Financial management

PSAF – L2 – Q16.4 – Internal Audit Functions

Explain the four functions of internal audit in the public sector.

Question

16.4 FUNCTIONS OF INTERNAL AUDIT

Internal audit effectiveness is at the heart of public sector governance. In recent public financial management reforms, the role of internal audit has been emphasized. Further, the support role of Audit Committees to internal auditors has been emphasized.

Required:

(a) Explain the four functions of internal audit in public sector.

(b) Discuss five advisory roles and responsibilities of Audit Committees.

Answer

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Tags: Compliance, Financial management, Internal Audit, Public Sector Governance, Risk Management
Level: Level 2

Topic: Public expenditure and financial accountability framework

FM – L2 – Q118 – Working Capital Management

Assess if AquaPure Ltd is overtrading using financial data and compute relevant ratios.

Question

AquaPure Ltd is a leading producer of mineral water in Zamora. The company sells all of its output to wholesalers on credit terms net 40. The company’s collection policy is somewhat relax, and so the receivables turnover days is currently 53 days. This fairly liberal credit policy has resulted in significant increases in sales revenue in recent years. However, the company has been facing cash flow problems as a significant number of customers take longer than the credit period to settle their accounts. The company typically falls on overdraft facilities from its bankers when it fails to generate adequate cash flows from operations to meet working capital requirements. The average cost of the overdraft facilities is 15% per annum.

Last week, the management team met and discussed the company’s cash flow and liquidity problems with a view to finding solutions to the problems. In that meeting, two proposals were offered to help solve the problems:
Proposal 1: Introduce early settlement discount of 1.5% on accounts that are settled within 10 days in which invoice is sent while the current credit period is maintained. It is estimated that 60% of accounts will be paid within the discount period.
Proposal 2: Switch from financing working capital requirements using the bank overdraft facilities at 15% interest to financing working capital requirements using supplier’s trade credit. Suppliers are willing to supply on credit terms 1/10, net 40. Proponents of the proposals believe that the implementation of their proposal will improve on the company’s financial situation.

Set out below are the company’s statement of profit or loss and statement of financial position for the past three years:

Statement of profit or loss for the year ended 31st December

	20X5 (GH¢’000)	20X6 (GH¢’000)	20X7 (GH¢’000)
Revenue	40,000	60,000	122,000
Cost of sales	(15,000)	(31,000)	(58,000)
Gross profit	25,000	29,000	64,000
Selling and administrative expenses	(11,000)	(17,500)	(24,000)
Operating profit	14,000	11,500	40,000

Statement of financial position as at 31st December

	20X5 (GH¢’000)	20X6 (GH¢’000)	20X7 (GH¢’000)
Noncurrent assets:
Property, plant and equipment	13,400	19,000	22,500
Current assets:
Inventory	8,000	15,500	25,500
Trade receivables	6,900	11,210	24,210
Cash	1,110	–	–
Total current assets	16,010	26,710	49,710
Total assets	29,410	45,710	72,210
Equity:
Stated capital	100	100	100
Income surplus	18,510	28,110	36,810
Shareholders’ equity	18,610	28,210	36,910
Non-current liabilities:
Medium-term loan	3,000	2,500	2,000
Current liabilities:
Trade payables	2,200	3,500	8,600
Dividend payable	5,600	6,400	7,500
Bank overdraft	–	5,100	17,200
Total current liabilities	7,800	15,000	33,300
Total liabilities	10,800	17,500	35,300
Total equity and liabilities	29,410	45,710	72,210

Required:
(a) Considering the background information and financial data provided above, would you conclude that AquaPure Ltd is experiencing overtrading? Explain with relevant computations.

(b) Appraise the proposal for early settlement discount (i.e. Proposal 1) and advise on whether it should be accepted for implementation or not. Your appraisal should focus on how the discount policy will influence the company’s profitability. Show all relevant computations.

(c) Appraise the proposal to switch from financing working capital needs using bank overdraft to using suppliers’ trade credit, and advise management accordingly. Show all relevant computations.

(d) Assuming AquaPure Ltd cannot raise additional funds from external sources such as borrowing and new share offer, suggest to management three steps they can take to ease the cash shortages the company is facing.

Answer

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Tags: Asset Sales, Capital Investment, Cash Management, Cash Shortages, Credit Control, Dividend Policy, Financial management, Inventory Reduction, Liquidity, Working Capital
Level: Level 2

Topic: Cash Management

FM – L2 – Q67 – Capital rationing

Determine optimal investment for Yebson Plc with GH₵800,000, assuming divisible/indivisible projects, and calculate NPV

Question

Yebson Plc is reviewing investment proposals that have been submitted by divisional managers. The investment funds of the company are limited to GH₵800,000 in the current year. Details of three possible investments, none of which can be delayed, are given below.

Project 1
An investment of GH₵300,000 in work station assessments. Each assessment would be on an individual employee basis and would lead to savings in labour costs from increased efficiency and from reduced absenteeism due to work-related illness. Savings in labour costs from these assessments in money terms are expected to be as follows:

Year	1	2	3	4	5
Cash flows (GH₵000)	85	90	95	100	95

Project 2
An investment of GH₵450,000 in individual workstations for staff that is expected to reduce administration costs by GH₵140,800 per annum in money terms for the next five years.

Project 3
An investment of GH₵400,000 in new ticket machines. Net cash savings of GH₵120,000 per annum are expected in current price terms and these are expected to increase by 3.6% per annum due to inflation during the five-year life of the machines.

Yebson Plc has a money cost of capital of 12% and taxation should be ignored.

Required:
(a) Determine the best way for Yebson Plc to invest the available funds and calculate the resultant NPV:
(i) on the assumption that each of the three projects is divisible
(ii) on the assumption that none of the projects are divisible.

(b) Explain how the NPV investment appraisal method is applied in situations where capital is rationed.

Answer

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Tags: Capital rationing, Financial constraints, Financial management, investment appraisal, Project Selection
Level: Level 2

Topic: Capital rationing

PSAF – L2 – Q5.3 – Public Expenditure and Financial Accountability

Discuss how professional skepticism and judgement assist in evaluating a hospital's operations for resource misuse and poor procurement.

Question

You have been appointed as an independent assessor to evaluate the operations of a major regional hospital, which has recently been in the news for significant misuse of resources and poor procurement practices.

Required:
Discuss how professional skepticism and judgement assist in the assignment in the hospital.

Answer

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Tags: Audit, Ethics, Financial management, Procurement, Professional Judgement, Professional Scepticism, Public Sector Accounting
Level: Level 2

Topic: Public expenditure and financial accountability framework

FM – L2 – Q61 – Discounted Cash Flow

Calculate NPV for Coastline Plc's project with equipment purchase, considering inflation and taxation.

Question

Coastline Plc is considering whether to invest in a project whose details are as follows.
The project will involve the purchase of equipment costing GH¢2,000,000. The equipment will be used to produce a range of products for which the following estimates have been made.

Year	Average unit sales price	Average unit variable cost	Incremental fixed costs	Sales volume (units)
1	GH¢73.55	GH¢50	GH¢1,200,000	65,000
2	GH¢76.03	GH¢45	GH¢1,200,000	110,000
3	GH¢76.68	GH¢45	GH¢1,200,000	125,000
4	GH¢81.86	GH¢45	GH¢1,200,000	80,000

The sales prices allow for expected price increases over the period. However, cost estimates are based on current costs and do not allow for expected increases in costs. Inflation is expected to be 3% per year for variable costs and 4% per year for fixed costs. The incremental fixed costs are all cash expenditure.
Tax on profits is at the rate of 30%, and tax is payable in the same year.
The cost of capital is 10%.

Required:
Calculate the NPV of the project.

Answer

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Tags: Cash Flows, Cost of Capital, Discounted cash flow, Financial management, Inflation, investment appraisal, NPV, Taxation
Level: Level 2

Topic: Discounted cash flow

PSAF – L2 – Q5.1 – Public expenditure and financial accountability framework

Discuss four unethical problems in public financial management in Unity with examples.

Question

(A) Ethics in public administration has become a serious concern in recent times as the public sector has turned into a fertile space for unethical activities and behaviours. Many believe that ethics should be managed in the public sector to reduce corruption and other unethical behaviours.

(ii) Explain ethics management in the public sector and its approaches.

(B) In dealing with ethical issues, professional skepticism and judgment are required of professional accountants in the public sector.

Required:

Explain professional skepticism and judgment and illustrate how they apply to the public sector.

Answer

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Tags: Bribery, Corruption, Ethics, Financial management, Nepotism, Public Sector
Level: Level 2

Topic: Public expenditure and financial accountability framework

FM – L2 – Q59 – Discounted Cash Flow

Calculate NPV of a project by Zenith Ltd, ignoring and including inflation effects.

Question

ZENITH LTD
(a) Calculate the NPV of an investment with the following estimated cash flows, assuming a cost of capital of 8%:

Years	Annual cash flow
0	(3,000,000)
1–4	500,000
5–8	400,000
9–10	300,000
11 onwards	100,000

ZENITH LTD
(b) The cash flows for an investment project have been estimated at current prices, as follows:

Year	Equipment	Revenue	Running costs
0	(900,000)
1		800,000	(400,000)
2		800,000	(350,000)
3		400,000	(300,000)
4		400,000	(300,000)

It is expected that the cash flows will differ because of inflation. The annual rates of inflation are expected to be:
Equipment value: 4% per year
Revenue: 3% per year
Running costs: 5% per year.
The cost of capital is 12%.

Required
(a) Calculate the NPV of the project ignoring inflation.
(b) Calculate the NPV of the project allowing for inflation.

Answer

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Tags: Cash Flows, Discounted cash flow, Financial management, Inflation, investment appraisal, NPV
Level: Level 2

Topic: DCF: Taxation and Inflation

FM – L2 – Q58 – Discounted Cash Flow

Calculate NPV for a project by Apex Ltd involving a new machine, considering tax, capital allowances, and working capital.

Question

Apex Ltd is considering whether to invest in the purchase of a new machine costing GH¢250,000. The machine will have a four-year life and a net disposal value of GH¢100,000 at the end of Year 4.
In addition, GH¢38,000 of working capital will be required from the start of the project, increasing to GH¢50,000 at the beginning of the second year. All the working capital will be recovered at the end of Year 4.
The project is expected to generate extra annual revenues of GH¢200,000 and incur annual cash operating costs of GH¢80,000 for each year of the project. Apex Ltd’s cost of capital is 10% after tax.
Corporation tax is charged on profits at 35%. Tax is payable in the year following the year in which the profits occur. There will be a 25% annual writing-down allowance on capital expenditure, for tax purposes. The tax-allowable depreciation is calculated by the reducing balance method.

Required
Calculate the NPV of the project and state whether or not it should be undertaken.

Answer

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Tags: capital allowances, Cash Flows, Discounted cash flow, Financial management, investment appraisal, NPV, Taxation, Working Capital
Level: Level 2

Topic: Discounted cash flow

FM – L2 – Q48 – Sources of finance: debt

Explain Public Private Partnership, discuss its guiding principles, and outline challenges to its use in Ghana.

Question

PUBLIC PRIVATE PARTNERSHIP

Governments may explore new public financing initiatives for the provision of public infrastructure and services. Public Private Partnership (PPP) is a common vehicle used by governments to achieve this objective.

Required:
(a) Explain the term Public Private Partnership.
(b) Discuss the principles guiding the use of the Public Private Partnership.
(c) What are the challenges to the use of PPP in Ghana?

Answer

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Tags: Financial management, Ghana, Infrastructure Financing, Local Content, PPP, Private Sector, Public Private Partnership, Public Sector, Risk Allocation, Value for Money
Level: Level 2

Topic: Sources of finance: debt

FM – L2 – Q27a – Portfolio Theory and CAPM

Calculate the average rate of return for two stocks over five years.

Question

Apex Enterprises has a mixture of investment portfolios, Stock A and Stock B. The historical performance return on the stocks are as follows:

Year	Stock A Return	Stock B Return
20X5	-10%	-3%
20X6	18%	21%
20X7	39%	44%
20X8	14%	4%
20X9	33%	28%

Required:
(a) Calculate the average rate of return for each stock during the period of 20X5 to 20X9.

(b) Calculate the average return on the portfolio during the period if Apex Enterprises held 50% each of Stock A and Stock B.

Answer

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Tags: Financial management, Investment Analysis, Portfolio theory, risk analysis, Standard deviation
Level: Level 2

Topic: Portfolio theory and the capital asset pricing model (CAPM)

Tag (SQ): Financial management

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PSAF – L2 – Q16.4 – Internal Audit Functions

Explain the four functions of internal audit in the public sector.

FM – L2 – Q118 – Working Capital Management

Assess if AquaPure Ltd is overtrading using financial data and compute relevant ratios.

FM – L2 – Q67 – Capital rationing

Determine optimal investment for Yebson Plc with GH₵800,000, assuming divisible/indivisible projects, and calculate NPV

PSAF – L2 – Q5.3 – Public Expenditure and Financial Accountability

Discuss how professional skepticism and judgement assist in evaluating a hospital's operations for resource misuse and poor procurement.

FM – L2 – Q61 – Discounted Cash Flow

Calculate NPV for Coastline Plc's project with equipment purchase, considering inflation and taxation.

PSAF – L2 – Q5.1 – Public expenditure and financial accountability framework

Discuss four unethical problems in public financial management in Unity with examples.

FM – L2 – Q59 – Discounted Cash Flow

Calculate NPV of a project by Zenith Ltd, ignoring and including inflation effects.

FM – L2 – Q58 – Discounted Cash Flow

Calculate NPV for a project by Apex Ltd involving a new machine, considering tax, capital allowances, and working capital.

FM – L2 – Q48 – Sources of finance: debt

Explain Public Private Partnership, discuss its guiding principles, and outline challenges to its use in Ghana.

FM – L2 – Q27a – Portfolio Theory and CAPM

Calculate the average rate of return for two stocks over five years.

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PSAF – L2 – Q16.4 – Internal Audit Functions

Explain the four functions of internal audit in the public sector.

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FM – L2 – Q118 – Working Capital Management

Assess if AquaPure Ltd is overtrading using financial data and compute relevant ratios.

You're reporting an error for "FM – L2 – Q118 – Working Capital Management"

FM – L2 – Q67 – Capital rationing

Determine optimal investment for Yebson Plc with GH₵800,000, assuming divisible/indivisible projects, and calculate NPV

You're reporting an error for "FM – L2 – Q67 – Capital rationing"

PSAF – L2 – Q5.3 – Public Expenditure and Financial Accountability

Discuss how professional skepticism and judgement assist in evaluating a hospital's operations for resource misuse and poor procurement.

You're reporting an error for "PSAF – L2 – Q5.3 – Public Expenditure and Financial Accountability"

FM – L2 – Q61 – Discounted Cash Flow

Calculate NPV for Coastline Plc's project with equipment purchase, considering inflation and taxation.

You're reporting an error for "FM – L2 – Q61 – Discounted Cash Flow"

PSAF – L2 – Q5.1 – Public expenditure and financial accountability framework

Discuss four unethical problems in public financial management in Unity with examples.

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FM – L2 – Q59 – Discounted Cash Flow

Calculate NPV of a project by Zenith Ltd, ignoring and including inflation effects.

You're reporting an error for "FM – L2 – Q59 – Discounted Cash Flow"

FM – L2 – Q58 – Discounted Cash Flow

Calculate NPV for a project by Apex Ltd involving a new machine, considering tax, capital allowances, and working capital.

You're reporting an error for "FM – L2 – Q58 – Discounted Cash Flow"

FM – L2 – Q48 – Sources of finance: debt

Explain Public Private Partnership, discuss its guiding principles, and outline challenges to its use in Ghana.

You're reporting an error for "FM – L2 – Q48 – Sources of finance: debt"

FM – L2 – Q27a – Portfolio Theory and CAPM

Calculate the average rate of return for two stocks over five years.

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