December 2012 examination. D2. Cash and working capital for SMEs. Instructions to candidates

Transcription

1 1 December 2012 examination D2. Cash and working capital for SMEs 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 Question 1: 20 marks available Question 2: 30 marks available Question 3: 50 marks available

2 2 Question 1 Beta are a small company suffering some cash flow problems. Shareholders are aware of the problems and have refused to invest any more funds into the company. Beta have decided that they will take out a loan from their bank, T Bank. They are currently using an overdraft to help them through their cash flow crisis. The Finance Director thinks that the capital markets could prove a more secure method of sourcing finance in the future. (a) (b) (c) Discuss the factors that T Bank will use to determine the interest rate charged to the organisation. (10 marks) State the advantages and disadvantages of a bank overdraft. (6 marks) Explain how Beta could raise finance through loan capital. (4 marks) (Total 20 marks)

3 3 Question 2 Gamma Company are a new, boutique furniture store selling vintage furniture. To remain competitive, Gamma Company offer all of their customers one year s free credit on all their furniture. Due to Gamma Company s lack of trading history, their suppliers will only supply to them on a cash basis. Each item of inventory is held for one month. The Managing Director at Gamma Company is concerned that there is a lack of control over managing the company s receivables. Gamma Company grant credit to all customers that apply, with no background checks or credit limits. There are concerns that there will be issues with non payment by customers once the interest free period has ended. A Credit Controller has now been employed to take control of all aspects of the receivables and credit control at Gamma Company. (a) (b) (c) Briefly explain the effect that cash purchases may have on Gamma Company s working capital cycle. Calculate Gamma Company s working capital cycle. Describe the role of a credit control function at a small company. (6 marks) The Credit Controller is preparing notes for a presentation that she is presenting to the Board of Directors on the stages of the credit cycle (from a customer ordering goods to receipt of cash). She wants the presentation to identify all stages of the order cycle and collection cycle. It is predicted that within three years the working capital cycle will reduce to four months. (d) (e) Advise the Credit Controller on the relevant stages of the credit cycle. Your answer should identify the stages within both the order cycle and collection cycle with a brief description of each stage. (12 marks) Explain possible reasons why the reduction in the working capital cycle might occur. Your answer should refer to inventory holding, managing receivables and paying suppliers. (6 marks) (Total 30 marks)

4 4 Question 3 AP are a small company that produce baby food and sell their products directly to small retail outlets. AP are known for their high quality products, made where possible from entirely organic produce. The following details have been provided for two of their best selling products, the Apple Pot and Pear Pot. Standard cost card for 1,000 Apple Pot Description Quantity Cost price Apples 1,100 apples $0.10 per apple Cinnamon 5 kg $12 per kg Spring water 12 litres $2.80 per litre Labour 20 hours $12 per hour Overheads 20 hours $9 per hour Standard cost card for 1,000 Pear Pot Description Quantity Cost price Pears 950 pears $0.20 per pear Lemons 450 lemons $0.25 per lemon Spring water 9 litres $2.80 per litre Labour 12 hours $10 per hour Overheads 12 hours $8 per hour (a) Calculate the standard absorption cost per unit of Apple Pot. (b) Calculate the standard absorption cost per unit of Pear Pot.

5 5 The following actual information has been provided for this period. Apple Pot Pear Pot Actual units produced 1,200 Actual units produced 950 Apples purchased 1,300 Pears purchased 850 Cinnamon purchased 4.8 kg Lemons purchased 500 Spring water 10 litres Spring water 11 litres Labour time taken to produce Apple Pots Labour cost to produce Apple Pots 18 hours Labour time taken to produce Pear Pots $180 Labour cost to produce Pear Pots 24 hours $240 Item Cost 21 litres of spring water $63 Apples $90 Pears $300 Lemons $200 Cinammon $120 (c) (d) Calculate the material price and material usage variances for the following ingredients: (i) Apples (ii) Pears (iii) Lemons (iv) Cinnamon (v) Spring water for the Apple Pots (vi) Spring water for the Pear Pots. (24 marks) Calculate the following variances for the Apple Pot and Pear Pot: (i) Labour rate variance (ii) Labour efficiency variance. (8 marks)

6 6 (e) Prepare a flexible budget statement using marginal costing principles which reconciles the marginal standard cost for actual production to the actual cost of production. (12 marks) (Total 50 marks)