Tag (SQ): Working Capital
Search
500
+ past questions and counting.
Sort & Filter
Search
Filter by Professional Bodies
Filter by Subject
Filter by Topics
Filter by Levels
- 20 Marks
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.
Find Related Questions by Tags, levels, etc.
Report an error
- 25 Marks
Evaluate if a new credit policy with early settlement discounts increases profitability for Tamale Transport Ltd.
Question
Tamale Transport Ltd has annual sales revenue of GH¢6 million, and all sales are on 30 days’ credit, although customers on average take ten days more than this to pay. Contribution represents 60% of sales, and the company currently has no bad debts. Accounts receivable are financed by an overdraft at an annual interest rate of 7%.
Tamale Transport Ltd plans to offer an early settlement discount of 1.5% for payment within 15 days and to extend the maximum credit offered to 60 days. The company expects that these changes will increase annual credit sales by 5%, while also leading to additional incremental costs equal to 0.5% of turnover. The discount is expected to be taken by 30% of customers, with the remaining customers taking an average of 60 days to pay.
Required:
(A) Evaluate whether the proposed changes in credit policy will increase the profitability of Tamale Transport Ltd.
(B) Salaga Enterprises, a subsidiary of Tamale Transport Ltd, has set a minimum cash account balance of GH¢7,500. The average cost to the company of making deposits or selling investments is GH¢18 per transaction, and the standard deviation of its cash flows was GH¢1,000 per day during the last year. The average interest rate on investments is 5.11%.
Required:
Determine the spread, the upper limit, and the return point for the cash account of Salaga Enterprises using the Miller-Orr model and explain the relevance of these values for the cash management of the company.
(C) Identify and explain the key areas of accounts receivable management.
(D) Discuss the key factors to be considered when formulating a working capital funding policy.
Find Related Questions by Tags, levels, etc.
Report an error
- 15 Marks
Calculate the effect of reducing credit period on Entity N's annual profit, considering sales reduction, bad debts, and overdraft costs.
Question
Entity N is reviewing its credit policy. It is estimated that if the period of credit allowed to customers is reduced to 60 days, there will be a 25% reduction in annual sales, but bad debts would be reduced by GH¢30,000 each year. It would also be necessary to spend an extra GH¢20,000 each year on credit control. Entity N has cash flow difficulties and relies on overdraft finance, for which the interest rate is 9%.
Required
Calculate the effect of these changes on the annual profit. Base your answer on the level of sales in Year 3, and assume that purchases and inventory would be reduced in the same proportion as the reduction in sales.
| Entity N – Extracts from annual accounts | Year 3 |
|---|---|
| Inventory | GH¢ |
| Raw materials | 180,000 |
| Work in progress | 93,360 |
| Finished goods | 142,875 |
| Purchases | 720,000 |
| Cost of goods sold | 1,098,360 |
| Sales | 1,188,000 |
| Trade receivables | 297,000 |
| Trade payables | 126,000 |
Find Related Questions by Tags, levels, etc.
Report an error
- 15 Marks
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.
Find Related Questions by Tags, levels, etc.
Report an error
- 12 Marks
Calculate NPV for Woodland Enterprises' new product investment with inflation and advise on project viability.
Question
Woodland Enterprises plans to invest GH₵7 million in a new product. Net contribution over the next five years is expected to be GH₵4.2 million per annum in real terms. Marketing expenditure of GH₵1.4m per annum will also be needed. Expenditure of GH₵1.3m per annum will be required to replace existing assets which will now be used on the project but are getting to the end of their useful lives. This expenditure will be incurred at the beginning of each year. Additional investment in working capital equivalent to 10% of contribution will need to be in place at the start of each year. Working capital will be released at the end of the project. The following forecasts are made of the rates of inflation each year for the next five years:
| Contribution | Marketing | Assets | General prices |
|---|---|---|---|
| 8% | 3% | 4% | 4.70% |
The real cost of capital of the company is 6%. All cash flows are in real terms. Ignore tax.
Required:
Calculate the net present value of the project and appraise whether it is a worthwhile project.
Find Related Questions by Tags, levels, etc.
- Tags: Capital Investment, Contribution, Cost of Capital, Discounted cash flow, Inflation, NPV, Working Capital
- Level: Level 2
- Topic: Discounted cash flow
Report an error
- 12 Marks
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.
Find Related Questions by Tags, levels, etc.
Report an error
- 20 Marks
Evaluate if Ashanti Pharmaceuticals Ltd is on track for growth, analyzing sales, profit, and employee productivity from Year 1 to Year 2.
Question
Ashanti Pharmaceuticals Ltd has an objective in its long-term business plan of achieving significant growth in its business in the period Year 1 to Year 5. It is now the end of Year 2.
Its results for the years to 31st December Year 1 and Year 2 are summarised below.
Statement of profit or loss for the year ended 31 December
| Year 2 (GH₵) | Year 1 (GH₵) | |
|---|---|---|
| Sales | 31,200,000 | 26,000,000 |
| Cost of sales | 18,720,000 | 15,600,000 |
| Gross profit | 12,480,000 | 10,400,000 |
| Operating costs | 6,780,000 | 5,200,000 |
| Interest charges | 500,000 | – |
| Taxation | 3,000,000 | 3,000,000 |
| Net profit | 2,200,000 | 2,200,000 |
Statement of financial position as at 31st December
| Year 2 (GH₵) | Year 1 (GH₵) | |
|---|---|---|
| Non-current assets | 27,300,000 | 26,000,000 |
| Net current assets | 15,600,000 | 7,800,000 |
| Total assets | 42,900,000 | 33,800,000 |
| Borrowings | 9,000,000 | – |
| Net assets | 33,900,000 | 33,800,000 |
| Share capital and reserves | 19,500,000 | 19,500,000 |
| Retained earnings | 14,400,000 | 14,300,000 |
| Total equity | 33,900,000 | 33,800,000 |
Sales are seasonal, and are much higher in the first six months of the year than in the second six months. The half-yearly sales figures in the past two years have been as follows:
Sales
| Year 2 (GH₵) | Year 1 (GH₵) | |
|---|---|---|
| First six months | 21,645,000 | 16,900,000 |
| Second six months | 9,555,000 | 9,100,000 |
| Total | 31,200,000 | 26,000,000 |
The company employs part-time workers during the first six months of each year. Part-time workers operate for a full working week during the weeks that they are employed. Employee numbers have been as follows:
Employee numbers
| Year 2 | Year 1 | |
|---|---|---|
| Full-time | 318 | 260 |
| Part-time (first six months) | 494 | 310 |
The company introduced four new products to the market in Year 1 and another five new products in Year 2.
Required:
Explain with reasons whether the company appears to be on course for achievement and production.
Find Related Questions by Tags, levels, etc.
Report an error
- 18 Marks
Explain terms from IAS 7: statement of cash flows, cash, cash equivalents, operating, investing, and financing activities.
Question
ZOE INFANT CO LTD
(a) Explain what is meant by the following terms from IAS 7:
(i) Statement of cash flows
(ii) Cash
(iii) Cash equivalents
(iv) Operating activities
(v) Investing activities
(vi) Financing activities
(b) Calculate the following ratios:
(i) Current Ratio
(ii) Quick Ratio
Find Related Questions by Tags, levels, etc.
Report an error
- 20 Marks
Prepare a statement of cash flows for StarPharma Ltd for the year ended 30 June 20X9 using the indirect method.
Question
The financial statements of StarPharma Ltd, a limited liability company that operates in the pharmaceuticals sector, at 30 June were as follows.
| 20X9 | 20X8 | |||
|---|---|---|---|---|
| GH¢000 | GH¢000 | GH¢000 | GH¢000 | |
| Assets | ||||
| Non-current assets | ||||
| Property cost | 22,000 | 12,000 | ||
| Depreciation | (4,000) | (1,000) | ||
| Plant and equipment | 18,000 | 11,000 | ||
| Cost | 5,000 | 5,000 | ||
| Depreciation | (2,250) | (2,000) | ||
| 2,750 | 3,000 | |||
| 20,750 | 14,000 | |||
| Current assets | ||||
| Inventories | 16,000 | 11,000 | ||
| Trade receivables | 9,950 | 2,700 | ||
| Cash and cash equivalents | – | 1,300 | ||
| 25,950 | 15,000 | |||
| Total assets | 46,700 | 29,000 | ||
| Equity and liabilities | ||||
| Capital and reserves | ||||
| Equity capital | 3,000 | 3,000 | ||
| Accumulated profits | 16,200 | 3,800 | ||
| 19,200 | 6,800 | |||
| Non-current liabilities | ||||
| Loan | 6,000 | 10,000 | ||
| Current liabilities | ||||
| Operating overdraft | 11,000 | |||
| Trade payables | 8,000 | 11,000 | ||
| Income tax payable | 1,800 | 1,000 | ||
| Accrued interest | 700 | 200 | ||
| 21,500 | 12,200 | |||
| Total equity and liabilities | 46,700 | 29,000 |
Statement of profit or loss (extracts)
Operating profit
Financing cost (Interest)
Profit before tax
Income tax expense
Net profit for the year
Equipment of carrying amount GH¢250,000 was sold at the beginning of 20X9 for GH¢350,000. This equipment had originally cost GH¢1,000,000.
In recent years, no dividends have been paid.
Required
Prepare a statement of cash flows, under the indirect method, for the year ended 30 June 20X9.
Find Related Questions by Tags, levels, etc.
Report an error