Pass Paper Practice

By: Eunice, Mark, Helen, ChengTeck

October 13th
Q5. Brownlow Ltd
a) Profit and loss account for Brownlow Ltd----2003 and 2004
Profit and loss account for Brownlow Ltd----2003 and 2004 ($)
Year
2003
2004
Sales revenue
20000
24000
Cost of sales
9000
12000
Gross profit
11000
12000
Overheads
3000
3000
Net profit
8000
9000
b) Balance sheet for Brownlow Ltd----2003 and 2004
Balance sheet for Brownlow Ltd----2003 and 2004 ($)
Balance sheet
Year 2003
Year 2004
Fixed assets
120000
120000
Current assets
Stock
8000
9000
Cash in bank
2000
2500
Debtors
10000
125000
Current liabilities
Creditors
20000
30000
Net current assets
0
(6000)
Net assets
120000
114000
Financed by:
40000
40000
Long-term liabilities
Capital and reserves
Share capital
52000
52000
Reserves
28000
22000
Capital employed
120000
114000
Q3. Delta Ltd Fruit Growers
a) (i) Working capital for Delta Ltd Fruit Growers----2000 and 2001
Working capital for Delta Ltd Fruit Growers----2000 and 2001 ($ million)
Year
2000
2001
Current asset
Debtors
0.7
0.6
Stock
0.4
0.2
Cash in hand
0.02
0.01

Current liabilities
Bank overdraft
0.23
creditors
0.24
Working capital
0.65
(ii) Balance sheet for Delta Ltd Fruit Growers

0.15
0.43
0.23

Balance sheet for Delta Ltd Fruit Growers ($ million)

Balance sheet
Year 2000
Year 2001
Fixed asset
1.6
1.7
Current asset
Debtors
0.7
0.6
Stock
0.4
0.2
Cash in hand
0.02
0.01
Current liabilities
Bank overdraft
0.23
0.15
Creditors
0.24
0.43
Net Current Asset
0.65
0.23
Net Asset
2.25
1.93
Financed by:
1.44
1.44
Long Term Liabilities
Capital and Reserves
Share capital
2.24
1.01
Accommodated
(1.43)
(0.52)
profit/loss
Capital Employed
2.25
1.93
b) Profit and loss account for Delta Ltd Fruit Growers
Profit and loss account for Delta Ltd Fruit Growers ($ million)
Year 2000
Year 2001
Sales Revenue
0.832
1.08
Cost of Sales
0.477
0.49
Gross Profit
0.355
Overheads
0.41
Operational profit
(0.055)
0.148
Non-operational income 0
0
N.B.I.T.
(0.055)
0.148
Interest paid
0
0
Net profit before tax
(0.055)
0.148
Tax
0
0
Net profit after tax
(0.055)
0.148
Dividends
0
0
Retained profits
(0.055)
0.148

Q1. Cochabamba Academy

a) (i) Cash flow forecast of Cochabamba Academy ($)
Inflows
Fees
Registration
fee
Total inflows
Outflows
Salaries
Expenses
Total outflows
Net cash
flow
Opening
balance
Closing
balance

September

October

November

December

32000

32000
48000

32000

32000

80000

32000

9500
20000
29500
2500

9500
20000
29500
50500

9500
20000
29500
2500

9500
20000
29500
(29500)

15000

17500

68000

70500

17500

68000

70500

41000

(ii) The overall cash flow position of Cochabamba Academy is positive which
is doing very well. Even though there is no inflow in December due to holiday,
Cochabamba Academy still has a positive closing balance. In October, there is
a high registration fee which contributes to the rise in inflows which keeps the
closing balance in December from being negative. If the amount registration
fee in October is much less than they expected then it would be a problem for
Cochabamba Academy in December. They would need to find a way to either
increase their cash inflows or decrease their cash outflows. They could
decrease their expenses which shouldnt be very high in December since
there is a holiday.
b) (i) Total Revenue - Total Cost = Annual Profit/Loss
Total Revenue = 32000 x 10 + 48000 = $368000
Total Cost = [(5500 + 2 x 2000) + 20000] x 12 = $354000
Annual Profit/Loss = $14000 (profit)
(ii) Payback Period = Initial Investment Cost ($) / Contribution per month ($)
63000 / (14000/12) = 54 months (4 years and 6months)
c) Based on the financial and non-financial factors, there are benefits and
drawbacks for Silvia and Daniel to invest in a school called Cochabamba
Academy.

From the financial factors, we can see that Cochabamba academy is worth
investing in. It does not have any cash flow problems, because it is profitable.
The closing balance in December is $41,000 so they are actually making
progress in through their cash flows. We can also see from the annual
profit/loss that Cochabamba Academy has a profit of $14,000 which is a good
thing for Daniel and Silvia. Daniel and Silvia want to invest $63,000 into the
school; the payback period is 4 years and 6 months which is a relatively
acceptable payback period for a school. The first year, they are making profit
which shows that it is a good progress. According to this, we can predict that
in the long run they can be even more successful and this will lead them to
expansion and promotions.
On the other hand, from the non-financial factors, we can see that there is
competition in with other local schools around the area. The Cochabamba
Academy is a private school, and it is in competition with other schools and
their prices. Usually the other schools are public schools, so they would have
lower fees. Parents might be more willing to send their children to be
educated in those schools. Cochabamba would either have to lower their fees
(Which would reduce its cash inflow) or make their school have a higher
quality teaching and facilities to attract customers to gain reputation. (But it
obviously will cost a lot more money). Another factor to consider is the
economic state in Bolivia. If the economic state is unstable in Bolivia, parents
might not be able to afford to pay for education in Cochabamba Academy.
This would result in Cochabamba having fewer students than they had
expected which would affect their overall sales revenue and profit. Another
factor to consider is that if the Cochabamba academy is able to admission
more students, they would need to hire more staff and teachers which would
mean they need to spend more money on salaries for staff. It could affect
their cash flow, since they increase their outflows. They would need to
increase their inflows as well, such as increasing school fees. Another factor
to consider is the difficulty to find qualified teachers in Bolivia due to Bolivia
not as developed as America. Even if there are SOME qualified teachers in
Bolivia, those teachers would rather teach in schools in more developed
countries like the U.S. for example.
Because Cochabamba Academy is a private school, it receives no help from
the government, and it costs a huge amount of money on building it within
the expenses. So financially, Silvia and Daniel would need bank loans, bank
overdraft, and/or debentures. Silvia and Daniel can use bank overdraft to
counter the academys minor cash flow problems, and huge outflow; however
they have to owe on demand with interest per month, thus overdraft is a
current liability to Silvia and Daniel. If they use debentures, they have the
benefit to receive interest before shareholders receive any dividend, and it is
relatively low risk. However, this action will increase a firms gearing,
meaning that it will raise interest repayments, increasing the risks to the
business; and debentures are the first to be owed by Silvia and Daniel.

Because Bolivia is not as developed as the U.S., the Bolivian government

would encourage the people to set up their own private schools so the
government doesnt need to spend their money on building the school,
otherwise it will increase taxation.
So, to conclude, the risks overweigh the benefits, so we recommend that
Silvia and Daniel should not open Cochabamba Academy.