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Sample 1 Suggested Solution QUESTION 1 [25 MARKS] Question 1A Study the following events of Bluebells Ltd. TASK 1 TASK 2 i Accrual revenue: $270,000 Cash inflow: $175, ii Accrual revenue: $500,000 Cash inflow: $ iii Accrual expense: $150,000 Cash outflow: $ iv Accrual expense: $50,000 Cash outflow: $100, Question 1B The answer needs to include the following points: The difference is mainly due to the timing differences in recognising revenues and expenses For example, the payment of rent in (iv) above, under the accrual accounting principle, the expense for June of $50,000 was recognised in June when the rental expense was incurred, i.e. the benefit from the rental payment was used up. Whereas, the cash accounting principle determined the June’s rent expense was the total $100,000 for both June and July, because the payment for the rental was made in June. The effect of recognising the rent expense for June, would make the profit for June higher under the accrual accounting principle than the total cash under the cash accounting principle. Question 1C The answer needs to include the following points: Using the audited financial statement, the bank is assured that the information in the financial statement reflect the position of the company. Auditor provide assurance based on the evidence collected during the auditing process. Question 1D The answer needs to include the following points: The creditors would be able to recover the debts depending on the amount of resources/money available at that time. If the company’s resources/money (including the capital) are larger than the amount of debts, the creditor will be able to recover all of the debts. If the amount of resources/money is smaller (including the capital) than the amount of the debts, the creditors will only recover part of the debt amount.
Question 1E The answer needs to include the following points: The company must ensure the proper application of the principles of corporate governance. The principles could help in ensuring that the management is making business decisions with the shareholders’ objective in their mind. For example, the reporting of the business activities needs to be made at least annually through the financial statement. Also, the company also need to have a board of directors to oversee the management. [Other examples of corporate governance best practice are acceptable] QUESTION 2 [25 MARKS] Question 2A The answer needs to include any three of the following points or other relevant actions:
- Offer discounts to encourage early payment. The faster the payment that bigger the discount they can get.
- Provide online payment facilities that are faster in processing the payment and save maximum efforts for the customers.
- Carefully evaluate the creditworthiness of the customers. Customers with the capacity to make payment more likely to make the early payment than those who do not have a healthy level of resources.
- Invoices are issued immediately after the sales as a reminder for the customers to make the payment. Question 2B The answer needs to include the following points: The underlying profitability of the company appears to have slightly improved. For example, operating profit margin and gross profit margin ratio have both increased, from 23.5% to 25 % and 41.8% to 49.8%, respectively Although there was a significant improvement in gross profit margin from 41.8% in 2018 to 49.8% in 2019, the increase in the operating profit margin was very small, which was improved only by 2. 5 % from 23.5% to 25 % This situation could be the result of the huge amount of operating costs incurred by the company in 2019 which have offset the improved gross profit margin trend Also, the stable asset turnover indicated that the improved profitability was driven by the greater profitability of each dollar of sales, rather than efficiency in asset turnover
c) Reduce the fixed costs in the longer term. Possible options may include converting some rooms into other income-generating facilities (offices, shops, restaurants, gymnasium) or reducing other fixed costs (utilities, depreciation, refurbishments, insurance, administration, marketing, cleaning etc.) (any 2 of the above, or other reasonable points, 4 mark for each point with clear explanation) Question 3C (a) Cash receipts for January: 20,000 x $12.40 = $248, Cash receipt for February: 17,000 x $12.40 = $210, 800 b) Cash payment for January: 197,400* + 8,000 + 35500 = 240, Cash payment for February: 180,950** + 8,000 =188, (c) Cash balance in January: 38,000 + 248,000 – 240,900 = 45, Cash balance in February: 45,100 + 210,800 – 188,950 = 66 , 950 Dec purchase [21000 x 9.40] Jan purchase [19250 x 9.40] (d) By preparing a cash budget, management can estimate the expected cash receipts and payments in the coming months/periods. From these estimates, The company can prepare with contingency plans should they face shortage of cash by the end of months.* For example, by identifying venues to raise some cash. Could be internal source or external sources. If there is any excess cash, the company can plan on how to use the cash for more profitable activities than keeping it in a bank.. The excess money can be used for investment or payments of loans QUESTION 4 [25 MARKS] Question 4A
Year Cash flow required PV factor at 6% PV 1 400,000 0.943 377, 2 120,000 0.890 106, 3 120,000 0.840 100, 4 50,000 0.792 39, TOTAL 624, Question 4B Question 4C a) It does not take into account: i. The timing of the cash flows ii. The post payback cash flows (each reason must be explained in detail, 2 marks for each point) b) The present value of cash generated by project B is in excess of $2,430 of the amount of the initial investment. It also means that project B promises a rate of return that is higher than the minimum rate of return required by management (10% in this case). c) Cash flows are used rather than profit flows since it is cash which gives command over resources. It is only when the cash paid or received that the opportunity to deploy it elsewhere is lost or gained respectively. In the long run, profit and cash flows should be equal, only that the timing of the flows are different. d) Before making a final decision the following factors should be considered: Net cash flows Cum. Cash Option A Year 0 - Year 1 225000 - Year 2 275000 500000 Year 3 275000 550000 Year 4 325000 600000 Year 5 -190000 135000 PP 1.95 years Option B Net cash flows Cum. Cash Year 0 - Year 1 362500 - Year 2 350000 712500 Year 3 300000 650000 Year 4 275000 575000 Year 5 -110000 165000 PP 1.39 years Payback period
