LSLSS

FIN3702

ernest
Luciano school of law and social sciences
LSLSS
Table of Contents
MAY/JUNE 2013 ............................................................................................................................................ 2
SECTION A ................................................................................................................................................. 2
SECTION B ................................................................................................................................................. 4
QUESTION 1 .......................................................................................................................................... 4
QUESTION 2 .......................................................................................................................................... 4
OCT/NOV 2013 .............................................................................................................................................. 6
SECTION A ................................................................................................................................................. 6
SECTION B ................................................................................................................................................. 8
QUESTION 1.A ....................................................................................................................................... 8
QUESTION 1B ........................................................................................................................................ 9
QUESTION 2 ........................................................................................................................................ 10
MAY/JUNE 2014 .......................................................................................................................................... 11
SECTION A ............................................................................................................................................... 11
SECTION B ............................................................................................................................................... 13
QUESTION 1 ........................................................................................................................................ 13
QUESTION 2 ........................................................................................................................................ 15
OCT /NOV 2014 ........................................................................................................................................... 17
SECTION A ............................................................................................................................................... 17
SECTION B ............................................................................................................................................... 20
QUESTION 1 ........................................................................................................................................ 20
QUESTION 2 ........................................................................................................................................ 21
MAY /JUNE 2015 ......................................................................................................................................... 24
SECTION A ............................................................................................................................................... 24
SECTION B ............................................................................................................................................... 27
QUESTION 1 ........................................................................................................................................ 27
Question 2 ........................................................................................................................................... 28

1
MAY/JUNE 2013

SECTION A
QUESTION ANSWER
1 3 INCREASEIN A CURRENTASSET ITEM IS
AN OUTFLOW.THE OPPOSITE IS ALSO
TRUE
2 3
3 2 (R25-R50+R30-R20+15-R35+5)
Increase in current asset and decrease in
current liabilities is an inflow, the opposite is
true.
4 2
5 4 Free cash flow =NFA(300 000)
DPN(200 000)
CA(150 000)
CL75000
OCF 700000
=125000

6 4
7 2 Not all accounts payable accrual collections
or purchases or dividends paid.
8 2 Cash receipts 400 000
Disbursements (500 000)
( 100 000)
OB 350 000
+250 000
Mini Bal (250 000)
0

9 3 It’s a cash budget not a sales forecast.

10 2 Current assets
Receivables 45 000
Inventory 55 000
Cash 2000
102 000
Less current liabilities
Account payables(90 000)
Overdraft (14000)
Networking capital(2000)
11 2 Current assets –current liabilities.
10000-5000=5000

12 2 15%×20000
=3000
13 4
14 2 Conservative financing strategy use long term

2
 financing to fund permanent assets, including
spontaneous forms of short-term finance.
15 2
16 3
17 1 Level of inventory =safety stock
+stock during the lead
period
(3×35)+(5×35)
=280
18 1 ABC inventory system from textbook
19 4 Definition from textbook
20 3 CD (2%) × 365
100%-CD% N (45-10)
21 2 16%×35 =1.55% 1.53%×365
365 100% 153%
=16.24%

22 2
23 1 15000×10%×60=2466
365
24 3
25 3 Only on the amount borrowed
Answer4 refers to a revolving credit
agreements
26 1 As defined in textbook
27 2 12%×100 000 =120000=13,33%
(100%-10%)1000000 90 000
28 3 𝐻
180
9% × 25000 × 360 = 1125 360
−1
25000 − 1125 180
( )

9.65

29 2 120
10%100 000×360=33333,33
30 1

3
SECTION B
QUESTION 1
Q11) average cash conversion cycle on old times ACP +AIP-APP

30 +40-10=60 DAYS

New terms

30+40-(10+20)=40days
60 40
Annual savings[365 × 18000 000 × 12%] [365 18000000 × 12%]

355 068-236 712

118 356

Q1.2) Four strategies for Management of cash cycle

QUESTION 2
Q2.1 Additional contribution

(36000 000-3000 000)×20%

=120 000

4
2.2) increase in Accounts Receivable and the Cost attribute

Increase in Accounts Receivable

=Existing Accounts Receivable –Expected receivable

EXISTING EXPECTED

45 90
×3000 0000 365
×3 600 000
365

=369 863 =887 671

Increase =887 671-369 863

=517 808

Cost = 517 808×16% =82 849

Q2.3) annual cost expected from increase in Back

Existing bad debt -expected bad debt

(1%×3000 000) - (2.5%×3 600 000)

30000 -90 000

(60000) increase

Q2.4) basic features of pledging trading Receivable and Factory

a) Pledging trade receivables b) Factory Trade & Receivables

DEFINITION
It is the use of a firm trade receivables as security
,or collateral to obtain a short-term loan
FEATURES
Lenders file a lien ,which is a publicity disclosed
legal claim on the Loan collateral
Pledges on a New notification basis ,meaning the
account customers whose account has been
pledged is not notified to remit payment directly
to the pledge or lender
Pledging cost is normally 2-5% above prime cost
-usually provided by commercial banks and
commercial finance companies.
DEFINITION
It is the outright sale of trade
Receivables at a discount to a factor or other
institutions
FEATURES
Selected accounts are sold without recourse .All
credit risk go with the account
Usually on a notification basis ,meaning the
account customers whose account has been
restored is notified to remit payment to the
factor
-interest on the advances is usually 2-4% above
prime
-Provided by factors, commercial bank and
commercial finance companies.

5
OCT/NOV 2013

SECTION A

QUESTION ANSWER

1 4
2 3 Fixed are investment cash flows
3 2 Cash flows from operating act 20000
Cash flows from investing act 15000
Cash flows from financing 1000
Net decrease in cash 5000
4 2 *insolvency as in sense of inability to
have cash
*NB the company is profitable have
(200 000-150500) = 49500
*note also the company has fully paid
inventory
:. Inability credit is not an issue
5 3
6 2  All others are non-cash items
7 4
8 1 Cash Receipt 10 000
Disbursement (8000)
(ignore depreciation) 2000

OB 500
Financing
(bal figure) 500
Minimum balance 3000
9 4
10 2 NB quoted straight from textbook
11 3
12 1 *the opposite is true; cash flows
(inflows) are not predictable. Outflows
are more predictable
13 2
14 2 60/360 x 12000 000 x12% - 50/360 x
12000 000 x 12%

6
 =240 000 -200 000
=40000
15 4 Operating cycles
AIP +ACP
365/8 +6 = 106 DAYS = 25ML
:. DAILY = 2800 000/365
16 4
17 1
18 3
800 𝑥 2 𝑥 300
√
50
19 1 Re-order point = lead time stocks =
safety stock
30+5
=35 days x 800/360
= 77.77 days
20 2
21 2 NB textbook definition
22 1
23 2 10% 𝑥 125000
1 + (125000 [(20% 𝑥 125000)−15000] − 1
=10.87%
24 1 Bank A BANK B
0.009(IE0.08+0.01) 0.10(IE
0.08+002)
(1-0.09-0.2) (1-0.15)
=12.68% =11.76%
25 3 Prime plus is in a range of 0% and
cocupensify balance is in a range of
10% - 20%
26 3
27 1
28 4
29 3 15% x1000x90/365
=369.86
30 1 369.86/10000
=3.70%

7
SECTION B

QUESTION 1.A

Question 1.1

Operating Cash flow

=NOPAF + depreciation

= 30000 x (1-T) + 3000

= 30000-8000 +3000

=25000

Question 1.2

Free cashflow
Cash generated from activities
Operating cashflow 25000

Change in working capital 13000

Increase in receivables (39000-45000) 6000
Increase in inventory (27000-30000) 3000
Increase in payables (28000-3000) 5000
Increase in accuals (1000-2000) 1000
Decrease in notes payable (50000-4000) 10000
12000

Investing activities
Net investment in priced assets
(22000-24000-depreciation 3000) 5000
Total free cashflows 7000

8
QUESTION 1B

Question 1.1

Additional contribution

New terms Old terms

Sales 510 000 45 000

Variable [345000/450 000 x 51000] (391 000) 345 000

Contribution 119 000 105 000

:. Increase contributuin = 119000-105000

=14000

Question 1.2
Increase in average investment New
[60/365 x 510000 x 20%] – [30/365 x 450 000 x 20%]
=16767 7397
=9370 increase in cost

9
QUESTION 2

Cash Budget for april, May, June

April May June

Caqsh Sales 56000 44800 30400
 1st lag sales 8800 7000 3500
 2nd lag sales 4600 4400 5600
Total 69400 56200 39500

Disbursements 66044 52626 31188

Cash purchase 59% x 60% 16520 13216
-payment after 1 month 60% x59% 31152 24780 19824
-overheads 10% x 59% preceedingly 5192 4130 3304
month sales
-salaries and ways 11% of proceeding 9680 7700 6160
months sales
-sales commission 5% 3500 2800 1900

Net cashflow 3356 3574 8312

Opening cash balance 10 000 13356 16930
Minimum cash 3000 3000 3000
Financing
Excess 10336 13930 22242
Closing balance
13356 16930 25242

10
 MAY/JUNE 2014

SECTION A

QUESTION ANSWERS
1 2
2 5
3 2 (12 000-10 000+4000)
4 4
5 1 2 × 126000 × 200 2×0×0
√ √
(𝑅25 × 20%) ℎ
=3174.90
6 4 126000
3175
=39.68then round off
7 2 A greater tax deduction will make
cashflows bigger after adding
depreciation back to NOPAT
8 4
9 3 Cash receipt for June
Jan -10%×4000=400
Dec-4%×3000=1200
Nov-50%×1000=500
21000

10 3
11 2 A negative play figure means a firm
will generate more financing that what
is required therefore the opposite is
also true for a positive plug figure
12 2
13 4 Operating cycle =average inventory
days (90) +average collection period
14 3 Ccc=average collection period
(60)+period of purchase at raw
material up to sale(i.e. for
manufacturing firms ) (100) days –
average payments days 30 days =130
15 1 Everything is financial with long term
debt
16 2
17 2
18 1 Re order point =safety stock
+leadtime
250
(250+ 40 × 15𝑑𝑎𝑦𝑠)
250 + 95.75
343.75
19 3

11
20 3 -increase in sales –units
Profit po unit decrease because
allowed an increase in discount
allowed
-decrease in receivables as payments
are received earlier.
Therefore less bad debts
21 1
22 2 1000 000-(10%×1000 000)=990 000
23 4 Cost of giving up discount
2% 360
98%
× 45−10=16.3%
24 3 5% 360
×
100%−5% 120−20
=18.94%
25 2 12% ×1 000 000 120 000
=
(100%−10%)1 000 000 900 000
=13.33%
26 3 3% 360
× = 74.226%
100%−3% 30−15
27 3 Assumption interest is compound
12%
daily(1 + (365𝑑𝑎𝑦𝑠)-1==12.74%
28 1
29 1
30 3 Nov net cash flows 190
Opening balance
(250-Sept less
200 cashflow oct 50
Less mini bal 50
Financing
Excess 190

12
SECTION B
QUESTION 1

QUESTION 1.1

Amounts invested in the companys cash conversion cycle.

Inventory

Inventory days =100-45

=55
𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
=55=𝑐𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 ×365

𝑥
=75%×12 000 000×365

55
×9 000 000=x
365

X=1356164

Debtors
𝑑𝑒𝑏𝑡𝑜𝑟𝑠
45 = ×365
𝑠𝑎𝑙𝑒𝑠

𝑥
45=12 000 000×365

45
X=365×12 000 000

=147 9452

13
Creditors

𝑐𝑟𝑒𝑑𝑖𝑡𝑜𝑟𝑠
35=𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠×365

𝑥
35=12 000000 ×75%×65%×365

35
X=365×5850000

=56 958

Therefore amounts invested =1356164+1479452-560 958=2 274 658

b)creditors under 45 days

45
5880 000=721233
365

Increase in creditors finance =721 233-560 958=160 275

160275
Daily savings = ×16%=R70.26
365

QUESTION 1.2

b)

Operating cycle

Average inventory days +average receivables days.

360
7.2
=60

50+60

110days

b)

cash conversion cycle

operating cycle –average payment days

110 days -40 days

14
70 days

c)

amount of resource required to support the cash conversion cycle.

𝑐𝑐𝑐
× 2 500 000
360
70
360
×2 500 000

486.111

QUESTION 2

2.1.)Additional profit contribution

Before after
3000 000 ×1-5% 3000 000 2 850 000
Valuable costs (2 100 000)
2100 000 (1995 000)
3 000 000
×285 0000
Contribution 900 000 855 000
There is a decrease in contribution of 45000 (855 000 -900000)

Q2.2) marginal cost of investment in accounts receivables

Before after
𝐴𝐶𝑃 45 45−15
360
×SALES ×3
000 000 ×2850 000
360 360
=375 000 237 500
Required ratio of returns 15% 15%
×56 250 ×3 35625

Therefore, there is a decrease in costs of 20 625 (56 250-35 625)

The cost of Marginal Accounts Receivables

20625
×100%
375000−237 500

15
=+15%

Q2.3) cost of marginal bad debts

Before after
Bad debt
2% ×3 000 000 60 000
1%×2850 000 28500
Therefore decrease in bad debt by 31500 (60000-28500)

The cost of marginal bad debts

31 500
3 000 000 − 2850 000

+21 %

16
OCT /NOV 2014

SECTION A

QUESTION ANSWER

1 1
2 2 NB) 1st prepare a sales forecast, then
operating budget
3 3
4 4 -all of the above
5 2
2𝑥1600𝑥75
√
𝑅4
=245
6 1 EOQ/2 = 245/2
7 4 1600/245 = 6.53
:. = 7
8 4
9 3 NB straight from textbooks
10 2 Increase/decrease in C.A +200000
Decrease in C.L 500 000
Net working capital 300 000
11 4 2000 000+200 000 =2200 000
1800 000
400 000
*NB add backdepreciation of 2012 only and
then subtract or
Net Fixed asset is found by depreciation
2000 000+200 000 +180000=2330 000
Minus 180 0000+180 000=1980 000
=400 000
12 1 Receipts 40 000
Disbursements 50 000
10 000
O.B 35000
Minimum 25000
Financing
(no needed

C.B 25000
Excess 25000-25000
=0

17
 Closing balance-minim balance

13 4
14 3 Inventory days =360/turnover ratio
Turnover Ratio =360/inventory days
=360/101
3.6
15 2 2000 x (15% +1%) x 90/365
=200000 x 16% x 90/365
=32000 x 90/365
= 7890.4
16 2 7900/200 000 x 100%
=3.95%
17 3 Effective annual rate
365
𝐶𝐷 𝑛
(1 + ) −1
4100% − 𝐶𝐷
365
7900 90
=(1 + ) −1
200 000

=17.01%

18 2 12000 000 12000 000

[ 𝑥 60%𝑥 12%] − [ ]
30 360

=40 000
19 1
20 4 i.e cost benefit analysis, there should be more
profit than cost
21 1
22 1 250 000- 300 000+ 3000 00-200 000+ 150
000- 350 000+ 50 000
=-300 000
NB increase in current assets and decrease
in current assets
=outflow
*the opposite is also true
23 4 NB calculate cost discount as
1% 365
[ − 1%] 𝑥
100% 10

=0.36%
:. Therefore compare cost o0f discount with
14%, line of credit
It is cheaper to forge the discount

24 3 [100000x(8.5%+2%) x 2/12] + [100 000 x

(9%+2%) x 9/12]
=1750+3666
=5416
25 3

18
26 2 12%𝑥1000 000
1000 000 − (10% 𝑥 1000 000

=13.33%
27 3
28 4
29 2
30 4 365
1000 000 − 992500 45
(1 + )
992500

=6.29%

19
SECTION B

QUESTION 1

a) Earning after onterest and tax

Revenue 5100 000

Cost of sales (3000 000)

Operating expenses (890 000)

- Admin Expenses 290 000
- Advertising 300 000
- Depreciation
15%(1.6m +04) 300 000

Finance cost 210 000

Earnings before tax 1000 000
Tax expense 30% 300 000
Earnings after interest and tax 700 000

b) Operating Cashflow

Earnings fter interest and tax 700 000

Finance cost after tax
(210 000 x (1-30%) 147000
Depreciation 300 000
Changes in Net working capital
300 000+ 900 000 +600 000- 300 000 1500 000
Operating cash flow 2647 000

20
 c) Free cashflow
Operating cashflow 2647 000

Increase in grose
Nun-current assets
(3600 000- 300 000)
+ depreciation 300 000 900 000

QUESTION 2

Question 2.1
a) - Economic order quantity is the optimum sire that will result in the total amount of
ordering and holding costs being minimized
– Re-order point is the point at which an order should be placed to obtain additional
inventory, to avoid stock outs

2𝑥 𝐷 𝑥 𝑂
b) EOQ = √
𝐻

2 𝑥 800 𝑥 25
=√
1.5

= 164 units

c) Number of batches =800/164

=4.87 = 5 batches

21
 Question 2.2

a) Four factors that should be stated before changing credit policy

1. The cash discount period which is the number of days after the beginning of the period
during the cash discount is available

2. Credit period – which is the number of days after the beginning of the credit period unit
full payment of the account, is due

3. Credit monitory- which is the ongoing review of the firms trade receivable to determine
whether the stated credit of terms
4. Aging Schedule- which breaks down trade receivable into group based on their time
origin

b) Additional contribution

before after
Sales 1200 000 1260 000
1200 000 x 1.05
Variable cost
7/20 of sales 420 000 441 000
780 000 819 000

Therefore additional contribution is 819 000- 780 000 = 39 000

C) Marginal cost of bad debts

before after
Bad debts
1% x 1200 000 12000
2% x 1260 000 25200

22
Therefore the marginal cost is
= 25200-12000 / 1260 000- 1200 000
=22%

23
MAY /JUNE 2015

SECTION A

QUESTION ANSWER

1 2
2 4
3 4 Alt 1
7% X 75000/75000-7%-10%
=5250/6225
=8.433%
Alt 2
8% 𝑥 75000 𝑥 1/2 12
(1 + [ ] − 1)
75000
=8.299%
4 4
5 3
6 3
7 1
8 2
9 3 Cash sales 10% x 4000 = 400
Receivable – Dec 40% 3000 = 1200
Receivable Nov 80% x 41000 = 500
2100
10 3 Cash Receipt 400 000
Disbursement (500000)
100 000
Opening Bal 350 000
Short term finance 200 000
Balance 450000
11 3 *NB depreciation is a non- cash flow
12 NOPAT = EBIT (1-T)

24
 =100 000 x (1-30%)
=70000
13 1 NOPAT = 100 000 x (1-T) =700 000
+depreciation = 50 000
Operating cash flows =120 000
:. FCF = 120 000- 400 000-500 000-100 000+ 400
000
=30 000
14 4 1300 000-(80% x 1300 000) = 26000
:.260 000/1546000 = 16.80%
15 3 (150000-35000-25000) / 5
16 2 1800 000 1800 000
[ 60%𝑥12%] − [ 𝑥 50 𝑥 12%]
360 360
=36000-3000
=6000
17 2 Average outlay = 1800 000/360
=5000
:. (60days-50days)5000
=50000xinterest
=50000x 0.12
=6000
365/𝑛
18 1 𝐶𝐷
[1 + ] −1
100% − 𝐶𝐷

9000 365/45
= [1 + ] −1
991000
=7.61%
19 4
20 2 360/101
i.e. 360/inventory days
21 2
22 2
23 1 85000/6=14167
24 4 [140 000 x 17% x6/12] + 14167 x 13 x 6/12

25
 12820.25
25 3 175000x 17% x 6/12
=14875
26 4 3%/100-3% x 365/15
=75.25%
27 4
28 1
29 1
30 3

26
SECTION B

QUESTION 1
Projected statement for comprehensive income for hope Ltd for the period ended 31
Dec 2015
Sales 6 500 000
Cost of sales 3275000
1750 000 ( 2 275 000)
-variable5 000 000×6 500 000
Fixed ( 1000 000)
Gross profit 3 225 000
Less operating 1188 000
-fixed 2 500 000+1 500 000 (depreciation) ( 400 0000)
600 000 (780 000)
Variable × 6 800 000
5 000 000
Profit before interest and taxes 2045000
Interest paid 200 000 ×2 (400 000)
Profit before taxes 1645 000
Tax 30% (493 500)
Profit after tax 1151 500
Dividents paid 40% (450 600)
Accumulated profit 690 900

Projected statement of financial position as at 31 Dec 2015

Assets
Fixed assets 1459 000
Net fixed assets (1400 000+459 000-150 000-250
000
Current assets
Inventory 500 000×2) 100 000
6 500 812 500
Trade and other receivables5000 ×62 5000
Cash 200 000×2 400 000
Marketable securities 275 000
Total current assets 2 487 500
Total assets 3 94 6500
Liabilities and owners equity
Ordinary share capital 750 000
Accumulated profits(137 5000 +690900) 2 065 900
Total shareholders equity 2140 900
Long term debt 500 000
Current liabilities
6500 1033 500
Trade payebles 795 000×5000

27
Notes payables 200 000
6500 6500
Other current liabilities 5000×5000
Total current liabilities 1 240 000
External financing figure 65 600
Total liabilities and owners equity
3946 500

Question 2
a) aging schedule

current less than 30 days >30 days >60 days >90 days

250 000 100 000 50 000 51 000

b)the companies average balance for receivables has increased from R21000 in September 2012 to R
250 000 in January 2013

-this is an indication that the company’s collection policy is weak

-due to the company offering extended credit to customers when they want to stimulate sales

Question 2.2

The operating cycle

Average inventory day + average collection period

1273 000 3368 000
1401000× 1137 500×365 +147 50000×365

1337000
×365 +83.34days
11375000

42.90 days +83.34 days

=126.24 days

28
b)cash conversion cycle

operating cycle -average payment period

197500
126.24 -11375000×365

(14010000-12730000
197 5000
126 24 11247000
×365

=126.24-64.09

=62.15days

29