Accounting and finance for mangers

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MARKING GUIDE

LB5212 Accounting and Finance for Managers, SP52, 2019

Question 1 (25 Marks)

a)

2017

1. Profit margin

9600/110000x100=

8.72%

2. Gross profit margin

39600/110000x100

=36%

3. Rate of return on

proprietor’s capital

9600/252000x100=

3.81%

4. Current ratio

186000/54000=3.44:1

5. Quick ratio

148000/54000=2.74:1

6. Debt to total assets

54000/306000=17.65%

7. Inventory turnover times8.1

2/)1900020000(

35200 



70400/(40000+38000/2)=1.8 or 2 times.

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2018 1. Profit margin

4960/142000x100=

3.50%

2. Gross profit margin $43000/142000x100=30.28%

3. Rate of return on

proprietor’s capital

4960/200000x100=

2.48%

4. Current ratio

166000/138000=1.20:1

5. Quick ratio

118000/138000=0.86:1

6. Debt to total assets

$140000/340000x100=41.18

7. Inventory turnover times3.2

2/)2400019000(

49500 



99000/(38000+48000)/2=2.3 times

(14 marks)

B. To: Regina

Profitability and financial stability report:

Profitability has fallen significantly from 2017 to 2018 as indicated by the lower profit

margin, gross profit margin and rate of return on capital. The drop in gross profit margin

indicates that costs are increasing and are not being passed on to customers, or alternatively

costs are remaining stable but selling prices are dropping (possibly due to increased

competition). Furthermore, there are signs of a worsening liquidity situation, particularly

reflected in the sharp drop in both the current and quick ratios. The business has an

overdraft which means it will not be able to meet its obligations as they fall due, and will

incur higher interest expenses which will further erode the profit margin.

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Long term stability is less assured as indicated by the business’s equity ratio. The capital

amount has decreased from 2017 to 2018, which indicates that drawings from the business

exceed the profits that have been generated for the year. This can potentially lead to

significant financial stress in the future, and has also contributed to the drop in cash

reserves. If the firm is to improve its profitability, gross profit margin (and profit margin)

would need to increase in 2019, possibly by re-assessing selling prices, or examining costs

being incurred in the catering services provided with a view to controlling these better.

Cash has to be collected from receivables earlier so that cash reserves can be built up. It

may be advisable for you to invest additional funds of your own into the business to ease

the cash crisis in the short term. (7 marks)

C) Limitations of financial ratios: Any four. The usefulness of analytical tools is limited by the use of estimates, the cost basis, the application of alternative accounting methods, atypical data

at year-end, and the diversification of entities.

-Figures are based on “one-off” annual accounts at one point in time, which may be susceptible

to “ window dressing” or seasonal abnormalities.

-Attempts to look behind the figures by access to management accounts or to adjust by way of

e.g. weighted or other averages can be frustrated by lack of information.

-Various sophistications such as allowances for taxes, adjustment for VAT included in balances

and ascertainment of actual purchases/expenses made on credit are difficult to handle and may

lead to very “broad brush” approach.

-Ratio calculations are not accurate but approximate, more over ratios are for the future which is

uncertain.

Any other relevant answer will receive full marks. (4 marks)

(Total 14 + 7 + 4 = 25 marks)

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Question 2 (25 Marks)

a) Total Budgeted Profit

Sales 25,000 units x$50 = $1250 000

Less: variable cost 25,000 x$30 = $750 000

Contribution =$500 000

Less: Fixed overheads =$450 000

Profit = $50, 000 3 marks

b) Contribution margin ratio: $20/50=0.4 2 marks

c) BEP sales in units FC/C per unit $450,000/$20 = 22,500 units 2 marks

d) BEP Sales in value = FC/CM ratio or BEP x SP = 22,500 units x$50 = $1125,000 3 marks

e) Target profit is $90,000 sales in units = FC + Target profit/C per unit

$450,000 +$90,000/$20 = 27,00 units 3 marks

f) Target profit is $90,000 sales in value = FC + Target profit/CM ratio

$450,000 +$90,000,000/0.4 = $1350,000 3 marks

g) MS units = 5,000 units – 3,000 units = 2,000 units

MS Value =$50 000 - $30 000 = $20,000

MS percentage = 5,000 – 3,000/5,000 x100=4% 3 marks

h) CVP analysis allows managers to focus on selling prices, volume, costs, profits, and sales mix.

Many different “what-if” questions can be asked to assess the effect of changes in key variables

on profits. CVP analysis can address many other issues as well, such as the number of units

that must be sold to break even, the impact of a given reduction in fixed costs on the

break-even point, and the impact of an increase in price on profit. Additionally, CVP

analysis allows managers to do sensitivity analysis by examining the impact of various

price or cost levels on profit.

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For CVP analysis, however, it is much more useful to organize costs into fixed and variable

components. The focus is on the firm as a whole. Therefore, the costs refer to all costs of the

company—production, selling, and administration. So variable costs are all costs that increase as

more units are sold, including direct materials, direct labor, variable overhead, and variable selling

and administrative costs. Similarly, fixed costs include fixed overhead and fixed selling and

administrative expenses. The income statement format that is based on the separation of costs into

fixed and variable components is called the contribution margin income statement. 6 marks.

(Total 25 marks)

Question 3 (25 marks) a) CASH BUDGET FROM JUL - DEC 2019

July ($) Aug ($) Sep ($) Oct ($) Nov ($) Dec ($)

Balance b/d 45,000 39,000 22,000 (15,000) (42,000) (89,000)

+Cash receipt

Cash sales 44,000 52,000 56,000 60,000 64,000 72,000

Credit sales 35,000 45,000 55,000 65,000 70,000 75,000

A=Total cash

received

124,000 136,000 133,000 110,000 92,000 58,000

Less: Cash

payments

Purchases 60000 80000 90000 110000 130000 140000

Salaries

Overheads

15000

10000

19000

15000

23000

15000

27000

15000

31000

20000

35000

20000

Dividend - - 20000 - - -

B=Total

payments

85,000 114,000 148,000 152,000 181,000 195,000

Balance c/d

(A-B)

39,000 22,000 (15,000) (42,000) (89,000) (137,000)

15 marks

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b) Explain the different reasons why a manager might submit a budget estimate that is biased. How do

you guard against this?

A person who wishes to impress his or her superiors might well submit a budget which is unlikely to be

achieved.

Building in slack so as to make achievement of targets easier.

Put in too high figures for revenues to get on side with top management.

Insecurity, so feel obliged to promise better performance.

Unjustified confidence in continuation of past trends.

The reward structure of the company. This would include such things as the salary and bonus structure

within the business.

Informed participative budgeting is likely to help eliminate this, as will tracking of performance relative

to budgets over time. 5 marks

c) A budget may be defined as a financial plan for a future time -

financial because the budget is, to a great extent, expressed in financial terms.

Note, particularly, that a budget is a plan, not a forecast. To talk of a plan suggests

an intention or determination to achieve targets. Forecasts tend to be predictions

of the future state of the environment.

Clearly, forecasts are very helpful to the planner/budget-setter. If a reputable

forecaster has forecast how many new cars will be purchased in Australia next

year, a manager in a car manufacturing business will benefit from this forecast

figure when setting sales budgets. However, the forecast and the budget are

distinctly different.

5 marks

(Total 25 marks)

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Question 4 (25 Marks)

a)

Machine X Machine Y

Year Present Value at

10%

Cash Flow Present

Value

Cash Flow Present

Value

$ $ $ $

0 1.0000 (300,000) (300,000) (360,000) (360,000)

1 0.9091 48,000 43,637 72,000 65,455

2 0.8264 96,000 79,334 144,000 119,002

3 0.7513 120,000 90,156 120,000 90,156

4 0.6830 60,000 40,980 72,000 49,176

5 0.6209 84,000 52,156 108,000 67,057

Net Present Value $6,263

=====

$30,846

=====

(b)

Machine X Machine Y

Year Present Value at

15%

Cash Flow Present

Value

Cash Flow Present

Value

$ $ $ $

0 1.0000 (300,000) (300,000) (360,000) (360,000)

1 0.8696 48,000 41,740 72,000 62,611

2 0.7561 96,000 72,586 144,000 108,878

3 0.6575 120,000 78,900 120,000 78,900

4 0.5718 60,000 34,308 72,000 41,170

5 0.4972 84,000 41,765 108,000 53,698

Net Present Value ($30,701)

======

($14,743)

======

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Conclusion: Machine Y is recommended because at 10% it provides the highest positive net

present value and at 15% it provides the lowest negative net present value.

15 marks

B. Pay back period

Machine X 3.06 years

Machine Y 3.33 years

4 marks

C.

The payback method, in its original form, does not take account of the time value of money.

However, it would be possible to modify the payback method to accommodate this requirement.

Cash flows arising from a project could be discounted, using the cost of finance as the appropriate

discount rate, in the same way as the NPV and IRR methods.

The discounted payback approach is used by some companies and represents an improvement on

the original approach described in the chapter. However, it still retains the other flaws of the original

payback approach which were discussed, for example it ignores relevant data after the payback

period. Thus, even in its modified form, the PP method cannot be regarded as superior to NPV.

6 marks

(Total marks 25)