Foundations in Financial Management (FFM)

Progress Test 1 (February 2020), Time: 1 hour 30 minutes

Section B – ALL FOUR questions are compulsory and MUST be attempted

Question 1
Explain what is meant by a Just-in-Time (JIT) system and briefly describe FOUR of its main
features.
(10 marks)
Question 2
Briefly outline the main features of:
(i) Standing order payments; and
(ii) Direct debit payments
(5 marks)
Question 3
You are an accounting technician working at EMW, a company that manufactures and distributes
clothing. You have estimated the following figures for the coming year:
Sales $5,600,000
Average trade receivables $506,000
Gross profit margin 25% on sales

Average inventories:
Finished goods $350,000
Work in progress (80% complete) $550,000
Raw materials $220,000

Average trade payables $210,000

Material costs (purchased on credit basis) represent 50% of the total cost of sales. EMW imports
most of its materials from overseas countries, especially Pernisia. The high inflation rates in
Pernisia have meant that the company’s cost of materials has risen rapidly over recent years. This
had led to a significant deterioration in the company’s margins, which, coupled with its increasing
liquidity problems, is making the shareholders nervous. All other costs are paid for in cash.

Required:

(a) Calculate the cash operating cycle, to the nearest days.

(6 marks)
(b) Suggest four methods of reducing the length of the cash operating cycle.
(4 marks)
(Total: 10 marks)
Question 4

Poor credit control has had a serious effect on the company’s overdraft, which currently stands at
$5 million, compared to $3 million at the same time last year. This, in turn, is pushing up interest
costs.
The company is therefore considering factoring its debts to improve its cash flow and reduce costs.
Credit sales for the last year totaled $8.5 million, with average receivables of $4.3 million. Next
year, sales are expected to be 20% higher and receivables days are expected to remain the same if
the factoring arrangement is NOT entered into.
A factoring company has put forward the following proposal to Bossy Limited:
(i) The factor would immediately advance 70% of the value of sales invoices outstanding.
(ii) The factor will charge interest of 12% per annum on the advances.
(iii) The factor will charge an administration fee of 1.5% of revenue for the service.
(iv) Receivables days will be reduced to 60 days, the industry norm, as a result of stricter
credit control procedures
Current bank overdraft rates are 9% per annum.

Required:
(a) Calculate for the coming year whether it is financially viable for Bossy Limited to
factor its debts.
(10 marks)
(b) Identify two advantages of factoring.
(2 marks)
(c) Suggest three methods other than factoring that may be used to prompt earlier
settlement from overdue receivables.
(3 marks)
(Total: 15 marks)

(Grand total: 40 marks)

End of Question Paper