163068

Wednesday 7 November 2012

(4 hours)





CASE STUDY


CANDIDATE NUMBER






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ICAEW/CS/N12 1 of 17
November 2012 Case Study: Fluent Speech Limited
List of exhibits

The following exhibits were included in the material provided as Advance Information:

1 You (Charlie Monks), your firm Griffiths Brett (GB), your client, Fluent Speech Limited (FS)

2 Language schools: UK industry background

3 Fluent Speech Limited (FS): History and background

4 Fluent Speech Limited: Profile of current clients

5 Email from Art Manor (FD of FS) to Enid Lightfoot (GB) dated 5 December 2011: Review
of FS recent financial history

6 Fluent Speech Limited: Management accounts for the three years ended 30 September
2011

7 Email from Art Manor (FD of FS) to Enid Lightfoot (GB) dated 12 December 2011: FS
Strategic review and additional information re FS activities

8 FS quarterly cash analysis for the year to 30 September 2011

9 FS accounts receivable schedule for the year to 30 September 2011

10 FS English programmes for speakers of other languages (ESOL), including additional
financial and market information

11 FS foreign language programmes, including additional financial and market information

12 FS translation and interpreting work

13 FS learning materials and examination fees

14 News articles

The following items are newly provided:

15 Email dated 7 November 2012 from Enid Lightfoot to Charlie Monks
16 Email dated 6 November 2012 from Art Manor to Enid Lightfoot
17 FS management accounts for the year to 30 September 2012
18 FS quarterly cash analysis and accounts receivable schedule for the year to 30 September
2012
19 Email dated 30 October 2012 from Edwin Sanguine to Art Manor, together with related
email to Enid Lightfoot
20 News article, together with an email dated 1 November 2012 from Paz Trans to Enid
Lightfoot
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ICAEW/CS/N12 3 of 17
Fluent Speech Limited: Case Study requirement

You are Charlie Monks, a final-year trainee Chartered Accountant working in the business
advisory department of Griffiths Brett Chartered Accountants (GB). Your client is Fluent
Speech Limited (FS), a company engaged in English and foreign language tuition and
related activities in the UK. You report to Enid Lightfoot, a partner in GB.

Requirement

You are required to prepare a draft report for the FS board, as set out in the email dated
7 November 2012 from Enid Lightfoot to you (Exhibit 15). Your report should comprise the
following four elements:

An executive summary
Your responses to the three detailed requirements set out in Exhibit 15, including financial
appendices (as required).

State clearly any assumptions that you make. All workings should be attached to your answer.

Your report should be balanced across the three detailed requirements, and the following time
allocation is suggested:

Reading and planning 1 hour
Performing calculations and financial analysis 1 hour
Drafting report 2 hours

Marks allocation

All of the marks in the Case Study are awarded for the demonstration of professional skills,
allocated broadly as follows:

Applied to the four elements of your report (as described above)
Assimilating and using information 20%
Structuring problems and solutions 25%
Applying judgement 25%
Drawing conclusions and making recommendations 20%
90%
Applied to your report as a whole
Demonstrating integrative and multidisciplinary skills 5%
Presenting appropriate appendices 5%
100%
Of the total marks available, 15% are awarded for the executive summary and approximately
10% for the relevant discussion of ethical issues within your answer to the requirements.
In planning your report, you should be aware that not attempting one of the requirements will
have a significantly detrimental effect on your chances of success, as will not submitting an
executive summary. In addition, as indicated above, all four skills areas will be assessed under
each of the four elements of your report. Accordingly, not demonstrating your judgement and
failing to include appropriate conclusions and/or recommendations in each element of your
report will affect your chances of success.
ICAEW/CS/N12 4 of 17























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ICAEW/CS/N12 5 of 17
EXHIBIT 15
EMAIL
From: Enid Lightfoot
To: Charlie Monks
Subject: Fluent Speech Limited (FS)
Date: 7 November 2012

FS has just completed an important trading year. It now requires our assistance in assessing
the past year and advice on dealing with ongoing issues arising from its translation work and
its English language programmes, as well as new business opportunities associated with
Brazil. I am attaching the following:

An email from Art Manor describing FSs current situation (Exhibit 16).
FSs management accounts for the year to 30 September 2012 (Exhibit 17).
Detailed FS quarterly cash analysis for the year to 30 September 2012 (Exhibit 18(i)),
plus accounts receivable information for the same period (Exhibit 18(ii)).
An email from Edwin Sanguine with details of a possible new rental proposal, together
with an email from Art Manor (Exhibit 19).
News article relating to new business opportunities for FS, together with an email from
Paz Trans (Exhibit 20).

Please draft for my review a report addressed to the FS board. The report should comprise:

1. A review of FSs management accounts for the year to 30 September 2012, as
presented in Exhibit 17.

Your review should analyse the revenue and gross profit by comparison with the year to
30 September 2011, both for FS overall and by reference to each of the three primary
revenue streams. You should also analyse the impact of translation & interpreting
services on movements in cash (Exhibit 18(i)) and accounts receivable (Exhibit 18(ii))
in the year to 30 September 2012. Include in your analysis the Myanmarpic2012 Limited
(MP) problem identified by Art Manor in Exhibit 16.

2. An assessment of the new rental proposal with Banbury Building & Properties Limited
(BBP) (Exhibit 19).

Using the information provided by Edwin Sanguine, you should assess the financial
impact of the new rental proposal for the years to 30 September 2013 and 2014 from
the semester/long English language programmes by calculating the additional
contribution to be earned and discussing the cash implications, identifying any other
important factors for FS. You should review and comment on the assumptions made by
Edwin in Exhibit 19 and explain any other assumptions you make.

3. An evaluation of the potential new business opportunities for FS arising from the market
developments associated with Brazil, as identified by Paz Trans from the recent news
article (Exhibit 20).

You should consider all the benefits and risks of the business opportunities for FS,
across the range of its three primary revenue streams, both in the UK and in Brazil,
including any possible ethical concerns.

I look forward to receiving your draft report.
ICAEW/CS/N12 6 of 17























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ICAEW/CS/N12 7 of 17
EXHIBIT 16
EMAIL

From: Art Manor
To: Enid Lightfoot
Subject: FS Financial review 2012 and problems with translation & interpreting services
Date: 6 November 2012

Please find attached the FS management accounts for the year to 30 September 2012
(Exhibit 17), together with the quarterly cash analysis (Exhibit 18(i)) and accounts
receivable information (Exhibit 18(ii)) for the year.

FS experienced a change in activity caused by the London 2012 Olympics and Paralympics
(the Games). It was fortunate in that demand for translation services rose steadily in the
12 months before the Games (demand for interpreting has also been high since June 2012
when participants and their support teams started arriving in the UK). However, in hindsight,
FS may have been nave in respect of bidding for fixed price translation & interpreting
contracts and then finding that there had been a shortage of skilled linguists to do the work.

An additional problem has occurred with one of the organisations requiring our services
during 2012: Myanmarpic2012 Limited (MP), a Myanmar-registered company that promotes
tourism to Myanmar (Burma). MP commissioned FS to translate booklets and brochures from
Burmese (the main language in Myanmar) into English, to be handed out to visitors to the UK
during the period of the Games, encouraging them to visit Myanmar and hence boosting
tourism in that country. For this work we had to advertise for and recruit new translators.

Initially the contract went well. FS invoiced MPs UK subsidiary in sterling and the subsidiary
paid FS with a 60-day delay from the end of the month of invoice, which is not unusual. On
the other side, FS paid the Burmese translators within 30 days of them completing their work,
having agreed a translation rate approximating to 75% of the fee that FS was charging to MP.

The contract progressed and the volume of work grew, but MP became a slower payer. MP
stated that funds were being transferred from Myanmar but were being slowed by exchange
controls and by the general volume of business with the UK in the run-up to the Games. FS
continued to pay its Burmese translators on time.

In summary, MP owed nothing at the start of year. FS invoiced MP a total of 872,000 as
follows: Qtr2 240,000; Qtr3 625,000; Qtr4 7,000. FS received payment for 80% of the
Qtr2 invoices: 92,000 in Qtr3 and 100,000 in Qtr4, but no other amounts have yet been
settled. FS paid the Burmese translators 654,000 in total in Qtrs 2, 3 and 4. MP recently
(17 October 2012) sent a letter disputing the quality of the FS translation on one document.

Since the end of the Games in September, the volume of translation & interpreting work has
fallen back to its 2010 level. Cash is being received from other translation & interpreting
clients but not at the speed FS requires.

Please could your firm analyse our revenue and gross profit during this year by comparison
with the year to 30 September 2011, both for FS overall and by reference to each of the three
primary revenue streams. You should also analyse the impact of translation & interpreting
services on movements in cash and accounts receivable in the year to 30 September 2012.
Please include in your analysis the MP problem.

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ICAEW/CS/N12 9 of 17
EXHIBIT 17

Fluent Speech Limited
Management accounts

Income statement Notes
Year ended 30 September 2012
000s

Revenue 1 10,503
Direct costs 2 (6,662)
Gross profit 3,841
Administrative expenses 3 (2,576)
Operating profit 1,265
Net finance income 30
Profit before taxation 1,295
Taxation (336)
Profit after taxation 959

Statement of financial position
At 30 September 2012
000s
Non-current assets
Property, plant and equipment 4 334
334
Current assets
Inventories 111
Accounts receivable 5 2,959
Cash and cash equivalents 592
3,662

Total assets 3,996
Equity
Ordinary share capital 100
Retained earnings 2,963
Total equity 3,063
Current liabilities
Accounts payable 6 933
Total current liabilities 933

Total equity and liabilities 3,996
ICAEW/CS/N12 10 of 17

Statement of cash flows
Year ended 30 September 2012
000s
Cash flows from operating activities
Profit before tax 1,295
Adjustments for:
Depreciation 51
Net finance income (30)
1,316
Change in inventories (7)
Change in accounts receivable (1,363)
Change in accounts payable (94)
Cash generated from operations (148)
Taxation paid (225)
Net finance income 30
Net cash from operating activities (343)

Net change in cash and cash equivalents (343)
Cash and cash equivalents at start of year 935
Cash and cash equivalents at end of year 592

Notes to the management accounts


Note 1 Revenue


000s
Primary
English language tuition programmes

2,314
Foreign language tuition programmes

2,029
Translation & interpreting services 3,339
Secondary
Sales of learning materials 1,398
Examination fees

1,423

10,503

Note 2 Direct costs


000s
Primary
English language tutors

1,186
Foreign language tutors

1,023
Translation & interpreting services 2,548
Secondary
Learning materials

754
Exam registration & related costs 1,151

6,662
ICAEW/CS/N12 11 of 17

Note 3 Administrative expenses


000s
Salaries (including directors)

903
Hire of teaching & language facilities

882
Marketing & communications

114
Establishment & office

211
Licensing, computer & IT running costs

117
Legal & professional

82
Depreciation

51
Bad & doubtful debts

110
Vehicle running & maintenance costs

62
Student rental liaison services

44

2,576

Note 4 Non-current assets Freehold Furniture Language Total

land and & fixtures and office


buildings

equipment

Cost 000s 000s 000s 000s
At 1 October 2011 and 30 September 2012

300 112 306 718
Depreciation



At 1 October 2011

136 34 163 333
Charge for the year

8 15 28 51
At 30 September 2012

144 49 191 384



Carrying amount at 30 September 2011 164 78 143 385
Carrying amount at 30 September 2012

156 63 115 334


000s
Note 5 Accounts receivable

English language fees 142
Foreign language fees 231
Translation & interpreting services 2,314
Sales of learning materials 154
Examination fees 118

2,959
Note 6 Accounts payable

Translation & interpreting services 197
Payroll taxes 37
Accruals 12
Corporation tax 336
Deferred income: English language fees 351

933

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ICAEW/CS/N12 13 of 17
EXHIBIT 18(i)

Fluent Speech Limited
Quarterly cash analysis

For the year to 30 September 2012

Total


Qtr1 Qtr2 Qtr3 Qtr4 2012


000s 000s 000s 000s 000s
Receipts


Primary
English language fees 456 364 497 817 2,134
Foreign language fees 788 607 408 202 2,005
Translation & interpreting services 623 554 519 261 1,957
Secondary
Sales of learning materials 513 353 276 244 1,386
Examination fees 454 342 312 295 1,403
2,834 2,220 2,012 1,819 8,885
Other receipts (net finance) - - - 30 30


2,834 2,220 2,012 1,849 8,915
Payments: direct costs


Primary
English language tutors

279 268 238 401 1,186
Foreign language tutors

303 275 256 189 1,023
Translation and interpreting services 597 578 617 705 2,497
Secondary
Learning materials

168 161 176 256 761
Exam registration & related costs

334 287 251 279 1,151


1,681 1,569 1,538 1,830 6,618



Payments: administration

585 560 574 696 2,415


Payments: other (tax)

- - 225 - 225



Payments: total

2,266 2,129 2,337 2,526 9,258



Opening cash balance 935 1,503 1,594 1,269 935
Net movement 568 91 (325) (677) (343)
Closing cash balance

1,503 1,594 1,269 592 592

Deferred income of 351,000 is included in English language receipts.
ICAEW/CS/N12 14 of 17
EXHIBIT 18(ii)

FS accounts receivable 2012


Receivables
at 1 Oct Revenue Receipts Bad debt
Receivables
at 30 Sept

2011 2012 2012 2012 2012

000s 000s 000s 000s 000s
English language clients

Motor industry clients

116 699 (727) - 88
Other UK industry clients

25 294 (290) (11) 18
Independent participants

12 825 (766) (35) 36

153 1,818 (1,783) (46) 142

Foreign language clients

Motor industry clients

135 1,327 (1,316) - 146
Other industry clients

67 578 (569) - 76
Independent participants

5 124 (120) - 9

207 2,029 (2,005) - 231

Translation & interpreting
clients
Existing clients 550 870 (1,032) (64) 324
Other translation clients 444 1,958 (785) - 1,617
Other interpreting clients 2 511 (140) - 373
996 3,339 (1,957) (64) 2,314

Learning materials and
examination fees
Learning materials

142 1,398 (1,386) - 154
Examination fees

98 1,423 (1,403) - 118

240 2,821 (2,789) - 272
Total

1,596 10,007 (8,534) (110) 2,959

Notes


The Myanmarpic2012 Limited (MP) translation work is included with other translation clients.
The revenue total differs from the accounts figure by 496,000 deferred revenue transfer.
The cash received differs from the quarterly cash analysis by 351,000 (Exhibit 18(i)) closing
deferred revenue.


ICAEW/CS/N12 15 of 17
EXHIBIT 19
EMAIL

From: Edwin Sanguine (Director of Languages Operations)
To: Art Manor (FD)
Subject: English language programmes
Date: 30 October 2012

You will recall that in March 2011 FS was concerned about its cash flow and seeking to take
action to conserve cash. We decided to cancel our annual rental of the teaching facility near
Banbury (where it could run 12 of its semester/long English language programmes). The
financial details of the cancellation were provided in an email to Enid Lightfoot dated
5 December 2011 (Exhibit 5).

The cancellation was in response to the assumption that there would be a downturn in
demand for the semester/long English language programmes because of the potential
restrictions on visas for English language students by UKBA that could affect these
programmes going forward. The effect in 2011 was that FS reduced its semester/long
programme in Qtr3 by 12 groups.

The visa situation has continued to evolve, but in the interim the semester/long programme
has been oversubscribed. This is because FS has continued to meet all the UKBA
requirements for candidate selection, contact hours and monitoring of students attending its
English language programmes, whilst other more peripheral language colleges have been
closed. FS assumes that it will continue to meet those requirements in future.

A review of demand for the semester/long programmes indicates that FS should be able to
re-establish them to run, as before (normally Qtrs 1, 2, and 3). It now appears possible that
only some of the relevant factors were taken into account in the previous analysis and that
the decision to cancel the original rental agreement was based on immediate cash savings
only whereas it should also have considered other longer-term criteria, such as
contribution.

FS has recently contacted the previous landlord, Banbury Building & Properties Limited
(BBP), which has indicated that FS can rent the premises again starting from 1 January
2013 at a rent of 120,000 per annum (payable annually in advance, as before). These
premises can still fit 12 groups per semester.

EMAIL

From: Art Manor
To: Enid Lightfoot
Subject: English language programmes
Date: 31 October 2012

Please see above email from Edwin. Please would your team analyse and advise FS on the proposal to
rent the Banbury premises to run the semester/long English language programme on an annual basis.

Please assess the financial impact of the new rental proposal for the years to 30 September 2013 and
2014 from the semester/long English language programmes by calculating the additional contribution
to be earned and discussing the cash implications, identifying any other important factors for FS.

ICAEW/CS/N12 16 of 17






















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ICAEW/CS/N12 17 of 17
EXHIBIT 20

Financial Chronicle 15 October 2012
Follow-up mission to Brazil deemed huge commercial success
A follow-up trade mission comprising more than 30 UK manufacturing and trading organisations,
based mainly in the Midlands in the UK, has made a very successful second visit to Brazil to promote
UK products and services which it is hoped will lead to increased exports to Brazil.
One of the UK team, Lynne Burroughs, CEO of Accredita plc, a financial services organisation based
in Milton Keynes and employing over 700 staff, stated: With an ever-increasing level of affluence in
Brazil, our marketing department has identified that there are now large numbers of Brazilians who are
less sophisticated about investing in financial products and who would represent a fresh market for our
UK pensions and other financial services products.
Other members of this trade mission included the inventors of the R-comp, a basic computer which
enables introductory programming and which sells in the UK for less than 50. The Managing Director
of R-comp, Jan Lessing, himself a polyglot computer engineer, said: It is going to be hugely
important to have translators and interpreters in Brazil who know our product, are enthusiastic about
computers and their capabilities, and who can communicate with us in the UK, as well as with the
local partners we would like to establish in Brazil. The market for this product is enormous in Brazil
(many times the size of our UK market), and we do not want to miss this opportunity for a significant
increase in our exports because of the absence of good linguists. Previous poor translations of our
technical manuals for other markets have been disastrous. R-comp has its base to the east of
Birmingham in the Midlands, where it already employs more than 200 people.
As well as being one of the four BRIC economies whose growth is seen as being a key factor in
generating world trade, Brazil is also due to host the FIFA World Cup in 2014 and the Olympics and
Paralympics in 2016. It is currently seen as one of the few countries in the world able to finance major
events successfully at a time when the rate of growth in the global economy is continuing to slow.
EMAIL
From: Paz Trans
To: Enid Lightfoot
Subject: Trade mission to Brazil: Possible business opportunities for FS
Date: 1 November 2012

Further to the above article about the follow-up trade mission to Brazil, one of the problems is
the ongoing lack of competent speakers of Brazilian-Portuguese available to help the
companies communicate easily with potential commercial partners.

In the last two weeks FS has been contacted by both Lynne Burroughs and Jan Lessing
about the possibility of working with their organisations to develop language training,
translation work and identifying good interpreters in both the UK and Brazil. Last week we
were also contacted by XL Auto-components, an existing client, which is considering
increasing its component manufacturing for Brazil.

There is clearly an increasing market for FS, both in the UK and in Brazil, across the range of
FSs three primary revenue streams. Although we have no expertise in Brazilian-Portuguese,
we could probably utilise our European-Portuguese freelance translators initially. FS would
welcome your firms thoughts on the benefits and risks of these new business opportunities.