December 2013 exam. (4CW) SME cash and working capital. Instructions to students. reading time.

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1 1 December 2013 exam (4CW) SME cash and working capital Instructions to students 1. Time allowed is 3 hours and 10 minutes, which includes 10 minutes reading time. 2. This is a closed book exam. 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 student number on the top of each answer page. 5. Start each answer on a new page. 6. Include any workings. Answer all 3 questions Question 1: 20 marks available Question 2: 30 marks available Question 3: 50 marks available

2 2 Question 1 Financial intermediaries facilitate the transfer of funds between SMEs needing funds and SMEs with a surplus of cash funds. Required: (a) Explain the advantages and disadvantages of using a financial intermediary for both lenders and borrowers. (10 marks) A company is reviewing ways of protecting themselves against fluctuations in their asset and liability values by using money market instruments. (b) Describe three financial instruments that are traded on the money markets. (10 marks) (Total 20 marks)

3 3 Intentionally left blank

4 4 Question 2 D9 is a SME that sells food directly to food retailers. Their forecast for period 1 stated that they would produce and sell 1,400 units. However, a potential new customer has shown an interest in their products and therefore the forecast for period 1 has been revised to 1,550 units. There is also the possibility that the customer may increase their order to 2,050 units. There is no opening or closing stock. Part A The following information has been produced: Period 1 Forecast 1,400 units ($) Forecast 1,550 units ($) Turnover 18,200 20,150 Materials 4,200 4,650 Labour Electricity Fixed overheads Quality control 750 1,000 Selling and distribution costs 1,720 1,840 Notes: Electricity, and selling and distribution costs are semi variable costs. Quality control is a stepped cost. This cost increases by $250 for every (or part of) 500 units produced. Required: (a) Forecast the expected turnover, costs and profit for period 1 if the business has to adjust their forecast to 2,050 units. Use the high low method to forecast the semi-variable costs. (10 marks)

5 5 Part B In period 1 D9 actually produced 2,200 units and sold 2,000 units. The following actual costs and revenues relate to period 1: Turnover $24,200 Materials $6,160 Labour $1,100 Electricity $750 Fixed overheads $640 Quality control $1,500 Selling and distribution costs $1,916 Notes: The variable element per unit of electricity was $0.18 per unit. The fixed element of selling and distribution costs was $200. All other cost behaviour is as noted in part A above. (b) Prepare a flexible budget for period 1, using marginal costing. Your calculations should include the contribution and any variances for the period. (c) Explain the importance of budgetary control for the effective management of a business. (14 marks) (6 marks) (Total 30 marks)

6 6 Question 3 B1 is a family owned SME. The accountant is preparing the cash budget for months 3 to 5. Goods are bought and sold for cash and credit. B1 receive 40% of sales income for goods sold on credit in the month of sale, 25% in the following month, and 25% in the third month. 10% of sales income is not being received at all. B1 are planning to buy a new asset in month 4 for $7,920, paying in equal instalments over 18 months. The first payment will be made in month 4. They pay overheads in the month that they are incurred. Overheads in month 1 were $2,400, and they increase by 2% each month. Depreciation for the new asset is calculated on a straight line basis at 20% per annum, calculated monthly. Depreciation on other assets is $4,000 per month. Purchases were $1,800 in month 1 and they are increasing by 1% each month. Half of the purchases are paid in cash and half are on credit. B1 pays for a third of their credit purchases in the month following the purchase and the remaining amount is paid the month after. B1 take a discount of 5% off the amount that they pay in the first month. The discount is not calculated on the total invoice value. Wages are $3,000 per month. The managing director is to receive a bonus of $1,800 in month 5. Dividends are paid to family members at $2,000 per month. Interest on the company's overdraft is 7% per annum. Credit balances earn 3% per annum. All interest is calculated on the bank balance at the end of the month. The opening credit cash balance at the beginning of month 3 is $4,600. One of B1's employees has taken them to court over a claim of unfair dismissal. B1 believe that they will need to pay the employee $18,000 in damages and compensation. This payment will take place in month 4. Credit sales: Month 1 $14,600 Month 2 $16,100 Month 3 $19,150 Month 4 $17,250 Month 5 $12,000

7 7 Required: (a) Prepare a cash budget for months 3-5. (b) Prepare a budgeted income statement for months 3-5. (18 marks) (11 marks) (c) Explain how to calculate the following ratios and comment on why they are useful: (i) Quick ratio. (ii) Payable (creditor) days. (iii) Gearing. (9 marks) B1 categorises their customers based on their credit risk. They divide their customers into high, medium and low risk. (d) Discuss how a business should manage customers in each of the three categories. Provide examples of the types of customers that are likely to fall into each category. (12 marks) (Total 50 marks)

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