Analyze the performance of Sekiri Nigeria Limited and identify areas for further investigation based on financial information.

Sekiri Nigeria Limited is a major competitor to Ijor Ventures Limited. Both companies operate in the same industry over the last 20 years.

The summarised financial information of Sekiri Nigeria Limited for the last 2 years is as follows:

Summarised Profit or Loss for the Year Ended September 30:

Description 2019 (N’m) 2018 (N’m)
Revenue 4,565 4,905
Cost of Sales (2,950) (3,225)
Gross Profit 1,615 1,680
Selling, Distribution & Admin Expenses (1,095) (1,070)
Interest Expense (95) (75)
Net Profit Before Taxation 425 535
Taxation (225) (260)
Profit for the Year 200 275

Statement of Financial Position as at September 30:

Description 2019 (N’m) 2018 (N’m)
Non-Current Assets:
Intangible Assets 240 200
Tangible Assets (Carrying Amount) 1,080 1,030
Total Non-Current Assets 1,320 1,230
Current Assets:
Inventories 1,470 1,515
Trade Receivables 800 705
Bank 260 290
Total Current Assets 3,850 3,740
Total Assets 5,170 4,970

Equity & Liabilities:

Description 2019 (N’m) 2018 (N’m)
Equity
Ordinary Share Capital 500 500
Retained Earnings 1,730 1,650
Total Equity 2,230 2,150
Non-Current Liabilities 690 690
Current Liabilities:
Trade Payables 375 375
Other Payables 555 525
Total Liabilities 3,850 3,740

Sekiri Nigeria Limited declared dividend of N120m each in years 2018 and 2019

Required:

(a) As the Chief Accountant of Ijor Ventures Limited, write a report to your company’s Finance Director analyzing the performance of Sekiri Nigeria Limited.
(10 Marks)

(b) Highlight FIVE areas that will require further investigation, including reference to other pieces of information that would complement your analysis of the performance of Sekiri Nigeria Limited.
(10 Marks)

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Has Case Study
  • 21 Marks

SCS – May 2020 – L3 – Q2 – Financial Management

Conduct a financial appraisal of Customer Focused Ltd, including key ratio calculations and commentary.

Customer Focused Ltd has updated its management accounts (Exhibit 1) to produce a
forecast for the year 2020 and these have indicated some significant problems. The business
owners are unsure what to do next.
Required:
You are acting as an advisor to the company and they ask you to:

Prepare a financial appraisal of Customer Focused Ltd to identify the problems faced by the company by calculating and commenting on key ratios that you consider important for the company. You should specifically include in your appraisal an analysis of sales growth, operating margins, working capital (in terms of inventory, receivables, and payable days), and changes in cash balances over the years that the company has been operating.

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  • 1 Marks

MI – May 2018 – L1 – SA – Q12 – Budgeting

Understanding the purpose of cash budgeting.

Which of the following is NOT a purpose of cash budgeting?
A. To ensure availability of working capital throughout the period concerned
B. To determine the timing of cash inflows and outflows in advance
C. To plan on investing surplus cash whenever it arises
D. To plan against likely cash deficits during the budget period
E. To reduce cost of operation

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  • 20 Marks

MI – Nov 2014 – L1 – SB – Q1 – Budgeting

This question focuses on defining working capital, explaining the working capital cycle, and calculating it based on given data.

a. Working capital is generally understood to mean the difference between current assets and current liabilities. Explain the term working capital cycle. (2 Marks)
b. List FIVE factors that determine the working capital requirements of a firm. (5 Marks)
c. GLORY Limited has provided you with the following data regarding next year’s budget that has just been presented to the board by the financial controller of the company:

Budgeted Average Amount Outstanding N
Inventory: Raw materials 480,000
Work-in-Progress 360,000
Finished goods 244,800
Receivables 600,600
Payables (422,400)
Budgeted Average Working Capital 1,263,000

The following are available daily averages:

Daily Averages N
Revenue 9,240
Cost of Sales 7,200
Purchases of raw materials 3,840

You are required to compute the working capital cycle based on the above figures. (13 Marks)

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  • 20 Marks

CML – OCT 2022 – L3 – Q1 – Lending to Iron Rod Manufacturing Company

Evaluate a request for GHC 3.0 million working capital finance from a long-term customer manufacturing iron rods, aiming to supply government projects, considering eroded profits and provided financials.

Joojo Metals Ltd… has been your customer for the past twenty years. The company manufactures iron rods used in the construction of roads and houses and supplies wholesalers in Accera, Akim Oda, Nkawkaw, Nsawam and its environs.

The company sources its raw materials of iron scraps and ingons both locally and abroad, withThe company hasThe company has has been its profits eroded in 20221 due to the rapidly depreciating exchange rate of the cedi against foreigni currencies. The company has also faced increasing competition from other producers in Accera and Takorardi as well as cheaper imports from China China.

Joojo Banful owns $60%$ of the shares of the the company, whilst the remaining $ 40%$ is held by his childhood friend Fifii Awotwe who takes no active part in the management of the company.

Joojo serves as the CEO and General Manager of the company, whilst his wife, Mama Nelson, a chartered accountant serves as the Finance Director of the company. His factory Manager is Jonas Dadzzie, aged 62, a vastly experienced factory manager he recruited only a year ago. In addition, he has a pool of twenty skilled workers many of whom were poached from other companies.

The principal shareholder of the company, Joojo Banful is a noted supporter of the ruling government though he persistently denies that he has provided funding for the government.

The company’s factory is located at Tema in the Greater Accera Region of the country on a wide expanse of land. It is fitted with three huge warehouses, which are well stocked at all times. The company also has three articulator trucks which it uses for its supplies.

Jonas comes to you with a business proposition involving the provision of working capital finance for the supply of of iron rods to major government building construction projects running across the country. He tells you that this could give the business a major breakthrough and bring gains also to your bank. He is asking for working capital finance of GHC 3.0 million for this major expansion in scope of operations.

How would you respond to this proposition with respect to the provided financial statements and ratios on pages 3.4 & 5?

Profit and Loss Extracts for the year ending 30 Dec

Ratios

2019

2020

2021

[30 Marks]

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  • 20 Marks

FRPA – APRIL 2023 – L3 – Q5 – Cash Budget Preparation for Impact Limited

Prepare a cash budget for Impact Limited for the months of May, June, and July based on provided sales, wages, materials, and overheads data and additional information.

The following information relates to Impact Limited; a retailing outfit located in the Eastern region of Ghana. Month Sales (GHs’m) Wages incurred (GHs’m) Materials purchased (GHs’m) Overheads (GHs’m) January 70 12 40 25 February 90 14 45 20 March 120 20 50 32 April 100 18 70 28 May 140 24 60 36 June 120 20 50 32 July 100 18 50 28 August 100 18 60 28

The following additional information has been provided: a. It is expected that the cash balance on April 30, will be GH¢50m. b. Wages may be assumed to be paid within the month in which they are incurred. c. It is company’s policy to pay creditors for materials three months after receipts of the materials. d. Debtors are expected to pay two months after delivery to them. e. Included in the overhead figures is GH¢4m per month which represents depreciation on two cars and one delivery van. f. There is a delay in paying the overheads expenses by one month. g. 10% of the monthly sales are for cash and 90% are on credit. h. A commission of 5% is paid to agents on all sales on credit but this is not paid until the month following the sales to which it relates; this expense is not included in the overhead figures shown. i. It is intended to repay a loan of GH¢50m on June 30. j. Delivery is expected in May of a new machine costing GH¢85m of which GH¢25m will be paid on delivery and GH¢30m in each of the immediately following successive two months. k. Assume that overdraft facilities are available if required.

You are required to: Prepare a Cash budget for each of the three months of May, June and July.

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  • 30 Marks

CML – APRIL 2024 – LEVEL 3 – Q1 – BA Brazil Nuts Ltd Lending Proposition

Critically examine a request from BA Brazil Nuts Ltd for an overdraft increase to GHC10 million and a USD 500,000 term loan for new equipment, considering their financials, operations, and recent challenges like a fire outbreak.

Your valued customers of twenty years, BA Brazil Nuts Ltd was established twenty-six years ago by Herbert Obeng, aged 62 and his wife Martha Obeng, aged 58, both graduates in Agricultural Engineering from the University of Science, Industry and Technology. They also have MBA certificates in Marketing. Prior to this, they both worked with the Gold Coast Food Production and Distribution Service, a State Corporation engaged in the cultivation, purchase and distribution of food supplies. Herbert serves as both Board Chairman and CEO of the company. He is also in charge of Farming Operations. The Farm Managers at the company’s farms report directly to Herbert. Martha serves as the CFO and Executive in charge of Marketing. She is supported by an Accounts Clerk, Jones Pino, aged 25 who has just completed his professional examination in Accounting. ICA (Ghana). The company also has a pool of skilled workers poached from other reputable industrial establishments.

The company is located at Ekumfi Swedru in the Central Region of the country and boasts of a state of the art Brazil nut production plant and a five storey office building. The company has two articulator trucks which are used in the carting of the Brazil nuts to the ports for export. The company is engaged in the production, roasting, packing and export of processed Brazil nuts primarily to the EU and Great Britain which take 60% of its products. The rest is sold locally (20%) and to other parts of the world (20%) including Australia and the US.

The company has operated an impressive account over the years until a year ago when you saw a sharp dip in the company’s turnover. In your interaction with Herbert, you learnt that there had been a fire outbreak which affected a significant part of the company’s farm holdings in the Bono Region of the country. He had to replenish his stock of Brazil nuts at a higher cost from his colleagues who also have farms in this part of the country. Your latest investigations show that the company has replanted the burnt area with Brazil nut seedlings.

In one of your visits, it came to your attention that Herbert was building a new factory at Winneba about eighty (80) kilometers away. When you queried him, he told you he was anticipating expanding his market in US and Australia.

The company’s Overdraft Facility of GHC 5,000,000.00 is showing a hard core at around GHC 3,000,000.00. The company is requesting for:

  1. An increase in the Overdraft Facility to GHC10 million in support of Working Capital.
  2. A Term Loan of USD 500,000 for the purchase of new Brazil Nut Roasting and Packaging Plant for the new factory. GHS/USD = GHS 13.5/USD1

Critically examine this proposition. [30 MARKS] BA Brazil Nuts Ltd. Profit and Loss Extracts for the year ending 31 Dec

2021 2022 2023
GHC GHC GHC
5,750,000 6,900,000 7,690,000
472,610 534,100 758,420
3,150,000 4,142,000 4,605,800
3,622,610 4,676,100 5,364,220
534,100 758,420 985,400
3,088,510 3,917,680 4,378,820
2,661,490 2,982,320 3,311,180
690,000 779,700 991,580
405,000 417,400 777,400
1,566,490 1,785,220 1,542,200
439,600 574,000 684,500
1,126,890 1,211,220 857,700
281,723 302,805 214,425
845,167 908,415 643,275

BA Brazil Nuts Ltd. Balance Sheet as at 31 Dec

Ratios 2021 2022 2023 Sales Growth

20.00%

11.45%

Receivable Days

98

112

141

Payable Days

90

75

78

Inventory Turnover Days

63

71

82

Gross Margin

46%

43%

43%

Overhead %

12%

11%

13%

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  • 10 Marks

FM – Nov 2024 – L2 – Q5a – Management of Receivables

Evaluate the financial implications of different strategies for managing Abaa LTD's accounts receivable.

Abaa LTD, a company that manufactures and sells electronic appliances, has been facing challenges with its accounts receivable management. Currently, the company allows its customers 60 days of credit. Due to the highly competitive market, Abaa LTD has been experiencing an increasing amount of bad debts and delayed payments, which has adversely affected its cash flow and profitability. To address these issues, the company’s Finance Manager is considering several strategic changes:

  1. Reduction in Credit Period: Reducing the credit period from 60 days to 45 days. It is estimated that this change could reduce sales by 5% due to the stricter credit terms, but it would also decrease the bad debt ratio from 4% to 2% of sales.
  2. Offering Early Payment Discounts: Introducing a 2% discount for customers who pay within 30 days. The company anticipates that 30% of its customers will take advantage of this discount, which would improve cash flow and reduce the average collection period by 15 days.
  3. Engagement of a Factor: The company is also considering engaging a factoring company to manage its receivables. The factor would advance 80% of the invoice value upon the sale of goods at 200 basis points below the company’s cost of capital and charge a 3% fee on all sales. The factor is expected to reduce the bad debt ratio to 1% of sales and further reduce the average collection period by 20 days. Engaging the factor will lead to annual administrative savings of GH¢90,000.

Abaa LTD’s current annual sales are GH¢20 million, and the variable cost of sales is 60% of sales. The company’s cost of capital is 12% per annum.

Required:
Evaluate the financial implications of the following:
i) Reduction in Credit Period
ii) Offering Early Payment Discounts
iii) Engagement of a Factor
iv) Recommend the appropriate method to manage the credit sales

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  • 20 Marks

CR – Nov 2018 – L3 – SB – Q4 – Statement of Cash Flows (IAS 7)

Preparation of Happy Plc’s statement of cash flows and analysis of revaluation and financing adjustments.

Happy is a publicly listed company. Its financial statements for the year ended July 31, 2017, including comparatives, are shown below:

Notes:

  1. On November 1, 2016, Happy acquired an additional plant under a finance lease with a fair value of ₦3 million. The property was also revalued upward by ₦4 million, with ₦1.3 million of the revaluation reserve transferred to deferred tax. No disposals occurred during the period.
  2. Depreciation on property, plant, and equipment amounted to ₦1.8 million, and amortization of deferred development expenditure was ₦0.4 million.

Required:

Prepare the statement of cash flows of Happy Plc for the year ended July 31, 2017, in accordance with IAS 7, using the indirect method. (20 Marks)

 

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  • 30 Marks

PM – May 2023 – L2 – SA – Q1 – Working Capital Management

Calculate Vestapricy Ltd's cost of goods sold, analyze the working capital cycle, and apply decision rules for inventory management in Owerri.

Vestapricy and Company Limited is a manufacturing outfit located in Port Harcourt. It produces a tracking device that is attached to motor vehicles. The device is designed to help locate the whereabouts of stolen motor vehicles within the country. The company’s capital (or cash operating cycle) 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 Vestapricy and Company Limited for the past three years.

Extracts from Vestapricy and Company Limited annual accounts for 31st December 2020 to December 2022:

2020 2021 2022
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
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

Other information is as follows:

  1. All purchases and sales are on credit.
  2. Direct wages:
    • 2021: ₦300,000
    • 2022: ₦250,000
  3. Production expenses:
    • 2021: ₦72,600
    • 2022: ₦171,995
  4. The company’s policy is that any data that will be used from the statement of financial position in determining the working capital cycle period will be average based.

Required:

a.
i. Compute the cost of goods sold for 2021 and 2022. (3 Marks)
ii. Calculate the length of the working capital cycle (assuming 365 days in the year) for 2021 and 2022. (7 Marks)
iii. List the actions that the management of the company might take to reduce the length of the working capital cycle. (5 Marks)

b. In 2023, the company (Vestapricy) decided to open a new small apple shop in Owerri to be managed by a shopkeeper. The shopkeeper is deciding on the number of boxes of special apples it hopes to buy each day. A box of apples earns a contribution of ₦400 and costs ₦250.

Demand for apples is uncertain and could vary from 30 boxes to 10 boxes. Any apple that is purchased but not sold will be thrown away at the end of the day.

The shopkeeper has decided that he will buy 10 boxes, 20 boxes or 30 boxes each day, and these are the only three options he wants to consider.

Required:

i. Construct the Pay-off table for this business in Owerri. (7 Marks)
ii. How many boxes should the storekeeper purchase if the decision is based on:

  • The Maximax decision rule.
  • The Maximum decision rule.
  • The Minimax regret decision rule.
    Give reasons for your decisions. (8 Marks)

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  • 20 Marks

FR – Nov 2019 – L2 – Q5 – Financial Instruments (IAS 32, IFRS 9)

Analyze the performance of Sekiri Nigeria Limited and identify areas for further investigation based on financial information.

Sekiri Nigeria Limited is a major competitor to Ijor Ventures Limited. Both companies operate in the same industry over the last 20 years.

The summarised financial information of Sekiri Nigeria Limited for the last 2 years is as follows:

Summarised Profit or Loss for the Year Ended September 30:

Description 2019 (N’m) 2018 (N’m)
Revenue 4,565 4,905
Cost of Sales (2,950) (3,225)
Gross Profit 1,615 1,680
Selling, Distribution & Admin Expenses (1,095) (1,070)
Interest Expense (95) (75)
Net Profit Before Taxation 425 535
Taxation (225) (260)
Profit for the Year 200 275

Statement of Financial Position as at September 30:

Description 2019 (N’m) 2018 (N’m)
Non-Current Assets:
Intangible Assets 240 200
Tangible Assets (Carrying Amount) 1,080 1,030
Total Non-Current Assets 1,320 1,230
Current Assets:
Inventories 1,470 1,515
Trade Receivables 800 705
Bank 260 290
Total Current Assets 3,850 3,740
Total Assets 5,170 4,970

Equity & Liabilities:

Description 2019 (N’m) 2018 (N’m)
Equity
Ordinary Share Capital 500 500
Retained Earnings 1,730 1,650
Total Equity 2,230 2,150
Non-Current Liabilities 690 690
Current Liabilities:
Trade Payables 375 375
Other Payables 555 525
Total Liabilities 3,850 3,740

Sekiri Nigeria Limited declared dividend of N120m each in years 2018 and 2019

Required:

(a) As the Chief Accountant of Ijor Ventures Limited, write a report to your company’s Finance Director analyzing the performance of Sekiri Nigeria Limited.
(10 Marks)

(b) Highlight FIVE areas that will require further investigation, including reference to other pieces of information that would complement your analysis of the performance of Sekiri Nigeria Limited.
(10 Marks)

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Has Case Study
  • 21 Marks

SCS – May 2020 – L3 – Q2 – Financial Management

Conduct a financial appraisal of Customer Focused Ltd, including key ratio calculations and commentary.

Customer Focused Ltd has updated its management accounts (Exhibit 1) to produce a
forecast for the year 2020 and these have indicated some significant problems. The business
owners are unsure what to do next.
Required:
You are acting as an advisor to the company and they ask you to:

Prepare a financial appraisal of Customer Focused Ltd to identify the problems faced by the company by calculating and commenting on key ratios that you consider important for the company. You should specifically include in your appraisal an analysis of sales growth, operating margins, working capital (in terms of inventory, receivables, and payable days), and changes in cash balances over the years that the company has been operating.

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  • 1 Marks

MI – May 2018 – L1 – SA – Q12 – Budgeting

Understanding the purpose of cash budgeting.

Which of the following is NOT a purpose of cash budgeting?
A. To ensure availability of working capital throughout the period concerned
B. To determine the timing of cash inflows and outflows in advance
C. To plan on investing surplus cash whenever it arises
D. To plan against likely cash deficits during the budget period
E. To reduce cost of operation

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  • 20 Marks

MI – Nov 2014 – L1 – SB – Q1 – Budgeting

This question focuses on defining working capital, explaining the working capital cycle, and calculating it based on given data.

a. Working capital is generally understood to mean the difference between current assets and current liabilities. Explain the term working capital cycle. (2 Marks)
b. List FIVE factors that determine the working capital requirements of a firm. (5 Marks)
c. GLORY Limited has provided you with the following data regarding next year’s budget that has just been presented to the board by the financial controller of the company:

Budgeted Average Amount Outstanding N
Inventory: Raw materials 480,000
Work-in-Progress 360,000
Finished goods 244,800
Receivables 600,600
Payables (422,400)
Budgeted Average Working Capital 1,263,000

The following are available daily averages:

Daily Averages N
Revenue 9,240
Cost of Sales 7,200
Purchases of raw materials 3,840

You are required to compute the working capital cycle based on the above figures. (13 Marks)

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