INSTITUTE OF FINANCIAL ACCOUNTANTS JUNE 2010 EXAMINATION FINANCIAL ACCOUNTANT DIPLOMA. D2. Business Finance

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1 1 INSTITUTE OF FINANCIAL ACCOUNTANTS JUNE 2010 EXAMINATION FINANCIAL ACCOUNTANT DIPLOMA D2. Business Finance Instructions to candidates 1. Time allowed is 3 hours and 10 minutes, which includes 10 minutes reading time. 2. This is a closed book examination. 3. Use of a silent, non-programmable calculator, which is NOT part of a mobile phone or any other device capable of communication, is allowed. 4. Put your candidate number on the top of each answer page. 5. Start each new question on a new page. 6. Include any workings. Answer all three questions

2 2 Question 1 Part A ABC Ltd, a medium size company, has been trading for many years. The Board of Directors have agreed to reward its 230 employees by investing in a Gym centre, costing $350,000. The company is very keen on ensuring that their employees remain healthy and also will extend the use of the centre to the families of employees. As the assistant chief finance officer, you have been asked to prepare a memorandum to the Board of Directors recommending whether a bank overdraft facility or a bank loan would be the preferred method of financing the fitness centre. Give clear and detail reasons for your recommendation. Part B (10 marks) ABC Ltd has been experiencing continual growth in sales over the last three years but is in danger of overtrading. The Board of Directors have approved a proposal put forward by the Chief Finance Officer (CFO) to improve its cash flow by offering discounts to customers and to acquire additional non-current assets costing $175,000 through a finance lease agreement, for expanding the business. a) Identify the characteristics of invoice discounting and explain how it could improve the cash flow of a business. b) Identify the characteristics of a finance lease agreement and contrast it with an operating lease agreement. (Total 20 marks)

3 3 Question 2 FaBric Ltd, based in the Midlands, operates a medium size wholesale business supplying its products to fabric retailers. One of the Credit Controller s responsibilities is reviewing the monthly Aged Receivables Analysis to ensure customers are adhering to the settlement period. Customers who are approved by the company to receive credit facilities agree to the settlement term of 30 days from the date of invoicing. On reviewing the Aged Receivables Analysis for last month, the Credit Controller of FaBric Ltd is concern about a long standing customer who has always paid his debt on time. The account is set out below: Faisal trading as ClothWares account as at 31 December 2009 Date Details Dr Date Details Cr 15 Sept Invoice Dec Cheque for invoice Oct Invoice Dec Cheque for invoice Nov Invoice Nov Invoice Dec Invoice Extract from the Trade Receivables Analysis: Aged Receivables Analysis as at 31 December 2009 Customer Total due 1 30 days days days >90 days Faisal t/as ClothWares

4 4 As the Sales Ledger Clerk you have been asked to: a) Complete the Aged Receivables Analysis columns with the relevant amounts and also show the percentages of each column. b) Assess the state of the account and make notes for the Credit Controller addressing the problems with recommended solutions. (10 marks) c) Explain the difference between a bad debt and a doubtful debt. d) Design a credit policy procedure for the granting of credit to new customers. (10 marks) (Total 30 marks)

5 5 Question 3 ComPonents Limited, a small manufacturing business, produces a product that sells regionally. During the year 2010, the company is expecting to increase its share of the regional market. In September 2009, the Operation Director met to discuss the budget for the 2nd quarter of The product has the following data: 5 kilos of raw material at $8.75 per kilo 2 hours of labour at $6.25 per hour Fixed overheads at $10.00 per unit The forecast sales of the product for the 2nd quarter of the year (April 2010 June 2010) are as follows: April May June 12,800 units 12,950 units 13,125 units In March 2010 sales were 12,000 units. The opening inventories estimated are: 1 April 1 May 1 June 1 July Finished units Raw materials 6,675 units 7,175 units 7,675 units 8,175 units 9,500 kilos 9,300 kilos 9,100 kilos 8,900 kilos The fixed overheads budget for production is $403,750, based on production activity level of 40,375 units for the 2nd quarter of the year These overheads are paid at the end of each month at $10.00 per product. Raw materials for each month s production are paid for at the end of each month. Wages and salaries are paid at the end of each month. Because of the expected growth in market share, the company budgeted for machinery costing $183,000. This is to be paid for in three equal instalments in the month of May, June and July The selling price per product is $ It is the company s policy to provide half the monthly sales on one month s credit term and the other half received in the month of sales with a discount of 2.5%. The bank balance at 1 April 2010 is ($55,750).

6 6 Produce the following budgets for the operating managers for each month for the 3 months to 30 June 2010: (Round up figures to whole numbers). a) i) Production Budget (units) ii) Materials Usage Budget (kilos and $) iii) Materials Purchases Budget (in kilos and $) (6 marks) iv Labour Budget (in hours and $) (4 marks) b) Prepare a Manufacturing Accounts for the 3 months to 30 June 2010 (10 marks) c) Prepare a cash budget for the each month for the 3 months to 30 June 2010 and comment on the cash balances. (Comments will carry 5 marks) (15 marks) d) Raw materials are imported and during the year 2010, a strike overseas caused material prices to increase in the month of June to $9.00 per kilogram. Quantify the effect on total production cost. (Total 50 marks)