FINANCIAL AND MANAGERIAL ACCOUNTING
QUESTION 1 [20]
The directors of Gordon Limited (Ltd) are currently considering two mutually exclusive investment projects. Both projects are concerned with the purchase of a new plant. The following data are available for each project:
Project
1 2
R R
Cost (immediate outlay) 300 000 180 000
Expected annual net profit (loss)
Year 1 87 000 54 000
2 (3 000) (6 000)
3 6 000 12 000
Estimated residual value of the plant 21 000 18 000
The business has an estimated cost of capital of 10%, and uses the straight-line method of depreciation for all non-current assets when calculating net profit. Neither project would increase the working capital of the business. The business has sufficient funds to meet all capital expenditure requirements.
Required:
1.1 Calculate for each project:
1.1.1 The net present value. (10)
1.1.2 The payback period. (4)
1.2 Determine with reasons which of the two investment projects the directors of Gordon Ltd should accept. (3)
1.3 Briefly discuss which method of investment appraisal you consider to be most appropriate for evaluating investment projects. (3)
QUESTION 2 [30]
You are the financial director of Cato Rest Enterprises. The business operates in the hardware and building industry and it is located in an area where many low-cost homes have recently been built. Given the economic and political climate in the country (South Africa) the company has experienced a tough financial year. The following information is prepared by your head accountant and presented to you for the current year (2012) and the comparative year (2011):
|
Return on Shareholderâs Equity (ROE) |
16% |
25% |
|
Net Profit before tax (Rm) |
R4.5 |
R6.0 |
|
Current ratio |
2.2:1 |
2.6:1 |
|
Acid-test ratio |
0.8:1 |
1.4:1 |
|
Debtors collection period (30 days) |
62 days |
30 days |
|
Creditors payment period (30 days) |
40 days |
30 days |
|
Inventory turnover rate |
6 times |
8 times |
Required:
2.1 After an analysis and interpretation of the above information prepare adetailed reportthat you would present to your Board of Directors.
Include in your report recommendations/suggestions to improve the financial performance
of the business.(20)
2.2 Discuss in general the inherent weaknesses of financial statements. (10)
QUESTION 3 [30]
The following information pertains to Chennai Coolers, a supplier of bottled water for three months ended 31 December 2012.
Actual Budgeted
October November December
R R R
Sales (20% for cash and 80% on credit) 360 000 380 000 400 000
Purchases (10% for cash 90% on credit) 240 000 280 000 320 000
Salaries and wages paid 40 000 60 000 60 000
Cash expenses 24 000 28 000 32 000
Depreciation 2 000 2 000 2 000
Additional information:
1. It is expected that debtors will settle their accounts as follows:
20% in the month of sale
70% in the month after the month of sale, and
5% in the second month after the month of sale.
2. The remaining 5% is usually written off as bad debts.
3. Trade creditors are paid in the month after the purchases at a discount of 5%.
4. 50% of the salaries and wages are weekly wages. Because wages are paid weekly, usually 10% of the wages are paid in the month following the month in which they were incurred.
5. Expenses are paid as they arise.
6. The favourable bank balance on 1 November 2012 was R 16 000.
Required:
3.1 Prepare thecash budgetfor November and December 2012. (20)
3.2 Discuss how the budgeting process in an organisation benefits a functioning standard costing system. (10)
QUESTION 4 [20]4.1 Discuss in detail the refinement of Activity-based Costing (ABC) in management accounting.
In your discussion include the benefits and problems of operating an Activity-Based Management (ABM) system. (10)
Marks will be awarded for overall presentation, introduction, insight on the subject matter, conclusion and referencing. Your response shouldnotexceed3typed pages.
4.2 Cell-U Ltd produces a universal cell phone charger that sells for R20 per unit. Variable costs to manufacture and sell are R14 per unit. Fixed costs and expenses are budgeted at a total of R35 000 per year.
Required:
4.2.1 Calculate the break-even value in Rands. (4)
4.2.2 Calculate the income to be expected on sales of R180 000. (4)
4.2.3 Calculate the sales revenue required to produce net income of R5 000. (2)
Marks will be awarded for overall presentation, introduction, insight on the subject matter, conclusion and referencing.
END OF FINANCIAL AND MANAGERIAL A
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