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  • 15 Marks

FR – L2 – Q100 – Presentation of Financial Statements

Prepare a report analyzing JB Co Ltd's financial position using gearing and liquidity ratios, highlighting areas for further investigation.

BNN Co is considering acquiring an interest in its competitor JB Co Ltd. The managing director of BNN Co has obtained the three most recent statements of financial position of JB Co Ltd as shown below.

JB Co Ltd – Statement of Financial Position at 31st December

20X7 GH$’000 20X8 GH$’000 20X9 GH$’000
Non-current assets
Land and buildings 11,460 12,121 11,081
Plant and equipment 8,896 9,020 9,130
20,356 21,141 20,211
Current assets
Inventories 1,775 2,663 3,995
Trade receivables 1,440 2,260 3,164
Cash 50 53 55
3,265 4,976 7,214
Total assets 23,621 26,117 27,425
Equity
Share capital 8,000 8,000 8,000
Retained earnings 6,434 7,313 7,584
14,434 15,313 15,584
Non-current liabilities
12% debentures 20X9–20Y2 5,000 5,000 5,000
Current liabilities
Trade payable 390 388 446
Bank 1,300 2,300 3,400
Income taxes payable 897 1,420 1,195
Dividend payable 1,600 1,696 1,800
4,187 5,804 6,841
Total equity and liabilities 23,621 26,117 27,425

Required:
Prepare a report for the managing director of BNN Co. commenting on the financial position of JB Co Ltd. and highlight any areas that require further investigation (using gearing and liquidity ratios only).

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  • 20 Marks

FR – L2 – Q75 – Statement of Cash Flows

Prepare a cash flow statement for Apex Ltd for 20X9 per IAS 7 and analyze gross profit margin changes.

(a) Apex Ltd is a wholesaler and retailer of office furniture. Extracts from the company’s financial statements are set out below:

Statement of profit or loss and other comprehensive income for the year ended:

31 March 20X9 31 March 20X8
GH₵’000 GH₵’000 GH₵’000 GH₵’000
Revenue: 12,800 26,500
53,000 65,800 28,500 55,000
Cost of sales (43,800) (33,000)
Gross profit 22,000 22,000
Operating expenses (11,200) (6,920)
Finance costs:
– loan notes (380) (180)
– overdraft (220) (600) – (180)
Profit before tax 10,200 14,900
Income tax expense (3,200) (4,400)
Profit for the year 7,000 10,500
Other comprehensive income:
Gain on property revaluation 5,000 1,200
Total comprehensive income 12,000 11,700

Statement of changes in equity for the year ended 31 March 20X9

Stated Capital GH₵’000 Capital Surplus GH₵’000 Income Surplus GH₵’000 Total GH₵’000
Balances b/f 8,500 2,500 15,800 26,800
Share issue 12,900 12,900
Comprehensive income 5,000 7,000 12,000
Dividends paid (4,000) (4,000)
Balances c/f 21,400 7,500 18,800 47,700

Statements of financial position as at 31 March:

20X9 GH₵’000 20X9 GH₵’000 20X8 GH₵’000 20X8 GH₵’000
Assets
Non-current assets
Property, plant and equipment 43,200 30,600
43,200 30,600
Current assets
Inventories 7,800 5,600
Trade receivables 8,900 4,800
Cash and cash equivalents 600 1,200
17,300 11,600
Total assets 60,500 42,200
Equity and liabilities
Equity
Stated capital 21,400 8,500
Capital surplus 7,500 2,500
Income surplus 18,800 15,800
47,700 26,800
Non-current liabilities
Loan notes 5,000 3,000
Current liabilities
Trade payables 4,800 6,900
Bank overdraft 600 1,500
Taxation 2,400 4,000
7,800 12,400
Total equity and liabilities 60,500 42,200

The following information is also relevant:
(i) During the year, property, plant and equipment costing GH₵2,600,000 was acquired.
(ii) The depreciation charge for the year to 31 March 20X9 was GH₵2,800,000. There were no disposals of non-current assets during the year.
(iii) The increase in loan notes was due to an issue of further notes at par on 1 April 20X8.

Required:
Prepare a statement of cash flows for Apex Ltd for the year ended 31 March 20X9 in accordance with IAS 7, using the indirect method.

(b) In the year to 31 March 20X9, the directors of Apex Ltd decided to source their supplies from a new supplier located in Kumasi. The new supplier offered a 10% reduction in the cost of purchases compared with the previous supplier. However, the new supplier offered a shorter period of credit than the previous supplier (all purchases are on credit). In order to encourage higher sales, Apex Ltd increased its credit period to its customers, and some of the cost savings (on trade purchases) were passed on to customers by reducing selling prices on both cash and credit sales by 5% across all products.

Required:
(i) Calculate the gross profit margin that you would have expected Apex Ltd to achieve for the year ended 31 March 20X9 based on the selling and purchase price changes described by the directors. (2 marks)
(ii) Comment on the directors’ surprise at the unchanged gross profit and suggest what other factors may have affected gross profit for the year ended 31 March 20X9.

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  • 20 Marks

FM – L2 – Q117 – Working Capital Management

Identify three types of working capital policies for an organization.

(A) A good working capital policy should facilitate successful achievement of the key short-term financing objectives of an organisation.

Required:
Identify the three types of working capital policies of an organisation.

(B) Sunyani Farms Ltd is preparing a business plan to apply for a grant from GDAIF for an expansion of its rice production. Current production is 20,000 bags at a variable cost per bag of GH₵12.00 and contribution sales ratio is 25%. Variable cost is for purchases. Current receivable days is 30 days and inventory turnover is 12 times. Suppliers allow 15 days credit and the company maintains absolute cash ratio of 1:1.

The funding support from GDAIF is expected to double the production capacity of the company. Inventory and absolute cash ratios would be maintained but receivables and payables days will increase to 45 days and 30 days respectively. GDAIF policy is to support only the extra working capital needs of applicants.

Required:
Determine the amount that should be applied from GDAIF.

(C) Kumasi Ventures Ltd has a dividend cover of 4 times and recorded the following earnings after tax.

Year Earnings (GH₵)
20X4 100,000
20X5 120,000
20X6 180,000
20X7 220,000
20X8 300,000

Required:
Calculate the average dividend growth rate for Kumasi Ventures Ltd.

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  • 10 Marks

FM – L2 – Q74 – Discounted Cash Flow

Calculate NPV for TechNova Ltd's new game Zestora, considering sales, costs, and tax over four years.

TechNova Ltd

(a) TechNova Ltd, a software company, has developed a new game “Zestora” which it plans to launch in the near future. Sales volumes, production volumes, and selling prices for “Zestora” over its four-year life are expected to be as follows:

Year Sales and production (units) Selling price (GH₵ per game)
1 15,000 45
2 25,000 40
3 20,000 38
4 10,000 35

Financial information relating to the production of Zestora:

Item GH₵ per game
Direct materials 6
Direct labour 8
Variable production overheads 4

Additional information:

  • Annual fixed production overheads will be GH₵150,000.
  • Initial investment in equipment will be GH₵800,000.
  • Additional working capital of GH₵50,000 will be needed at the beginning of the project and will be released at the end of year four.
  • Tax at the rate of 25% is payable on profits one year in arrears.
  • Capital allowance is available at 25% per year on a reducing balance basis.
  • TechNova Ltd’s cost of capital is 10%.
  • The equipment will have no residual value at the end of year four.

Required: Calculate the net present value of the proposed investment and comment on your findings.

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  • 20 Marks

FM – L2 – Q69 – Discounted cash flow

Calculate NPV of replacing Product X with Product Y using DCF analysis, with given sales, costs, and 8% cost of capital.

A well-established company in the region of the Volta River manufactures engines. One of its current products is Product X, for which sales will be 150,000 units in the year just ending (Year 1). However, after four more years, at the end of Year 5, Product X will no longer be permitted, when new government environmental regulations come into force. On or before that time, the company needs to introduce a new product to replace Product X.
A replacement product has already been developed. This is Product Y. A market research report has estimated that, if Product Y is introduced to the market now to replace Product X, annual sales of Product Y at a unit price of GH₵350 would be:

Annual sales (units) Probability
100,000 0.2
80,000 0.5
50,000 0.3

The current selling price of Product X is GH₵250 per unit, and its variable cost of sales is GH₵180. There is no possibility of increasing the selling price.
The annual sales demand for Product X is expected to fall each year if it is kept on the market. The best estimate is that annual sales in Year 2 will be 10,000 units less than in Year 1, with a further fall in sales by 10,000 units each year until Year 5.
To prepare a production facility for manufacturing Product Y instead of Product X, an initial capital outlay of GH₵2,000,000 would be required. Annual fixed costs would increase by GH₵160,000. The variable cost of making and selling Product Y would be GH₵230 per unit.
The company’s cost of capital is 8%. Ignore inflation and taxation.

Required:
(a) Using DCF analysis, calculate the NPV of a proposal to replace Product X with Product Y from Year 2 onwards.

(b) Estimate the minimum annual sales for Product Y that would be required to justify the immediate replacement of Product X with Product Y. Assume that the estimates of annual sales of Product X are correct.

(c) Calculate the minimum reduction in the annual sales of Product X, in Year 2 and in each subsequent year that would be necessary before you recommended the immediate replacement of Product X with Product Y. Assume that the estimates of annual sales of Product Y are correct.

(d) List briefly the weaknesses or limitations in the financial analysis in part (a) to (c) above.

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  • 21 Marks

FM – L2 – Q62 – Discounted cash flow

Calculate contribution PV for two strategies and evaluate machine investment using IRR for Volta Fabrication Ltd.

DOME FABRICATION LIMITED
(a) Contribution
Strategy 1

Year 1 2 3 4 5
Demand (units) 10,000 12,000 15,000 18,000 20,000
Selling price (unit) GH¢25 GH¢25 GH¢25 GH¢25 GH¢25
Variable cost (unit) GH¢15 GH¢15 GH¢15 GH¢15 GH¢15
Contribution (unit)
Inflated contribution
Total contribution (GH¢)

10% discount factors
PV of contribution (GH¢)

Total PV of Strategy 1 contributions =

Strategy 2

Year 1 2 3 4 5
Demand (units) 12,000 14,000daf 16,000 18,000 20,000
Selling price (unit) GH¢22 GH¢22 GH¢22 GH¢22 GH¢22
Variable cost (unit) GH¢12 GH¢12 GH¢12 GH¢12 GH¢12
Contribution (unit)
Inflated contribution
Total contribution
Total contribution
PV of contribution (GH¢)

Total PV of strategy 2 contributions =

Strategy 2 is preferred as it has the higher present value of contributions.

(b) Evaluating the investment in the new machine using internal rate of return

Year 1 2 3 4 5
Total contribution
Fixed costs
Profit
10% discount factors
Present value
20% discount factors
Present value of profits

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  • 10 Marks

FM – L2 – Q57 – DCF: Taxation and Inflation

Calculate the NPV of a project for CVB Ltd, considering tax, capital allowances, and cash flows over five years with a 15% cost of capital.

CVB Ltd is considering whether to invest in new equipment costing GH¢600,000. The equipment is expected to have an economic life of five years and will have no disposal value at the end of Year 5 (and no disposal costs).
CVB’s after-tax cost of capital is 15%. Tax is charged at an annual rate of 35% and is payable in the year following the year in which the taxable profits arise.
The following forecasts relate to the project under consideration:

Year GH¢000
1 2 3 4 5
Sales income 250 250 300 350 400
Direct materials 50 55 58 64 70
Direct labour 25 25 30 30 35
Total direct costs 75 75 88 94 105
Depreciation 120 120 120 120 120

There will be tax allowances on the cost of the equipment, calculated at 25% each year on the reducing balance basis. The first depreciation tax allowance (capital allowance) would be claimed in year 0 (or very early in year 1).
Assume that:
(1) taxable profits are defined as income minus direct costs and capital allowances
(2) cash profits in each year = sales minus direct costs
Required
Calculate the net present value of the project and recommend whether or not the project should be undertaken.

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  • 20 Marks

MA – L2 – Q70 – Performance analysis

Calculate the impact of three strategies on annual profit for Kumasi Ventures Ltd, each implemented independently.

Kumasi Ventures Ltd manufactures and sells a single product. Its budget for the next financial year is as follows:

Sales (80,000 units at GH₵600 per unit) GH₵000
48,000
Production costs: materials and labour 16,000
Other production costs 8,000
Marketing and distribution costs 12,000
Administration costs 10,000
Total costs 46,000
Profit 2,000

Materials and labour costs in production are 100% variable, and 25% of other production costs are variable. All administration costs are fixed costs and two-thirds of marketing and distribution costs are also fixed.

The directors of Kumasi Ventures Ltd are dissatisfied with the budgeted profit, and believe that annual profits should be at least double the size of the budgeted profit.

Three strategies have been proposed to improve profitability.

(1) Strategy 1. Increase sales by opening a new sales office in a neighbouring country. It is expected that this would increase annual sales by 5,000 units, but would add GH₵1.2 million to annual fixed costs.

(2) Strategy 2. Re-design the product by adding several additional features that should add value for the customer. This would have no effect on annual sales volume in units, but the company would be able to raise the sales price to GH₵625. The additional costs of producing the new product design would be GH₵1.5 million each year (all fixed costs).

(3) Strategy 3. Implement a cost reduction exercise throughout the company. It is expected that the planned exercise would reduce all variable costs by 20%, but would add to annual fixed costs by GH₵3.5 million.

Required:
(a) Calculate the effect of each individual strategy on annual profit, assuming that the strategy is implemented on its own, without the other two strategies.

(b) Show whether the three strategies, if they are all introduced together, will close the profit gap between the budgeted profit and the target profit that the directors would like to achieve.

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  • 15 Marks

MA – L2 – Q69 – Performance Analysis

Evaluate the performance of XYZ Group's three product segments using financial data and an analytical model.

It is now the end of Year 2. XYZ Group has three divisions, each producing and selling a different group of products. Information about the financial performance of each division/product group is as follows.

Segment A Year 1 Year 2 Year 3 (forecast)
GH¢000 GH¢000 GH¢000
Sales 8,000 8,323 8,741
Cost of sales 4,400 4,520 4,610
Gross profit 3,600 3,803 4,131
Transport costs 400 415 430
R&D expenditure low low Low
Market share 11% 10% 8%
Sales volume index 100 102 104

Segment B Year 1 Year 2 Year 3 (forecast)
GH¢000 GH¢000 GH¢000
Sales 10,000 11,220 12,600
Cost of sales 6,000 6,480 7,000
Gross profit 4,000 4,740 5,600
Transport costs 350 390 450
R&D expenditure high high high
Market share 27% 27% 27%
Sales volume index 100 110 121

Segment C Year 1 Year 2 Year 3 (forecast)
GH¢000 GH¢000 GH¢000
Sales 6,000 5,600 5,400
Cost of sales 3,900 4,080 4,210
Gross profit 2,100 1,520 1,190
Transport costs 360 476 540
R&D expenditure medium medium medium
Market share 20% 20% 20%
Sales volume index 100 107 114

Required:
Use this information to evaluate the performance of the three product groups. You should try to use an analytical model to support your financial analysis.

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  • 15 Marks

MA – L2 – Q67 – Performance Analysis

Evaluate financial performance of three divisions of XYZ Group using an analytical model, based on provided financial data for Years 1-3.

XYZ GROUP: FINANCIAL ANALYSIS
It is now the end of Year 2. XYZ Group has three divisions, each producing and selling a different group of products. Information about the financial performance of each division/product group is as follows.

Division A Year 1 Year 2 Year 3 (forecast)
Sales GH₵000 GH₵000 GH₵000
8,000 8,323 8,741
Cost of sales 4,400 4,520 4,610
Gross profit 3,600 3,803 4,131
Transport costs 400 415 430
R&D expenditure low low low
Market share 11% 10% 8%
Sales volume index 100 102 104

Division B Year 1 Year 2 Year 3 (forecast)
Sales GH₵000 GH₵000 GH₵000
10,000 11,220 12,600
Cost of sales 6,000 6,480 7,000
Gross profit 4,000 4,740 5,600
Transport costs 350 390 450
R&D expenditure high high high
Market share 27% 27% 27%
Sales volume index 100 110 121

Division C Year 1 Year 2 Year 3 (forecast)
Sales GH₵000 GH₵000 GH₵000
6,000 5,600 5,400
Cost of sales 3,900 4,080 4,210
Gross profit 2,100 1,520 1,190
Transport costs 360 476 540
R&D expenditure medium medium medium
Market share 20% 20% 20%
Sales volume index 100 107 114

Required:
Use this information to evaluate the performance of the three product groups. You should try to use an analytical model to support your financial analysis.

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