Task 1: Understand the sources of finance available to a business
Task 1.1 The business
• Explain the type of business organisation and it's ownership
• This should include : The business's name, the form of business organisation, (Partnership, Sole trader or limited company)
Task 1.2 The initial costs
• Give detail of the items of expenditure you will need to get before you start trading
• State how much capital may be needed on commencement, and how and where this initial finance would be obtained
• Investigated a range of different sources of finance and comment on how they compare
• State why the chosen sources of finance are related for your business.
Task 1.3 Financing every day activities
• Give details of your business's everyday costs and how you intend to finance them
• State why the selected sources of finance are appropriate for the above venture.
Task 1.4 The cost of finance
• For all the kinds of finance you have selected, provide an analysis of the financial and non financial costs of obtaining this finance
• State the advantages and disadvantages of each selected source of finance
Task 1.5 The future
In the future your business will hopefully become successful and achieve expansion and growth . Will the way you finance your business change from those you selected on the commencement of your business?
Task 2: Be able to make financial decisions based on financial information
Scenario
Your accountant has suggested that you prepare a cash budget for the first six months of trading.
Task 2.1 Describe the purpose of preparing a cash budget and its importance with regards to planning and decision making. Also explain benefits and limitations of a cash budget.
Task 2.2 Prepare a cash budget for each of the four months ending 31st August 2012.
Ali Murad the chartered accountant working as GM finance in Sainsbury, has obtained the subsequent information for the seven months ending 30th September 2012. This information is to be used to purpose a cash budget for the four months ending 31 August 2012.
1. Actual sales were £44,000 and £46,000 for March and April 2012 concurrently.
2. Total forecast sales at the end of each of the next five months are expected to be:
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2012
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May
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June
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July
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Aug
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Sep
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£
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£
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£
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£
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£
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44,000
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46,000
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42,000
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44,000
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48,000
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80% of each month's net forecast sales are expected to be for cash. The debtors are expected to pay one month in arrears.
3. The subsequent costs are expected to be paid in the month in which they occur:
4. Wages £9,000 per month to 31st July 2012 and £9,500 per month thereafter
5. Fixed Costs £3,000 per month.
6. Variable cost being 10 percent of each month's total forecast sales.
7. Purchases are expected to be 70% of the subsequent month's total forecast sales value and are paid for two months in arrears.
8. The bank balance as at 1 May 2012 was £ 12,100.
a) Once the cash budget has been completed, comment on the closing balance position of your business each month paying particular attention to any shortages of liquidity.
b) Explain why a business face cash flow problems & and also describe what tools are available to a management accountant in the preparation of cash flow forecast.
Task 3 Make financial decisions based on financial information
Task 3.1
The Sajid & Co. is operating in secondary sector and manufactures three products, alpha, gamma and beta , all made from the same material. Company is using traditional absorption costing to allocate overheads to its products but wants to adopt ABC costing method because the management accountant thinks that it will enhance the profitability. Last year information relating to these three products is as follows.
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Alpha
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Beta
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Gamma
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Production & Sales volume (units)
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15,000
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12,000
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18,000
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Raw material usage (kg) per unit
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2.00
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3
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4
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Direct labour hour per unit
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0.1
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0.15
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0.2
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Machine hours per unit
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0.5
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0.7
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0.9
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Number of productions runs per annum
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16
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11
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7
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Number of purchase orders per annum
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25
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28
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42
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Number of deliveries to retailers per annum
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45
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32
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62
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The price of raw material is similar throughout the year at £ 1.35 per kg. Likewise, the direct wages cost for the whole work force was £ 14.80 per hour. The annual overhead costs were as under.
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£
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Delivery Cost
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36,550
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Machine running cost
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64,400
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Procurement Cost
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46,000
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Machine set up cost
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24,350
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Required:
a) Evaluate the full cost per unit for products alpha, gamma, beta under traditional absorption costing using direct labour hour as a basis for apportionment.
b) Determine the full cost per unit of each product using activity based costing.
c) Determine the sales price under activity based costing method; consider the co. set the prices for the product by adding 25% mark up
Task 3.2
Show the advantages and disadvantages of full cost plus pricing.
Task 3.3
Danny Healey, one of your business clients, has told you that the management is supposing two major capital investment projects for his business. Only ONE project can be chosen and the subsequent information is available:
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Alpha
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Beta
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Gamma
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Production & Sales volume (units)
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15,000
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12,000
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18,000
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|
Raw material usage (kg) per unit
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2.00
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3
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4
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|
Direct labour hour per unit
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0.1
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0.15
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0.2
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Machine hours per unit
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0.5
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0.7
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0.9
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Number of productions runs per annum
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16
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11
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7
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Number of purchase orders per annum
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25
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28
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42
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Number of deliveries to retailers per annum
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45
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32
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62
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The initial capital outlay will occur immediately and you may assume that the net cash inflows will arise at the end of each year. The estimated cost of capital over the five year period is 10% per annum.
Required
To assist Danny and the management in deciding on which project to undertake, you are to:
Produce numeric assessments of the two projects based on the following capital investment appraisal methods:
a) payback
b) net present value
c) accounting rate of return
d) Comment on the findings of your results and advise Danny which investment you think should be undertaken.
e) Explain any limitations of your analysis.
Task 4: Understand the implications of finance as a resource within a business
Scenario
You have a friend who has recently inherited several thousands of pounds. Your friend wishes to use some of the money to buy shares and has asked for your advice. From the FTSE 100 companies, select two companies of your choice of the same field. Using the internet details of the company's published accounts for the last two years.
Task 4.1
Explain the purpose of the main financial statements (i.e. trading profit and loss account and balance sheet). Suggest two other users of financial statements other than investors, and suggest why they might be interested in reading them.
Task 4.2
Briefly explain the differences between the formats of financial statements, (sole trader, limited company and partnership). You are not required to draft the statements.
Task 4.3
With reference to your financial statements, calculate for each year for each company
• Two profitability ratios
• Two liquidity ratios
• Gearing ratio
• Two Working Capital Ratios
• ROCE ratio
Task 4.4
From your findings from Task 4, undertake a ratio analysis of the organisation comparing profitability, liquidity and gearing position of both companies. Also, recommend your friend in which company shall he/she invests.
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