BINDURA UNIVERSITY OF SCIENCE EDUCATION FACULTY OF COMMERC GRADUATE SCHOOL OF BUSINESS LEADERSHIP FINANCIAL MANAGEMENT AND ACCOUNTING (MBL 504) EXAMINATION PAPER DURATION: 3 HOURS 30 MINUTES Instructions and Information to Candidates Seetion A is compulsory and carries 40 marks. Answer ‘Question 1” from Section A and any three (3) questions from Section B. ‘The paper carries six questions. All Questions Section B carry equal marks of 20 cach. The use of cell phones is not allowed in the examination, Page 1 of 11SECTION A: [COMPULSRY| Mufaro Tom, has decided to invest in an established business in the manufacturing industry in Zimbabwe. He has seen the published financial statements of two companies Mwendamberi Leather and Nyathi Enterprises. ‘The core business of both firms is the manufacturing of leather bags for the export market. Mufaro Tom has requested that you advise him on the business that he should consider investing in based on the financial information presented below. Statements of Profit or Loss and Other Comprehensive Income for the year ended 31 December 2021 Muwendamberi Nyathi Enterprises Leather E i Sm Revenue 1478.1 Cost of sales : 1018.3 Gross profit z 459.8 Operating Expenses Hee 308.5] 408.6 Operating profit 151.3 166.9 | Interest payable 19.4 275 | Profit before taxation 131.9 B94 Taxation 32, 348 Profit for the year i 99.9 104.6 Statements of financial position as at 31 December 2021 [ "| Mwendamberi | Nyathi Leather ___| Enterprises Sm. I Sm operty, plant and equipment (cost less depreciation) Land and Buildings 360 | 510 Fixtures and Fittings [ 8&7 91.2 | L : 47 O12 Current assets eas Inventories 32) Trade receivables 1764 Cash at bank l we Page 2 of 11853 816.5 Total assets 1300 1417.7 [EQUITY AND LIABILITES pega : | Equity SI ordinary shares 320 __250 Retained earnings 367.6 624.6 See 687.6 874.6 ‘Non-current liabili PEE E | | Borrowings-Loan notes 190 250 | [Current liabi eeEeHHE eee PEPE [_ Trade payables 406.4 2157 [Taxation 16 174 i] _ 422.4 | 293.1 a0) eat Total equity and liabilities Additional Information ‘The two business have also proposed that Mufaro Tom should consider the human talent (craftsmen) as they constitute one of the key assets in their line of business. They therefore urged Mufaro Tom to include the craftsmen on the Statements of Financial Position (Balance Sheets) of the businesses, As at 31 December 2021 Mwendamberi Leather’s payroll had 300 craftsmen on payroll whilst Nyathi Enterprises employed 350. Required: ) Advise Mufaro Tom on the appropriateness of treating craftsmen as assets and whether treating them as assets would meet the conventional definition of an asset for inclusion on the statement of financial position (6 marks) b) Discuss the three methods that are normally used to analyse the financial performance of businesses. (8 marks) ©) Provide guidance on the attractiveness of each business with the aid of at least two financial ratios from the following categories: i profitability: ii efficiency; iii, liquidity; iv. gearing; Page 3 of 11v_ investment [20 marks} 4) Discuss the limitations of ratios as a tool of financial analysis. (6 marks) [Totat: 40 marks} SECTION B: Answer any three (3) questions from this section. QUESTION 2 The accountant for Mhofu Holdings has not been able to report for duty because of Covid-19 induced complications. The accountant had only managed to prepare the statement of profit or loss and other comprehensive income and the statement of fi ctor tancial position. The Managing Di has requested that you assist them with the preparation of the Statement of Cash Flows. Provided below are the financial statements that the accountant has prepared. Mhofu Holdings Statement of profit or loss and other comprehensive income for the period ended 31 December _ 2020 2021 serge rrr eases Revenuc _ 173 207 [Cost ofsaies | 96| 101] Gross Profit 77106 [Disuibution expenses [18 20] [ Administrative expenses 24| 36] ‘Other operating income 3 4 | Operating prot a [Interest payable 4 [Profit before taxation 3 @ ‘Taxation fee 16 Profit fo year L a4 Page 4 of 11Mhofu Holdings Statement of Financial Position as at 31 December 2021 [ ae 72020 2021 [ T ‘Sm [Sm ASSETS ‘Non-current assets [ Property, plant and equipment [ Tand and Buildings oF ii Plant and Machinery 3 «dL «C z 7 172 (Current Assets _ [Inventories ae 3 2 Treasury bills (short-term investments) * 15 ‘Trade receivables suai 26 Cash at Bank and in hand 4 o [Totar Assets 2a EQUITY AND LIABILITIES Equity ez re ee Ordinary shares OFS, Tally pac 70 00 Retained earnings fee 30 36 150 156 | Non-current liabilities a I Tt | Borrowings - loan notes(10%) 20 40 ‘Current liabilities = “Trade payables 3 ‘Taxation 4 of | a Total equi ie The following information has also been provided. 1. Included in cost of sales, distribution expenses and administrative expenses, was depreciation from the following sources: L 2021 Sm | Cand and buildings anes (aae [Plant and machinery, 6 10 Page 5 of IThere were no non-current-asset disposals in either year. The interest payable expense equalled the cash payment made during each of the years. The business paid dividends on ordinary shares of $14 million during 2020 and $18 million during 2021 5, The Treasury bills represent a short-term investment of funds that will be used shortly in ‘operations. There is insignificant risk that this investment will lose value. Required: a) Discuss the importance of the statement of cash flows to a busi (5 marks) b) Provide an explanation on why the profit for the reporting period for Mhofu Holdings is not equal to the net cash inflow for that period. ( marks) ©) Prepare a statement of cash flows for the business for 2021 (10 marks) [Total: 20 marks} QUESTION 3 Portia Jones has established a perfumery that produces three brands of fragrances that are targeted at both male and female clients. The three perfumes (Duo, Deal, Cool) are produced by the same staff. Portia has made the following estimates for next year: Perfumes. Brands Duo Deal Cool Selling price (S/unit) 30 39 20 Variable material cost (S/unit) 15 18 10 Other variable costs (S/umit) 6 10 5 Share of fixed costs (S/unit) 8 12 4 Staff time required (hours) 2 3 1 Fixed cost for next year is expected to total $40,000, Portia Jones considers Duo to be the flagship perfume of her company. She has also received projections regarding demand for her perfumes in the next financial year from market analysts, Page 6 of 11These are as follows: Perfume Demand in Units 1 Duo 3.000 2 Deal 2.000 3 Cool 5.000 Portia has requested that you assist her with the analysis of the future of her business. Required: a) Determine the number of units of the perfume that the business would need to produce in order to break even if Portia’s business were to produce just the Duo next year and assuming there is no limit to market size and staffing level. (4 marks) b) In the event that Portia’s perfumery has limited staff hours available next year, advise her oon the order of preference or ranking for the three perfumes. (S marks) ©) Determine the quantities the business should produce for each product and compute the profit the company would earn, in the event that Portia’s business only has a maximum of 10,000 staff hours available next year. (5 marks) 4) Discuss the four areas of decision making where marginal analysis can be used. (6 marks) [Total: 20 marks} QUESTION 4 Mambokadzi Tiles is a newly established company based in Bindura, The company produces a range of ceramic products for sale within the Northern Province. There has been a surge in demand for the company's products and as a result, the directors have decided to expand production. The cost of acquiring new plant and machinery and the increase in working capi | requirements are planned to be financed by a mixture of long-term and short-term borrowing. Page 7 of 11The directors have since approached you for advice. Required: (a) Discuss the major factors that should be taken into account when deciding on the appropriate mix of long-term and short-term borrowing necessary to finance the expansion programme. (10 marks) (b) Discuss the major factors that a lender should take into account when deciding whether to grant a long-term loan to the business. (6 marks) (©) Identify three conditions that might be included in a long-term loan agreement. (4 marks) [Total 0 marks} QUESTION 5 You have just joined a new company, PK Holdings as financial advisor to the Chief Executive Officer. Your first assignment is to review the following set of financial statements. PK Holdings Statement of Profit or Loss and other Comprehensive Income for the year ended 31 December 2021 $000 Revenue 1456 Cost of sales (768) Gross profit 688 Salaries (220) Depreciation (249) Other operating costs (31) Operating profit 88 Interest payable (5) Profit before taxation B Taxation at 30% (22) Page 8 of 11Profit for the year 51 PK Holdings Statement of financial position as at 31 December 2021 $000 ASSETS Non-current assets Property, plant, and equipment at cost 1,570 Depreciation (690) 880 Current assets i Inventories 207 Trade receivables 182 Cash at bank 21 410 Total assets 1290 EQUITY AND LIABILITIES Equ Share capital 300 Share premium account 300 Retained earnings at beginning of year 104 Profit for year SL 755 Non-current liabilities Borrowings (10% loan notes repayable 2025) 300 Current liabilities Trade payables 88 Other payables 20 Page 9 of 11Taxation 22 Borrowings (bank overdraft) 105 235 ‘Total equity and liabilities 1290 From an carlier meeting with the Head of Internal Audit, the following information had been brought to your attention: 1, Depreciation has not been charged on office equipment with a net book value of $100,000. ‘This class of assets depreciated at 12 per cent a year using the reducing balance method. for $30,000 and delivered on 29 December 2021 ‘A new machine was purchased, on credit, but has not been included in the financial statements (Ignore depreciation.) A sales invoice to the value of $18,000 for December 2021 has been omitted from the financial statements. (The cost of sales figure is stated correctly.) 4. Dividends amounting to $25,000 had been approved by the shareholders before 31 December 2021 but was unpaid at that date, This is not reflected in the financial statements. 5, The interest payable on the loan notes for the second half-year was not paid until I January 2022 and has not been included in the financial statements, 6. Bad debis are to be written off representing 2 per cent of trade receivables outstanding at the year-end, 7. An invoice for electricity to the value of $2,000 for the quarter ended 31 December 2021 arrived on 4 January 2022 and has not been included in the financial statements 8. The charge for taxation will have to be amended to take account of the above information, (Make the simplifying assumption that tax is payable shortly after the end of the year, at the rate of 30 per cent of the profit before tax). Required: 1a) Discuss the importance of the two financial statements that you have been requested to review. (5 marks) b) Prepare a revised set of financial statements for the year ended 31 December 2021 incorporating the additional information in 1 to 8 above. (Work to the nearest $1,000.) Page 10 of 11(15 marks) [Total: 20 marks} QUESTION 6 Discuss the link between budgets and strategic plans and objectives of a business and the usefulness of budgets to business managers in Small to Medium Enterprises in Zimbabwe. [20 marks} END OF EXAMINATION PAPER Page 11 of 11