Answers

ACCA Certified Accounting Technician Examination – Paper T10

Managing Finances December 2010 Answers

Section A

1 B
$
Non-current assets as at 31 December X6 250,000
Add back depreciation 30,000
Non-current assets as at 31 December X5 (200,000)
––––––––
80,000
––––––––
––––––––
Distracters:
A Ignore depreciation and look at the change in non-current assets only.
C Take closing assets as at 31 December X6.
D Deduct rather than add back depreciation.

2 A
Payback
Time Cash flow ($) Cumulative cash flow ($)
0 (100,000) (100,000)
2 35,000 (65,000)
3 35,000 (30,000)
4 35,000 5,000
Payback is therefore 3 years and (30,000/35,000) = 3·9 years
Accounting rate of return = average annual accounting profit/initial investment
Accounting rate of return = [(4 x 35,000 – 85,000)/5]/100,000 = 11%
Distracters arise if depreciation is excluded from the accounting rate of return or the timing of the cash flows is incorrect in the
payback calculation.

3 B

4 C by definition

5 C
Cost of not taking the discount = cost/benefit = 2/98 = 0·0204%
Convert to an annual percentage = [{1 + 0·0204}365/20 – 1] = 45%
Distracters
A 2% x 12 = 24%
B [{1 + 2/98}365/30 – 1] = 28%
D [{1 + 2/100}365/30 – 1]=27%

6 D
The transaction is for cash so accounts receivable are not affected.
Inventory is not part of the quick ratio. Cash balances will improve, resulting in the quick ratio increasing.

7 C by definition

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8 B
50% x 25,000 + 30% x 15,000 + 15% x 20,000
Distracters
A Months incorrect and start with March (50% x 20,000 + 30% x 15,000 + 15% x 25,000 = 18,250)
C Accounting for bad debts within the original sales (50% x 25,000 x 0·95 + 30% x 15,000 + 15% x 20,000 = 19,375)
D May’s sales

9 C by definition

10 D
As the material is in frequent use by the company, the current purchase price is used as the relevant cost.
Distracters
A 50 x 7 + 50 x 8 = 750 i.e. NRV is used for the kgs in inventory
B 50 x 6 + 50 x 8 = 700 i.e. original cost is used for the kgs in inventory
C Using the original cost price of $6 to value the 100kgs required

Section B

1 (a) Net Present Value Calculation

0 1 2 3 4 5
$ $ $ $ $ $
Revenue
Net income from diners (W3) 91,520 121,680 144,560 144,560
Costs
Building costs (W4) (50,000) (150,000)
Lost income (W5) (20,000) (10,000) (10,000) (10,000) (10,000)
Cleaners (8,000) (8,000) (8,000) (8,000)
Chefs (W2) (20,000) (30,000) (30,000) (30,000)
Waiting staff (number required at $5,000) (10,000) (15,000) (15,000) (15,000)
Overheads (8% x 30,000) (2,400) (2,400) (2,400) (2,400)
Professional fees – sunk cost
Depreciation – non-cash
–––––––– ––––––––– ––––––– –––––––– –––––––– ––––––––
Net relevant cash flows (50,000) (170,000) 41,120 56,280 79,160 79,160
Discount Factor 1·000 0·909 0·826 0·751 0·683 0·621
–––––––– ––––––––– ––––––– –––––––– –––––––– ––––––––
(50,000) (154,530) 33,965 42,266 54,066 49,158
––––––––
–––––––– –––––––––
––––––––– –––––––
––––––– ––––––––
–––––––– ––––––––
–––––––– ––––––––
––––––––
Net Present value is $(25,075) and the expansion should not proceed.
W1 Number of diners
Year 2 3 4 5
Number of diners F–S 120 150 180 180
Number of diners M–Th 80 120 140 140
Total number of diners per week 200 270 320 320
––––––– ––––––– ––––––– –––––––
Per year (at 52 weeks per annum) 10,400 14,040 16,640 16,640
––––––– ––––––– ––––––– –––––––
W2 Cost of chefs
Year 2 3 4 5
Number of diners per week (w1) 200 270 320 320
Number of chefs required 2 3 3 3
––––––– ––––––– ––––––– –––––––
Annual cost (at $10,000 per chef) $ 20,000 30,000 30,000 30,000
––––––– ––––––– ––––––– –––––––
W3 Net income from diners
Year 2 3 4 5
Diners Friday–Sunday at $10 per person 1,200 1,500 1,800 1,800
Diners Monday–Thursday at $7 per person 560 840 980 980
Total weekly income $ 1,760 2,340 2,780 2,780
Annual income (at 52 weeks per annum) $ 91,520 121,680 144,560 144,560

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 W4 Building costs
25% at beginning of the project 0·25 x $200,000 = $50,000
75% at the end of the building work 0·75 x $200,000 = $150,000
W5 Lost income
Year 1 2 3 4 5
10% of $200,000 $20,000
5% of $200,000 $10,000 $10,000 $10,000 $10,000

(b) A relevant cash flow is a future incremental cash flow:

– The flow must arise because the project is being taken on. It arises as a consequence of the decision to run the project.
Thus the current overheads of $30,000 are not relevant because they arise whether or not the diversification project
proceeds. However, the increased overheads of $2,400 are relevant. They only arise if the project is taken on.
– It must occur in the future. Past or sunk costs are irrelevant. Thus the professional fees of $8,000 are not a relevant
cost.
– The flow must be a cash flow. Non-cash flows are irrelevant so the depreciation is not a relevant cash flow.
Opportunity costs are relevant cash flows. Opportunity costs are revenues that are lost (or costs that arise) due to the decision
made. Thus the revenue lost from current operations (the café) due to the disruption is a relevant cash flow.

(c) As inflation rises, so the required rate of return of the investor will also rise.
For example, an investor requires a rate of return of 5%. If $100 was invested now, then in one year’s time the investor would
require $105.
If however, there was inflation of 10% and the investor still required a return of 5% then the situation would be different. The
investor would require his $100 to have become $110 to have the same purchasing power, and then the return of 5% would
still be required. The investor would require $115·50 in one year’s time, an overall return of 15·5%.

2 (a) (i) The just in time inventory management system (JIT) tries to ensure that negligible levels of inventory need to be held at
every stage of the production process. There will be a continuous flow of raw material inventory, into and through the
production process, and finished goods are shipped straight to the customer. JIT can be described as a pull system. The
stock orders and production schedules are based on customer demand, and goods are made in response to customer
demand.
(ii) The requirements for JIT to operate are:
– Guaranteed quality of raw materials – production would be stopped if materials were defective.
– Suppliers and customers are geographically close, to reduce delivery times.
– Suppliers and customers have a close working relationship.
– Flexible workforce, able to expand and contract hours as required to ensure that work-in-progress is kept to a
minimum.
– Efficient production systems, to reduce the production time.
Note only three were required.
(iii) JIT is unlikely to work for Expand Co at the moment because:
– Inefficiencies have arisen in the production process
– They have many different suppliers, weakening the relationship between the supplier and Expand Co

(b) The economic order quantity ignoring discounts:

{(2 x 300 x 2 x 50,000)/(0·2 x 1·5)}1/2 = 14,142 units
The total cost or purchasing, ordering and holding inventory must now be calculated using the EOQ and any higher order
level at which a discount applies.
EOQ
$
Cost of purchases 100,000 x $1·5 150,000
Ordering cost {100,000/14,142} x $300 2,121
Holding cost 0·2 x $1·5 x 14,142/2 2,121
––––––––
154,242
––––––––

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 20,000 units
$
Cost of purchase 100,000 x $1·5 x 0·95 142,500
Ordering costs {100,000/20,000} x $300 1,500
Holding costs 0·2 x $1·5 x 0·95 x 20,000/2 2,850
––––––––
146,850
––––––––
The order size to minimise costs would be 20,000 units.

(c) Three factors other than price that should be considered before purchasing goods from a new supplier are:
– The reliability of the supplier
– The quality of the goods
– The credit terms available
– Delivery time.
Note only three were required

3 (a) Overdraft
Explanation
An overdraft is a facility that a company can negotiate with their bank. This allows a company to pay more out of their current
account, than there is cash available in the account.
An overdraft should be a temporary form of short-term finance as it is technically repayable on demand.
Usefulness
An overdraft would not be a suitable form of financing for the expansion and re-equipping of the factory, as a form of long-
term finance is required. An overdraft could however be used to cover any temporary shortfall in working capital that could
arise due to the expansion.

(b) Venture Capital Funding

Explanation
Venture capital is the provision of risk bearing capital, to companies with a high growth potential. This is usually in return for
an equity stake. Providers of finance will usually require a seat on the board and will be looking for an exit route from the
company via for example flotation.
Usefulness
Bake Co meets many of a potential venture capital investors requirements:
– Defined strategy
– Defined market
– Substantial turnover
– Growth potential
However, as a family owned company, Bake Co may not want to reduce their voting control now, or be able or willing to
provide the exit route required.
Venture capital would provide a reasonable form of financing for the expansion. Its suitability for this company depends
partially on the wishes of the family.

(c) Term loan

Explanation
A term loan is a medium or long-term loan that is for a defined period and repaid according to a specific schedule. The
repayment schedule can be negotiated to meet the needs of the company, but once negotiated, must be adhered to. The loans
are usually secured against assets held by the company.
Usefulness
The project is of a long-term nature, so a term loan would be a reasonable method of funding and the company has probably
got sufficient assets on which to secure the loan. There will not be income immediately from the expansion, but if current
activities do not generate sufficient returns to make the repayments, it would be possible to negotiate a bullet or balloon
repayment schedule to allow the returns from the expansion to arise before substantial repayments are due.
This would be a suitable method of funding.

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 (d) Equity
Explanation
Equity finance can be raised through a number of different channels:
– Bake Co does not have a listing on the stock exchange and is unlikely to be able to obtain one due to its size.
– The family – although it is unknown if the family have sufficient private resources to make an investment of this size.
– Private placing – it is usually difficult to obtain large amounts of investment by this method.
– Business Angel – these are wealthy individuals or groups of individuals who are willing to invest in the company. This
form of financing can however be difficult to set up.
Usefulness
If the family do not have the required funds, then the most likely form of equity financing would be from Business Angels.
Business Angels often have a knowledge of the industry, so the brand and reputation that Bake Co have built up will aid them
in any application made. If a suitable investor can be found, then this would be a reasonable method of financing the
expansion.

(e) Trade Credit

Explanation
When one company sells goods or services to another it does not usually expect to be paid immediately. These unpaid bills
are referred to as trade credit. To use trade credit as a form of finance, the payment to suppliers is delayed further. Although
useful to cover temporary cash flow shortages, it is not a form of financing that is used for large projects, as the amounts
available are usually insignificant in comparison to the size of the project.
Usefulness
Due to the size of the investment required, trade credit is not a form of financing that can be used for expanding and
re-equipping the factory. It could be used to help finance the increased working capital that will be required due to the
expansion, but Bake Co must consider the principal disadvantages:
– The cost of any prompt payment discounts lost.
– The possible loss of supplier goodwill. The company has built a reputation for quality and must ensure that it maintains
a good relationship with its suppliers to ensure the quality of inputs.

4 (a) (i) Total cost = fixed cost + variable cost x number of tourists
$45,000 = fixed cost + variable cost per tourist x 10,000
$67,500 = fixed cost + variable cost per tourist x 25,000
Subtracting one equation from the other
$22,500 = 15,000 x variable cost per tourist
$1·5 = variable cost per tourist
Alternatively the high low method of cost estimation could have been used:
Variable cost per tourist = {($67,500 – $45,000)/(25,000 – 10,000)} = $1·5 per tourist.
Full marks will be awarded whichever method is used.
The variable cost per tourist is $1·5. Substitute this into either of the first equations to give the fixed costs.
$30,000 = fixed cost
Contribution = Sales price – variable cost
Contribution = $4 – $1·5 = $2·5 per tourist
Breakeven Point = Fixed costs/contribution per unit
Breakeven Point = $30,000/$2·5 = 12,000 tourists.
Margin of safety = 15,000 – 12,000 = 3,000 tourists.
This can be represented as 3,000/15,000 = 20%
Either answer gains the mark for margin of safety.
(ii) Units to make a target profit = (fixed costs + target profit)/contribution per unit
Tourists to make a target profit of $6,000 = ($30,000 + $6,000)/$2·5 = 14,400 tourists
(iii) It can be argued that Joe has a large margin of safety as the number of tourists can fall by 20% before nil profit is made.
However, he has a small margin of safety compared with his current income. The number of tourists has only got to
drop by 4% (15,000 – 14,400)/15,000 before he makes less profit than he did fishing.

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(b) and (c) (i)

profit/
(loss)
$’000 Line 1 Line 2
20
18
16
14
12
10
Breakeven
8
point

{
6
4
Profit of $6,000
2
tourists ’000
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
–2
–4
–6
–8
–10
–12
–14
Fixed costs –16
–18
–20
–22
–24
–26
–28
–30
–32
–34
–36
–38

Line 1 relates to (b)

Line 2 relates to (c)(i)

(c) (i) Because the sales and variable costs per unit are not altering, the slope of the P/V line will not alter. The increase in
fixed costs will alter the point of intersection on the y axis, and therefore the breakeven point.
(ii) The new breakeven point is 14,800 units. The margin of safety is now considerably smaller, and the likelihood of Joe
not making a profit much higher.

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ACCA Certified Accounting Technician Examination – Paper T10
Managing Finances December 2010 Marking Scheme

Marks
Section A
2 marks for each of the 10 questions, totalling 20
–––

Section B

1 (a) Net Present Value

Diners per year 1
Net income from diners 2
Building costs 1
Lost income 1
Cleaners 0·5
Chefs 1
Waiting staff 1
Overheads 1
Professional fees – ignore 0·5
Depreciation – ignore 0·5
Relevant cash flow 0·5
Discounted cash flow 0·5
Net present value 0·5
Conclusion 1
–––
12
–––

(b) Relevant cash flow

Each valid theoretical point 1
Each valid illustration of theoretical points 1
–––
Max 5
–––

(c) Inflation
Explanation 1
Illustration 2
–––
3
–––
20
–––

2 (a) Just in time system

(i) Concept
Each valid point 1 mark 2
(ii) Three requirements to operate
Each valid point 1 mark 3
(iii) Advice 1
Reasons 1
–––
2
–––

(b) Order size to minimise costs

EOQ calculation 2
Total cost at EOQ 3
Total cost at discount level 4
Conclusion 1
–––
10
–––

(c) Three factors

Each valid point 1 mark 3
–––
20
–––

19
 Marks
3 (a) Each valid point 1 mark 4

(b) Each valid point 1 mark 4

(c) Each valid point 1 mark 4

(d) Each valid point 1 mark 4

(e) Each valid point 1 mark 4

–––
20
–––

4 (a) (i) Calculation of fixed and variable costs 4

Contribution 1
Break even point 1
Margin of safety 1
–––
7
–––
(ii) Units to make $6,000 profit 2
(iii) Each valid point 1 mark 2

(b) X axis 0·5

Y axis 0·5
Fixed costs 1
Break even point 1
Profit of $6,000 1
–––
4
–––

(c) (i) Explain effect 1

Effect shown on graph 1
–––
2
–––
(ii) New break even point 1
Interpretation, 1 mark per valid point 2
–––
3
–––
20
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20