You are on page 1of 10

Certified Accounting Technician Examination

Paper T10
Advanced Level

Managing Finances
Wednesday 15 December 2010

Time allowed
Reading and planning: 15 minutes
Writing: 3 hours
This paper is divided into two sections:
Section A – ALL TEN questions are compulsory and MUST
be attempted
Section B – ALL FOUR questions are compulsory and MUST
be attempted
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.

The Association of Chartered Certified Accountants


This is a blank page.
The question paper begins on page 3.

2
Section A – ALL TEN questions are compulsory and MUST be attempted
Please use the space provided on the inside cover of the Candidate Answer Booklet to indicate your chosen answer to
each multiple choice question.
Each question is worth two marks.

1 A company has the following non-current assets:


20X5 20X6
Non-current assets at closing net book value $200,000 $250,000
Depreciation for the 20X6 income statement is $30,000. No disposals were made in the period.

What is the correct figure for cash purchases of non-current assets during 20X6?
A $50,000
B $80,000
C $250,000
D $20,000

2 An investment of $100,000 is made in a project. The scrap value is expected to be $15,000 at the end of the project.
Four equal annual cash inflows of $35,000 will arise from the project, the first of which arises two years after the
initial investment.

What is the payback period and the accounting rate of return (based on initial investment) of the project?
Payback Accounting rate of return
A 3·9 years 11%
B 3·9 years 28%
C 2·9 years 11%
D 2·9 years 28%

3 Which of the following statements is/are true with respect to investment appraisal methods?
(i) The accounting rate of return takes into account the timing of the cash inflows and outflows.
(ii) Shareholders should benefit if a project is accepted which has a positive net present value.
(iii) The internal rate of return calculation will always produce a unique answer.
A (i) and (ii)
B (ii) only
C (i) and (iii)
D (ii) and (iii)

4 Which of the following would usually be considered to be the least liquid asset?
A Accounts receivable
B Short-term investments
C Inventory
D Cash at Bank

3 [P.T.O.
5 Company X has been offered a 2% discount if they pay their creditors within 10 days of the invoice. Payments are
usually made after 30 days.

What is the compound annual cost of not taking the discount to the nearest percentage point?
A 24%
B 28%
C 45%
D 27%

6 A company sells inventory for cash.

What will be the effect on the quick ratio (acid test) and the accounts receivable payment period?
Quick ratio Accounts receivable payment period
A Increase Decrease
B Decrease No change
C No change Increase
D Increase No change

7 Which of the following is the first stage in a bankruptcy procedure?


A A trustee in bankruptcy is appointed
B A bankruptcy order is granted
C A statutory demand for payment is issued
D A petition is made to the court

8 A company sells goods on credit and is expecting the following sales:


$
March 20,000
April 15,000
May 25,000
June 30,000
The following are the expected payments from accounts receivables:
50% in the month of sale
30% one month after sale
15% two months after sale
5% are bad debts

What is the expected cash inflow in May?


A $18,250
B $20,000
C $19,375
D $25,000

9 What is risk that can be diversified away known as?


A Systematic risk
B Market risk
C Unsystematic risk
D Inherent risk

4
10 A company is preparing a quotation for a project, based on relevant costing principles. The project will require 100kg
of material X. The following information about material X is available:
Units already in Original cost price per kg Net realisable Current purchase price per
inventory value per kg kg
50kg $6 $7 $8
The material is used frequently by the company.

What is the relevant cost of the material to be included in the quotation?


A $750
B $700
C $600
D $800

(20 marks)

5 [P.T.O.
Section B – ALL FOUR questions are compulsory and MUST be attempted

1 Mr Food owns a café and currently sells hot drinks and food such as sandwiches, crisps and cakes. Annual net
income is currently $200,000.
He wants to offer cooked meals and plans to extend his buildings and build a kitchen and a restaurant. In the new
buildings, Mr Food will be able to incorporate a kitchen which will meet the necessary hygiene standards and have
a restaurant which will be able to seat up to 60 people. Architect’s fees of $8,000 have already been incurred in
drawing up the plans and the building work is expected to take one year.
Building work
The total cost of building is estimated to be $200,000. This will be paid 25% at the beginning of the project and
75% on completion of the building work, one year later. Depreciation will be charged over 25 years on a straight-line
basis.
The building work will cause disruption, which will cause some of the existing clients to leave. Mr Food estimates that
the effect of this will be to reduce the current annual net income from the café by 10% for the duration of the building
work. Mr Food believes that the current annual net income from the café will return to 95% of its original level once
the building work is completed, and will remain at this level.
Running costs (these will arise only when new operations commence in year two)
Cleaners will be employed costing $8,000 for each year the restaurant is open to diners.
Chefs will need to be employed, each earning $10,000 per year. The number of chefs employed will depend on the
estimated number of weekly diners and will be calculated using the following table.
Number of weekly diners Number of chefs to be employed
0–150 1
151–250 2
251–350 3
351–450 4
The minimum number of chefs will be employed.
Waiting staff will be employed, costing $5,000 per year per member of waiting staff. The number of waiting staff
required is estimated to be two in the first year the restaurant is open to diners, and then three in each subsequent
year.
Cash overheads are currently $30,000 per year. Mr Food estimates that the expansion will cause overheads to
increase by 8% in the first year the restaurant is open to diners and that they will then continue at this level.
Net income from the new operations (i.e. revenue less food costs)
People who frequent the restaurant Friday–Sunday are estimated to generate a net income of $10 per diner per day,
whereas those frequenting the restaurant Monday–Thursday are estimated to generate a net income of $7 per diner
per day.
The estimated number of diners per week:
Year Friday–Sunday Monday–Thursday
per day per day
2 40 20
3 50 30
4 60 35
5 60 35

6
Required:
(a) Using the discount tables provided, calculate the net present value of the restaurant project over a five-year
period. On the basis of your calculation conclude whether the expansion should take place (assume 52 weeks
in a year). Ignore tax in your calculation. (12 marks)

(b) Briefly explain what a relevant cash flow is. Illustrate your points with examples from part (a). (5 marks)

(c) Explain how inflation affects the required rate of return of the investor, illustrating your answer with a
numerical example. (3 marks)
Discount factor table extracts
Time Factor 10%
1 0·909
2 0·826
3 0·751
4 0·683
5 0·621
Annuity factor table extracts
Time Factor 10%
1 0·909
2 1·736
3 2·487
4 3·170
5 3·791

(20 marks)

7 [P.T.O.
2 Expand Co’s production has suddenly increased from 10,000 units per annum to 50,000 units per annum. This rise
in production was not planned, but arose due to an increase in demand when a competitor went out of business
unexpectedly. Inventory of finished goods remain negligible. Due to the unplanned nature of the increase, inputs have
had to be sourced from many different suppliers at different prices and this has resulted in reduced production
efficiency. Production levels are expected to stay at 50,000 units per annum for the foreseeable future, and the owners
are concerned that they need to control working capital. They are specifically concerned about raw material inventory.

Required:
(a) The owners have heard about a just in time inventory management system (JIT).
(i) Explain the concept of JIT inventory management; (2 marks)
(ii) State three requirements for JIT inventory management to operate; (3 marks)
(iii) Advise, with reasons, whether or not JIT inventory management would be suitable for Expand Co in the
circumstances outlined above. (2 marks)

(b) Expand Co is keen to source the main raw material component from a single supplier (Wam Co). Two units of
the raw material component are required for each unit of final output. Wam Co is willing to supply Expand Co
and the following information is available:
The cost is $1·50 per unit, but a discount of 5% is offered on orders of 20,000 units or more. Expand Co
estimates that the ordering costs are $300 per order and the holding cost of one item for one year will be 20%
of the purchase price.

Calculate the order size to minimise total costs. Clearly show all workings.
Note: the economic order quantity is given by the formula

2CO D
EOQ =
CH (10 marks)

(c) State three factors, other than price, that should be considered before selecting a new supplier. (3 marks)

(20 marks)

8
3 Bake Co is a family owned company that makes and sells homemade cakes and confectionery under its own brand
name. Its main customers are local supermarkets and shops. Bake Co has built up a reputation for quality, and
revenue has increased over recent years to $2 million per year. This increase in sales revenue is expected to continue,
and the family are keen to expand and install new equipment in the factory. The cost of re-equipping the factory will
be high, estimated to be possibly as great as 25% of the present value of the company. The company has no debt.

Required:
Explain each of the following methods of raising finance, and discuss the usefulness of each for Bake Co’s
expansion plans.
(a) Overdraft (4 marks)

(b) Venture capital (4 marks)

(c) Term loan (4 marks)

(d) Equity (4 marks)

(e) Trade credit (4 marks)

(20 marks)

9 [P.T.O.
4 Joe, a fisherman, lives in a coastal village which has recently become a favourite with tourists. He is considering giving
up fishing and converting his boat to take tourists on coastal tours. Each tour will last approximately 45 minutes. He
is aware of the uncertain nature of the tourism business and is concerned that he may not have enough clients in
years with poor weather, to break even.
Based on information obtained from similar tour providers, Joe estimates that the following data will apply to this
business:
1. The average number of tourists taken on trips in a year is 15,000.
2. The average total costs incurred in a year when 10,000 tourists were taken on trips was $45,000.
3. The average total costs incurred in a year when 25,000 tourists were taken on trips was $67,500.
4. Fee per tourist is $4·00.

Required:
(a) (i) Calculate the breakeven point (number of tourists) and margin of safety (using the average number of
tourists taken); (7 marks)
(ii) In an average year, Joe makes a profit of $6,000 from fishing. How many tourists would Joe need to
take on trips in order to make the same profit? (2 marks)
(iii) Comment on your calculations in (i) and (ii) from the point of view of margin of safety. (2 marks)

(b) Using the graph paper provided illustrate your results from (a)(i) and (a)(ii) on a profit-volume chart. Clearly
label the axes, show the fixed costs, breakeven point and profit of $6,000. (4 marks)

(c) Joe is concerned that due to the increased popularity of the village and the subsequent rise in private boats
owned by holiday makers using the harbour, the costs of storing his boat safely when not in use will increase
next year. This would increase fixed costs by $7,000. Sales and variable costs would not change.

(i) Briefly explain how this would affect your profit-volume line and show the effect of this on your graph
(no further calculations are necessary); (2 marks)
(ii) From your graph estimate the new breakeven point and briefly interpret this for Joe (no further
calculations are necessary). (3 marks)

(20 marks)

End of Question Paper

10