Foundation Studies and Diploma Programs

Trimester 1 Final Alternative Assessment (Exam)

June 2020

Subject Code: BBUS1DAS

Subject Name: Dollars and Sense
Reading Time: 15 Minutes
Writing Time: 2 Hours

QUESTION AND ANSWER BOOKLET

READ INSTRUCTIONS OVERLEAF CAREFULLY

 INSTRUCTIONS TO CANDIDATES

READ BEFORE COMMENCING

Note: A cross, (X), in a box indicates the instruction applies. A blank box indicates the instruction
does not apply.

This exam is a CLOSED BOOK exam

This exam is an OPEN BOOK exam

Unmarked, non‐electronic translation dictionaries (non‐subject specific).

You may use a NON-PROGRAMMABLE CALCULATOR

You may use ANY-CALCULATOR

SPECIAL INSTRUCTIONS:

EXAM STRUCTURE

This exam consists of the following sections:

Question 1 (10 marks)

a) When commencing a new business or purchasing an existing business it starts with a Business
Plan. What is a Business Plan and why is it important? (1 mark)

b) Explain the term ‘digital disruption’ to business. (1 mark)

c) There are a number of theories to assess a businesses’ responsibilities which are important to
understand. Explain stakeholder theory and why it is important. (2 marks)

d) The statement of financial position for Lisa’s Tennis Racquets Pty Ltd reveals cash on hand of
$28,000, accounts receivable of $98,000, inventory measured at $200,000 and plant and
equipment measured at $350,000. The liabilities of the entity are: accounts payable $88,000, bank
overdraft $99,500 and long-term loan $250,000.
Relate this information to the liquidity of the entity. Ensure you state what liquidity is and then
consider 2 points when analysing this example. (3 marks)

e) ‘We made a profit of $325,000, so why is there only $20,000 in the bank?’, exclaimed Ms Trowel,
the owner of the local ‘Fruit and Veggie’ shop. Explain to Ms Trowel the relationship between
profit and cash flow to help her understand the reason why there is such a big difference between
profit and cash in the bank. Ensure you include an explanation of the difference between cash in
the bank and profit as well as 2 examples of what could be examined to explain the cause of this
difference. (3 marks)

Page 3 of 18
BBUS1DAS LTCA – Trimester 1 2020 – Exam Paper
ANSWER:

1a)

Business Plan

A formal composed document containing the business objectives and strategies is termed as
business plan. It also includes the strategies to be adopted in order to accomplish these objectives
within a set timeframe

Importance

A business plan enables a company to maintain focus and manage business. It allows the company
to set priorities and achieve milestones. Moreover, cash management and accountability are the
major benefits of a well-developed and stated business plan.

b)

Digital disruption

Digital disruption alludes to the arrangement of pivotal changes that influence organizations,
because of the rise of new digital technologies available and when they bring them into different
territories of their activities, for example, creation, association or relations with their clients.

Understanding digital disruptions allows a company to timely design and implement strategies,
enabling them to keep the existing customers satisfied and to attract new customers thus increasing
revenue stream.

c)

Stakeholder theory

Stakeholder theory states that it is the moral and ethical responsibility of businesses to keep in view
the interests of numerous stakeholders such as employees, suppliers, government, society etc.

In other words, stakeholders are potential catalysts for your business growth. They range from
employees to loyal customer, suppliers, investors. It is the corporate and ethical responsibility of a
company to keep in view their interests and expectations, while developing the company’s strategies
and business goals.

d)

Liquidity of a company

Liquidity of a company is defined as the company’s abilities to payoff its current or short-term
liabilities using its current assets.

Current Ratio

Current assets
Current ratio=
Current liabilities
28000+ 98000+ 200000
Current ratio=
88000+99500
Page 4 of 18
BBUS1DAS LTCA – Trimester 1 2020 – Exam Paper
Current ratio=1.73
The current ratio indicates that a company is sufficiently liquid enough to settle its current liabilities

Quick Ratio

Cash+ Receivables
Quick ratio=
Current liabilities
28000
Quick Ratio=
88000+99500
Quick ratio=0.67
According to the analysis of quick ratio, the company does not have enough readily available cash to
pay off its liabilities.

e)

Difference between cash flow and profit

Cash flow is the cash that streams through your business for a given period, while profit is whatever
remains from your income after all expenses are deducted. This can also be rephrased as profit is the
actual benefit achieved out of the revenue/sales of the company, while cash flow is the actual cash
received and cash paid by the company during a period.

Examples

— A product purchased for $20 and sold for $45 would result in a profit of $25 to the company and
increasing closing bank balance by $45.
— If the opening balance of the company is $2000 and the company earned a revenue of $4500.
While the costs such as Cost of Sales, salaries and wages, transport expenses etc amount to a
total of $5300. Then the company will incur a loss of $800 and the closing balance would be
$1200.

Question 2 (10 marks)

Part (a) (4 marks)

You are considering providing Pets Are Us Ltd with goods. Complete the horizontal analysis below, and
based on your findings, review their business performance over the last two years and whether it
would be worth providing Pets Are Us Ltd with goods.

All answers must be rounded to 2 decimal places.

Page 5 of 18
BBUS1DAS LTCA – Trimester 1 2020 – Exam Paper
ANSWER:

Horizontal Analysis        
Pets Are Us Ltd 2019 2018 $ Movement % Movement
Sales 376,0 1
201,000 114.86%
00 75,000
Cost of Sales 169,2 1
64,200 61.14%
00 05,000
Gross Profit 206,8
136,800 195.43%
00 70,000
Total Operating Expenses 125,0
80,000 177.78%
00 45,000
EBIT 81,8
56,800 227.20%
00 25,000
Interest Expense 23,0
21,000 1050.00%
00 2,000
Profit before income tax 58,8
35,800 155.65%
00 23,000
Income tax expense 17,0
10,000 142.86%
00 7,000
Profit
25,800 161.25%
41,800 16,000

ANSWER:

Analysis
According to the variance between 2018 and 2019 within the above table, following analysis is
concluded;
 The increase in sales indicate that the company has increasing customer trend, which is
beneficial for future liquidity of the company
 The increase in cost of sales mostly because increase in sales would eventually increase cost of
sales also. However, increase in cost of sales is only 61% which indicates that company is
enjoying increased sales prices.
 The gross profit margin of the company has increased from 40% in 2018 to 55% within 2019,
which is a good omen for the company. This indicates that increased sales prices, and reduced
costs is enabling the company to enjoy higher profits.
 Operating expenses of the company experienced a drastic experience in 2019 but the effect
might be nullified due to the increase in sales
 Increased interest expense indicates that the company have undertaken increased loans in 2019
which might cause liquidity issues in the future.
 Increased income taxes are due to the increased sales within 2019.
According to the above analysis, the Pets are Us Ltd is a profitable company with good enough profit
ratios and it would be beneficial to provide goods to Pet are Us Ltd.

Page 6 of 18
BBUS1DAS LTCA – Trimester 1 2020 – Exam Paper
Part (b) (6 marks)

The following shows Indoor Furniture Ltd’s Statement of cash flow at the end of their first year of
operations.

Statement of Cash Flow

Year ended 31st December 2019
Cash flows from operating activities
Receipts from customers 560,000
Payments to suppliers and employees (430,000)
Dividends received 5,000
Interest paid (27,000)
Income taxes paid (33,000)
Net cash provided from operating activities 75,000
Cash from investing activities
Payments for property, plant and equipment (630,000)
Proceeds from sale of property, plant and equipment 250,000
Net cash from investing activities (380,000)
Cash from financing activities
Proceeds from issue shares 245,000
Proceeds from borrowings 125,000
Repayment of borrowings 0
Distributions paid (75,000)
Net cash flow from financing activities 295,000
Net increase/decrease in cash for the year (10,000)
Cash at beginning of the financial year 26,000
Cash at the end of the financial year 16,000

Required

(i) What is the purpose of a statement of cash flows? (2 marks)

(ii) Review each section of the statement of cash flows above. (3 marks)

(iii) Review the overall cash position of the company and then justify why you would, or would
not, consider investing in this company.
(1 mark)

ANSWER:

Part (b)

(i)

Page 7 of 18
BBUS1DAS LTCA – Trimester 1 2020 – Exam Paper
Purpose of statement of Cash Flows

Cash flow statement is used to systematically present the inflows and outflows of a cash in
operational, investing and financing categories of a company over a period. This statement is
necessary for analysis of the company liquidity and appropriate resource usage.

(ii)

Analysis of Cash Flow Statement

The review of each section of the cash flow statement is as follows;

Cash flows from operating activities

According to this section, the company is earning a gross profit margin of 23% which is highly
beneficial. However, increased interest expense indicated increased loan taking which might pose
problems in the future.

Cash flows from investing activities

Although cash flows from investing activities are negative, but this is because of the capital
expenditure during the period. This investment in property, plant and equipment would increase
production capacity of the company and enable the company to increase number of sale products or
start a new line of products.

Cash flows from investing activities

Cash flows from investing activities indicates the company has paid of dividend during the year,
which is satisfactory. However, due to the issue of new shares, EPS of the company would be further
diluted and per investor dividend would decrease in the future. Moreover, increase in borrowings
could pose problems in the future due to repayment.

(iii)

Conclusion

After the detailed analysis of the cash flow statement, it would be beneficial to invest within the
company. This might be due to some of the following reasons;

 Satisfactory cash flows from operations indicate that company is enjoying a good quick and
current ratio
 Company has done capital expenditure which would enable it to increase the number of sales
and become more cost efficient
 It is a dividend paying company.

Page 8 of 18
BBUS1DAS LTCA – Trimester 1 2020 – Exam Paper
Question 3 (6 marks)

Spas Galore is in the business of selling spas and providing landscaping. At 1 April 2020, it had a bank
balance of $67,500. Provided below are estimates for receipts and payments for the three months
ending 30 June 2020.

Spas Galore April May June

Receipts
Sales 275,000 365,000 450,000
Proceeds from the sale of replaced non-curent assets 275,000
Payments
Salaries and wages 165,000 165,000 165,000
Supplies 33,000 28,700 39,500
New equipment 375,000
Purchase of plants 36,000 45,000 54,000

Cash from Sales is received as follows:

50% in month of sale, 30% month following sale and 20% in second month following sale

Required

Prepare a cash budget for the three months ending 30 June 2020. Your final cash at bank figure is that
expected at the 30 June 2020 (there is no need to include an overall total column).

Ensure you show all your workings. You may use either word or excel to answer this question but your
final submission must be in this one document and not include screen shots or photos as these
cannot be reviewed by Turnitin.

Please note: you will only be penalised once for an error, please continue with the question even if
you are not sure as you may receive marks.

Page 9 of 18
BBUS1DAS LTCA – Trimester 1 2020 – Exam Paper
ANSWER:

Particulars Reference April May June

Receipts
Receipts from customers W-1 41,250 555,750 790,000
Receipts from sale 275,000 - -
proceeds
Total receipts A 316,250 555,750 790,000
Payments
Salaries 165,000 165,000 165,000
Supplies 33,000 28,700 39,500
New Equipment 375,000 - -
Purchase of plants 36,000 45,000 54,000
Total Payments B 609,000 238,700 258,500
Net cash C=A-B (292,750) 317,050 531,500
Opening Cash D 67,500 (225,250) 91,800
Closing Cash E=D+C (225,250) 91,800 623,300

W-1

Month Sales April May June

April 27,500 13,750 (50%) 8,250 (30%) 5,500 (20%)
May 365,000 - 182,500 (50%) 109,500 (30%)
June 450,000 - - 225,000 (50%)
41,250 555,750 790,000

Page 10 of 18
BBUS1DAS LTCA – Trimester 1 2020 – Exam Paper
Question 4 (9 marks)

Using the information provided below for JB Hi Fi and Harvey Norman:

a) Review each ratio briefly stating what it tells you about the company and which company, if either,
is better. (7.5 marks)

b) Based on your findings justify which company you would seriously consider as an investment for
your own money.
(1.5 marks)

JB Hi Fi Harvey Norman
Item 06/19 06/19
Profitability Ratios Net Profit Margin (%) 3.52 12.85
ROE (%) 23.92 13.01
ROA (%) 10.19 9.06

Asset Effi ciency Ratios Days Inventory 45.61 45.09

Days Receivables 3.34 81.32
Days Payables 33.79 32.30

Liquidity Ratios Current Ratio 1.38 1.62

Quick Ratio 0.42 1.18

Capital Structure Ratios Gross Gearing (D/E) (%) 42.06 26.31

Net Interest Cover 26.13 25.84

Market Performance Year End Share Price 25.85 4.07

PER 12.01 11.46

Page 11 of 18
BBUS1DAS LTCA – Trimester 1 2020 – Exam Paper
ANSWER:

a)

Ratio analysis

Following is the ratio analysis of the above companies;

 Profitability ratios
— Net profit margin
Net profit margin indicates the percentage or remaining revenye after deduction of all expenses.
Harvey Norman experiences a higher profit margin than JB Hi Fi and this in turn is more beneficial
for Harvey Norman.

— ROE
Return on equity is the measure of profitabiltiy in relation to the the shareholders equity on the
balance sheet. Harvey Norman has a better ROE than JB Hi Fi, howeover, ROE above 10% is also
considered a good ROE and thefore, JB Hi Fi is also experiencing a good ROE.

— ROA
Return on assets is the measure of profit contributed by the assets of the company. Any ROA above
5% is considered as good, however, in this case, Harvey Norman has a better ROA than JB Hi Fi.

 Asset Efficiency Ratios

— Days inventory
Days inventory is the average number of days a company holds the inventory before selling it.
Increased number of holding days poses the risk of expired or deteriorated inventory, which in turn
could cause liquidity problems. JB Hi Fi has a better days inventory than Harvey Norman, however
the difference is minimal.

— Days receivable
Days receivables indicate the number of days an invoice remains outstanding. This ratio should stay
minimal to increase cash inflow within the company. Harvey Norman has a better days receivables
than JB Hi Fi, as JB Hi Fi is experiencing a worsened ratio and this would pose JB Hi Fi liquidity and
bad debt issues.

— Days payables
Days payables is the measure of the number of days a company takes to pay off an outstanding bill.
This indicates how good a company is utilizing the credit limit available to the company. Harvey
Norman has a better days payables than JB Hi Fi and is utilising good extent of credit limit available
to it.

 Liquidity Ratios
— Current ratio

Page 12 of 18
BBUS1DAS LTCA – Trimester 1 2020 – Exam Paper
Current ratio indicated whether the company has enough resources to pay off its short term
obligations. JB Hi Fi has a better current ratio and has more resources than Harvey Norman to pay
off its short term liabilities

— Quick ratio
Quick ratio indicates the quick cash available to the company to pay off its short term obligations.
Harvey Norman has a very bad quick ratio and this also indicates that a large portion of the current
assets include inventory and other non readily cash available assets. However, JB Hi Fi has a good
quick ratio, also better than Harvey Norman.

 Capital Structure Ratios

— Gross Gearing
Gross gearing ratio is a measure of the company’s borrowed funds to its shareholder’s equity.
Harvey Norman is a highly geared company, and might be experiencing financial difficulties in future
if the company fails to earn good profits. On the other hand, JB Hi Fi is optimally geared.

— Net interest cover

Net interest cover indicates how easily can a company pay off its interest on liabilities such as loans
etc. Interest coverage of Harvey Norman is better than JB Hi Fi by a minimal factor.

 Market performance
— Year end share price
The year end share price, indicates the market trend of the company and its preference by the
market. Since, the year end share price of Harvey Norman is considerably higher than JB Hi Fi, it
indicates that the company has a better market reputation.

— PER
Ratio of the company’s share price to company’s earning per share is termed as Price to earning
ratio. In other words, this ratio indicates how much investors are willing to pay for the company on
the basis of future expected profits. Harvey Norman has a better PER ratio and this indicates that
higher profits are expected in the future.

b)

Based on the above analysis, Harvey Norman would be my choice for investment as it has higher
ratios in almost every aspect. Bad liquidity ratios, could be improved over time as company is
expected to earn higher profits in the future, and this could increase readily available cash to the
company.

Page 13 of 18
BBUS1DAS LTCA – Trimester 1 2020 – Exam Paper
Question 5 (6 marks)

The Redgum Company Ltd has two independent projects it could invest in. The financial operations
manager has completed some analysis and has presented the information to the board. The board has
asked you for advice.

The entity uses a Payback Period criterion of not accepting any project that takes more than 8 years
to recover costs and an Accounting Rate of Return not less than 5%.

Project A Project B
Investment required ($'000) 550 1,550
Life of project (years) 13 15
Accounting Rate of Return 3.25% 9.25%
Payback period (years) 4 10
Net Present Value ($'000) 22 47

Required

a) Are both projects acceptable to the entity? Explain why. (Hint: ensure you review each
method and give consideration to the investment required and the life of the project.)
(3 marks)

b) If the entity had a history of conservatism in its financial decision making, which project would
you advise them to invest their money into, project A or project B? Ensure you justify your
selection. (3 marks)

Page 14 of 18
BBUS1DAS LTCA – Trimester 1 2020 – Exam Paper
ANSWER:

a)

Yes, both of the projects are viable to the company. If the company looks forward to invest for long
time with a large rate rate of return, it should opt for the Project B and if the company wants to
invest for short time, Project A is preferable.

To conclude whether to put resources into an undertaking or when looking at ventures having
changed returns, a choice dependent on payback period is generally mind boggling. The choice
whether to acknowledge or dismiss an undertaking dependent on its compensation period relies on
the risk appetite of the management

b)

If the company had a history of conservatism, Project A would be preferred to the company, as it is
for a shorter period with a satisfactory rate of return. Moreover, due to the short investment,
company’s cash won’t be stagnant for long and it could be used for other investments also.
Moreover, as Project B having a longer payback period it poses greater risk

Page 15 of 18
BBUS1DAS LTCA – Trimester 1 2020 – Exam Paper
Question 6 (9 marks)

Part (a) (5 marks)

Cement Truck Enterprises operates a single-product entity selling cement trucks. Data relating to the
product for 2020 were as follows:

Annual volume 1,200

Selling price per unit $ 105,000
Variable manufacturing cost per unit $ 75,000
Annual fixed manufacturing costs $ 2,500,000
Variable marketing and distribution costs per unit $ 25,000
Annual fixed non-manufacturing costs $ 1,750,000

Required

(i) Calculate the break-even in both dollars and units for 2020 (2 marks)

(ii) Calculate the margin of safety in both units and sales dollars (2 marks)

(iii) Calculate the profit achieved in 2019 given the annual volume of units sold (1 mark)

Page 16 of 18
BBUS1DAS LTCA – Trimester 1 2020 – Exam Paper
ANSWER:

Part (a)

(i)

Break Even in units

¿ costs
Break even ( ¿ units ) =
Sales price per unit−Variable costs per unit
2,500,000+1,750,000
Break even ( ¿ units ) =
105,000−75,000−25,000
Break even ( ¿ units ) =850 units

Break Even in dollars

¿ costs
Break even ( ¿ dollars )=
Contribution Margin
2,500,000+1,750,000
Break even ( ¿ dollars )=
Contribution per unit
x 100
Sale price per unit
2,500,000+1,750,000
Break even ( ¿ dollars )=
105,000−75,000−25,000
x 100
105,000
Break even ( ¿ dollars )=892,500 dollars

(ii)

Margin of safety in units

Margin of safety=Budgeted Sales−Breakeven sales

Margin of safety=1,200−850
Margin of safety=350
Margin of safety in dollars

Margin of safety=Margin of safety∈units x sale price per unit

Margin of safety=350 x 105,000
Margin of safety=36,750,000

Page 17 of 18
BBUS1DAS LTCA – Trimester 1 2020 – Exam Paper
(iii)

Sales (1200 x 105000) 126,000,000

Variable manufacturing cost (1200 x 75000) (90,000,000)
Annual fixed manufacturing cost (2,500,000)
Gross profit 33,500,000
Variable marketing and distribution cost (1200 x 25000) (30,000,000)
Annual fixed non-manufacturing cost (1,750,000)
1,750,000

Part (b) (4 marks)

You and your best friend completed your Marketing Degrees 10 years ago and have built a successful
business that you wish to grow. The business will require larger premises, additional staff and
equipment such as computers, desks etc to maximise employee productivity. You do have a strong
client base and revenue streams.

List 3 forms of finance that you could use to finance your business and select and justify your preferred
method.

ANSWER:

Part (b)

We are mostly available for the following forms of finances;

 Debt financing
 Equity financing
 Combination of debt and equity financing

The preferred method according to me is Debt financing for some of the following reasons;

 Ownership of the company remains with me and my friend

 Our ownership will allow us freedom and flexibility
 Interest payments of loans will be granted as tax deductions
 Since the loans have fixed schedules, so it would be easy to plan for the repayment of loans,
as we have strong client base and revenue streams

Page 18 of 18
BBUS1DAS LTCA – Trimester 1 2020 – Exam Paper