QUESTION 1

1.1 Contingency happens when a current circumstance has a result that is obscure and
questionable and won't be settled until a future point in time .An unexpected risk brings
about a negative commitment for the organization. Components of budget report
Considering of moderate methodology, we should follow the act of revelation of unexpected
obligation unveiled in the fiscal summary of the organization as a note to accounts.

This happens

•There must be a potential present commitment from past occasion .

•The outpouring of financial assets to settle the commitment isn't plausible

•Such a chance of an outpouring of assets isn't distant

•The measure of commitment can be sensibly estimated

In fiscal reports of the organization component of unforeseen obligation will be included if

the event of things to come occasion (losing the case) is likely. In the event that likelihood is
100% the case will be lost dependent on the organization legitimate opinion, the obligation
for the sum will be perceived. In any case, any legitimate costs that are caused in such
manner will be cost paying little heed to losing or winning the case.

1.2 Recognition criteria in the proposed conservative accounting which considers the past
experiences of the company and other legal opinions which help to calculate the probability
based on which liability is created. Expense recognition will be based on actual occurrences
basis.
Recognition Criteria for expense and liability
 If possible, of an outflow of resources is not remote
 The amount of obligation can be reasonably measured
1.3 Since it is probable that the case is in favor of plaintiff amount of compensation and other
charges expected will be recorded as contingent liability. Once the contingent liability meets the
recognition criteria the company must pass the journal and book expenses and create a current
liability in the financial statement

Question 2
2.1. Challenges for small business for calculating of fixed asset depreciation are as
follows:

 Small business does not have adequate managerial resources for estimation of the
useful life and depreciation of assets in the long run .

 Improper estimations of Costs and maintaining records regarding depreciation

calculations and disclosures.
  Small company generally have an existence crisis and their assets may be having a
higher life than the company's life so they are sometime having a problem of proper
identification of life of asset in advance.
 There is a high amount of cost which are related to ascertainment of receivable amount
and realizable values so it will not be easily estimated.
 If any financial year gets a little profit in that year if they charge depreciation that may
convert those profits into losses.
 If they start depreciating assets, they have to comply with income tax depreciation also
and has to maintain deferred tax asset and deferred tax liabilities.
 Small business do not have sufficient managerial sources to maintain deferred assets
and liabilities.
 Small business cannot estimate life of the asset, residual value of asset.
 Small business cannot afford maintaining of accounting standards and reporting
standards

2.2  

Residual value :-

The residual value is the estimated value of a fixed asset at the end of its lease or at the end of
its useful life. The lessor uses residual value as one of its primary methods for determining how
much the lessee pays in lease payments. As a general rule, the longer the useful life or lease
period of an asset, the lower its residual value.

Useful life of asset :-

The useful life of an asset is an accounting estimate of the number of years it is likely to remain
in service for the purpose of cost-effective revenue generation. The Internal Revenue Service
(IRS) employs useful life estimates to determine the amount of time during which an asset can
be depreciated. There are a variety of factors that can affect useful life estimates, including
usage

Question 3

3.1

Total cash inflows = 2+2.25+2.2+2.1 =8.55

In payback period is = i.e. how much time it takes to cover initial investment of 6 million

Therefore, cash inflows of project in 2+2.25+2.2=6.45

In payback period without considering time value of money year cash inflows, simply it takes 3
years or

in 3rd year cash inflow 2.2 = 12 months

We required (6-4.25). 1.75 cash inflow how may months?

= 1.75*12÷2.2 = 9.545 months

Therefore, payback period is 2 years 9.545 months.

NPV calculation:

@10% cost of capital year 1 = 0.909*2 =1.818

Year 2 = 0.826*2.25=1.8585

year 3= 0.751*2.2 =1.6522

year 4 = 0.6830*2.1=1.4343

total cash inflows =6.763

Less initial investment=6

Therefore npv= 0.763 million

Positive npv,we can accept project.

3.2 Payback Period = Cost / Future cash inflow

Project X:

Payback Period = 2.5 / 1 = 2.5 years

Project Y:

Payback Period = 2.5 / 1.75 = 1.43 Answer

The payback period cutoff is 2 years.

We will accept a project whose payback period will be lower than 2 years.

Hence, project Y should be accepted since it has a payback period that is lower than 2 years

Question 4

4.1 Answer -Gross profit on cost of sales, expressed as percentage 60%

% of Gross profit on cost of sale

Gross profit = Sales- Cost of goods sold

Gross profit = 9000000-5625000

Gross profit = 3375000

Gross profit % or Rate = Gross profit/Cost of Goods sold

3375000/5625000)*100
 Gross profit % 60%
Note :

Gross profit Margin Ratio is Different from Gross profit rate or percentage .. The profit Rate is
determined by dividing the Gross profit by cost of sales and multiplying by 100

Gross profit ratio is the percentage of gross profit on total revenue. That is (Gross profit/Total
Revenue)*100

4.2 - Answer -Net profit on sales, Expressed as percentage -10.04%

% of Net profit on sale

Net Profit = 904000

Sales 9,000,000

Net Profit %= Net profit/Total revenue

(904000/9000000)*100

Net Profit % 10.04%

4.3 Operating profit on sales expressed as percentage -15.81%

% of Operating profit on sale

Operating profit = 1423200

Sales 9,000,000

Operating profit %= Operating profit/Total revenue

(1423200/9000000)*100

Operating profit % 15.81%

4.4- Current Ratio - 2.3

Current Ratio

Current Ratio Current assets /Current liabilities

Current assets

Inventories (all trading stock) 1640000

 Trade and other receivables 110000

Cash and cash equivalent 107,000.00

Current assets 1,857,000.00

Current liabilities

Trade and other payables 705000

SARS 32000

Current portion of loan 68000

Current liabilities 805000

Current Rati 1857000/805000

Current Ratio 2.306832298

or 2 approx-
Note :The business currently has a current ratio of 2.3, meaning it can easily settle each dollar
on loan or accounts payable twice. A rate of more than 1 suggests financial well-being for the
company. There is no upper-end on what is “too much,” as it can be very dependent on the
industry, however, a very high current ratio may indicate that a company is leaving excess cash
unused rather than investing in growing its business.

4.5 - Acid Test Ratio - 0.269

Acid Test Ratio

Cash and cash

equivalents+Trade receivables+
short term Investments /Current
Acid test Ratio liabilities

Short term Investments 0

Trade and other receivables 110000

Cash and cash equivalent 107,000.00

217,000.00
 Current liabilities

Trade and other payables 705000

SARS 32000

Current portion of loan 68000

Current liabilities 805000

Acid test Ratio 110000+107000/805000

Acid test Ratio 0.269565217

0.2 Approx
Note : Ideally, companies should have a ratio of a 1.0 or greater, meaning the company has
enough current assets to cover their short-term debt obligations or bills.

4.6 Debt equity Ratio - 0.376

Debt equity Ratio

Total Liabilities/Total
Debt equity Ratio Shareholders equity

Retained income 1213000

Ordinary share holders equity 3698000

Ordinary sharecapital 2,485,000.00

Total share holder's equity 7,396,000.00

Current liabilities

Trade and other payables 705000

SARS 32000

Current portion of loan 68000

Current liabilities 805000

Noncurrent liabilities 1980000

 Total Liabilities 2785000

Debt equity Ratio 0.376554895

Debt equity Ratio 0.376

0.4 approx
Note

The optimal debt-to-equity ratio will tend to vary widely by industry, but the general consensus
is that it should not be above a level of 2.0

Question 5

Procurement strategies are alluded to as an organized cycle or procedural strategy utilized by

proprietors to gain development items and administrations. Acquisition is likewise called as
sourcing, which means gathering administrations and products from the readiness and of
solicitation through the endorsement of articulation for installment. This includes buy arranging,
financing, making the buy, stock control and stores, explicit turn of events, standard assurance,
provider examination and choice, flexibly contract organization, removal and other related
capacities, esteem investigation and value arrangement. Obtainment assumes significant
function in work connection between parties associated with the development cycle.

There are a few different ways to categorize procurement strategies.

1. Risk taken by each group

2. Information accessibility at the time of appropriating contracts or tenders.

3. The method of plan and development is requested and kept up.

Picking the procurement frameworks is a risky decision. The primary risks obtained at the time
of task or project to customers, contract-based workers(Contractors), sub-contract workers, plan
and design team and providers are in completion deadlines, development cost, design
ampleness, risk or liability deformities, safety, quality, workmanship and so forth.

The workers or contractors are chosen by some competition or exchange with a solitary
organization’s point considered in listing a tender are as follows,

• Financial standing and records

• Experience in comparative contracts in recent periods.

• Capable administration or management.

• Capacity.

Time, Cost and Quality of construction are the different options used to address the clients’
objectives.

There are various procurement strategies accessible. Some have a long life which was
proceeded till now. Some vanished. It relies upon the consequences of the past projects. A few
frameworks or systems are in extensive use. Some will suite for the temporary worker or
contractor. Some will be appropriate for the customers.

Procurement types:

 Lump sum or traditional procurement

 Design and build
 Management contracting
 Framework agreement
 Public private partnerships
 Construction management

1. Traditional procurement:
This is most common strategy for procurement It is reasonable to all customers,
including experienced customers and it is time unsurprising and cost conviction. It is
appropriate for quick track ventures or projects. In this method customer designates a
group of advisors to start planning and furthermore delicate administration. The
customer also selects a building contractor, to build or construct the structure according
to plan with finish date according to affirmed rates. Most work will be circulated to the
sub-contractual workers and the contractual worker stays mindful. Customer selected
advisors administrates the extend and prompt the angles related with progress, plan and
installments. This is okay choice for the customers to limit the postponements, plan
disappointments and so on. In any case, now and again the danger will increment, when
the plan stage is hurried and furthermore when delicate records are not completely
finished. The two-phase offering is alluded as the quickened conventional strategy. By
this plan and development cycle will simultaneously for some time.

Advantages:
 Design was fully developed, and cost is detailed before the building contractor being
signed.
  This method will give clients very customized building.
 The design and construction were split into separate sections will give clear
responsibilities.

Disadvantages:
 It’s difficult to fine the responsibility for errors and omissions.
 Different parties involved in the contract can create climate antagonistic.
 Unexpected circumstances will change the final cost of the project than original
tendered amount. But proper planning keeps this under control.

2. Design and Build:

In build and design procurement technique, a solitary contractor is chosen for design, planning
and development activities. Subcontractor will be chosen by the fundamental or main
contractual worker. The principle attributes of this obtainment technique are: Single association
will be designated for both form and development of undertaking. It might be temporary worker
or expert. The development works will be done by subcontractors when taken care of by the
temporary worker when the undertaking is given to contractual worker. Customer will oversee
subcontractor when the venture is given to the advisors. The plan and manufacture acquirement
framework is characterized as: Design and fabricated association acts as specialist with direct
contact with customer for plan and working of undertaking. All bundling works are among plans
and construct association. Graph : Flow visit of Design and Build acquisition technique. Utilizing
this agreement plan and fabricate framework, customers acquire single or two serious offers.
The reasonable contractual worker who contains the customer's necessities and configuration
will be given the agreement.

Installments will be made on net expense of work contract-based workers. Open book strategy
bookkeeping will be done in planning and fabricate technique to make the monetary records
accessible for the customers or budgetary counselor, to confirm the genuine expense of the
undertaking with records.

The quality control will be issue with the obligation for capacities permitted to the plan and
fabricate temporary worker. In any case, creating quality control was finished by type of
reviewers, which were delegated by the customer.

Advantages:
 Single point of Responsibility: the manager is responsible for design and construction.
The client should have single point of responsibility. This method is more advantageous
than other, where the client employee separate designers and construction agreements.
If the claim is done, the contractors, designers and architects blame each other of their
responsibility.
 Price certainty: Design and build gets more price certainty than other forms of
procurement methods. Many of design and build contractors include guaranteed
maximum price (GMP). Design and build contractor can’t claim for loss and expenses for
late instructions from architects. This kind of claims can be done under traditional form of
procurement method. The fee paid for the professionals is also less and depends on the
roles of the professionals.
 Speed: It can be easily achieved from design and build method, by starting the work
at site earlier than the traditional forms of contract. The contractor is not relaying on
design and supply information, this is called single point of contract. This type of method
 will allow budget and programmes level of control to the contractor. So the construction
process is likely to be quicker.
 Buildability: The contractor is responsible for design and construction, so the project is
more likely to be buildable than other procurement methods.
 Claims: It’s not easy to claim because it’s a single point of responsibility.

Disadvantages:
 Design quality: Design and build method is not an exact procurement method where
high priority of design quality is not given because of certainty among the architects.
 Additional design fee: If the client likes to take independent advice on design matters
where the building contractor involved, then this will cost the client to pay additional fee
to the design team of the contractor.
 Inflexibility: Once the contract proposal is agreed, the scope for client to make
changes in his requirement is less otherwise the cost consequences will be prohibitive.

3. Management contracting:

The board contracting is one of the most well-known techniques for procurement . In this
customer selects specialists to plan drawings and task subtleties. The administration
contract was chosen by offering, paid bases, prime expenses and the board charge. The
principle function of the board contract is to deal with the execution of work. The
fundamental contractual worker doesn't include in any sort of development work legitimately.
It will be finished by bundles which were attempted by sub-contractual workers, which were
designated by the executive’s contractual workers. At times, the administration temporary
workers likewise concur plan liabilities. In this the works contracted were legitimately and
legally mindful to the administration contractual worker. The administration temporary
worker's commitment is to acknowledge duty regarding plan and development implies. It
alluded as 'Plan, Manage, Construct' it is called as included as contractual worker drove
acquisition. In this the drove planned answerable for generally speaking plan and director
was liable for coordination of work. It is appropriate for quick track ventures, complex
structures and creating brief. It isn't reasonable for unpracticed customers. Cost assurance,
and unrealistic to move the all-out danger to contractual worker. This methodology will cover
plan and development progress. The installment is made based on cost of work with
concurred expense by the overseeing contractual worker. Achievement of undertaking is
primarily relying upon the temporary worker's group. Value assurance is less in light of the
fact that the development begins before fruition of all plan works. This implies a significant
number of bundling attempts to be offered later in the development stage. Means the plan
and work bundles are balanced appropriately to keep the undertaking inside the financial
plan. Plan and development will in general be not as much as plan and assemble
techniques.

Advantages:
 This system enables client to obtain Guaranteed Maximum Price (GMP) for the
construction element of project from the management contractor.
 It is used to accelerate the project process. The risk of delay will be overcome by
timely targets.
Disadvantages:
 Project cost incurred in this system is higher, when compared with design and build
system.
 When guaranteed maximum price (GMP) achieves, the management contractor
position with clients as consultants will be at risk.
4. Framework agreement:

Framework agreement is established with limited number of suppliers or single suppliers. It will
allow suppliers bring together with relevant experience which will save both the parties when
more projects involved. This method of procurement includes all forms of procurement methods.
Like traditional, design and build etc. the developing framework agreements for consultancy
service will be done by LSC (Learning and skill council). Reduced transaction costs. Continuous
improvement within long-term relationships. Framework agreement with number of suppliers or
single supplier can result in significance savings to both parties. No need for constant re-
tendering at call of stages. When the contract conditions are unchanged for all projects, there
will be substantial gains from continuous improvement. When the term changed, small
competitions within framework will takes place. Client may have more framework suppliers for
different requirements. The resource implications for client should be decided whether they
need one framework supplier under one framework agreement are not.

Advantages:
 Single tendering for the life of the framework agreement.
 Reduction of cost and administrative efforts.
 Initial tendering allows contractors to know competitive supply and should offer
competitive prices for expected value of business.
 The range of supplies will be provided is short time by contracting authority, it reduces
the stock holding for goods and also reduces time and equipment maintenance and
repairs.
 Long term working relationship can be established with the supplier.
Disadvantages:
 This is a closed system, once the framework agreement is established then new
suppliers cannot be admitted.
 Competitive reopen can be considered onerous, if its structure is not planned properly
in framework agreement.

5. Public private partnership:

Public private partnership is an association among public and private sector implies the
administration and private gatherings did the undertaking together on the concurred division of
errands and dangers. Each gathering keeps its own personality and duties. The public private
association is becoming because of interest in framework. The restricted reserve in the public
division prompts get together with private part, in this arrangement of foundation. The rule trusts
PPPs is that the public segment is liable for the best possible conveyance of administration and
it isn't liable for genuine offering support.

Significant public part extends have consistently attempted by private segment contract. The
significant distinction between all the acquisition strategies and this strategy was, private area
viewed as a completely fledged entertainer.

Advantages:

 Value for money

 Risk transfer
 Long term nature of contract
 Performance measurement of contracts.
  Private sector management skills
 Cost efficiency
 Time to delivery saving
 Reduction on the public treasury
 Board support
 Improved cost calculations

Disadvantages:
 Insecurity
 Higher transaction cost
 Higher capital cost
 Inefficiencies
 Culture gap
 Short term rigidities

6. Construction management:

In construction management procurement the total services are between the package
contractors and clients. This will show the difference between management contracting. In this
approach the client will contact directly with sub-contractors. Here the construction manager
acts as an employee agent. When dealing with sub-contractors.

Advantages:
 Positive attitude and more constructive being exhibited at all levels. i.e. management,
supervising and operative level.
 The proper using of value engineer by construction manager.
 Client’s involvement is a bit higher when compared when compared with remaining
procurement methods. It will promote better working relationship with project team.
 In this method the clients will direct contact with subcontractors, which will improve
subcontractor’s cash flow. Means direct payments from the clients.

Disadvantages:
 Client must involve deeply into all course of works. He must also able to manage
construction manager and design consultants.
 The fee to the construction manager will vary from project to project; it will depend on
the size of the project and roles of the construction manager.

For Example, with reference to South Africa:

An indicator of an effective construction industry is the completion of a construction project on

time, on budget, and on specification, which are all considered to be major project objectives.
However, in the South African context, over and above these criteria, empowerment and
employment creation are also considered to be crucial project/client objectives. All of these
project objectives may be impacted on by the procurement methods used. Typical procurement
methods include traditional, design/build (DB), and construction management (CM) procurement
techniques. These procurement methods which are all used within the South African
construction industry. The findings of a study show that the traditional method of procurement is
currently the most used route used for procurement in construction project in South Africa.
Moreover, the findings also reveal that using the DB method will improve the project/client
objectives. Based on this, the study concludes that the DB method will produce the best
outcome in terms of the project/client objectives in the South African construction industry. The
study thus suggest that public sector clients such as government and city councils, should be
advised on the benefits of using the DB methods for procurement of their construction projects,
as it will lead to the accomplishment of most of their project objectives.