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aiming for a merit
|Assignment title||Managing Financial Resources and Decisions|
You have recently been appointed as a finance manager at accountancy firm. The senior partner of the firm wants you to prepare a Formal Report about the information for new and existing businesses.
Your report should include;
(This provides evidence for assessment criteria’s 1.1, 1.2 , 1.3, 2.1)
Range of sources: sources for different businesses; long term such as share capital; retained earnings; loans; third-party investment; short/medium term such as hire purchase and leasing; working capital stock control; cash management; debtor factoring
Implications of choices: legal, financial and dilution of control implications; bankruptcy
Choosing a source: advantages and disadvantages of different sources; suitability for purpose e.g. matching of term of finance to term of project
The company is looking to put together a series of seminars for local businesses, covering a variety of finance-related topics. It is your job to plan the events and put together materials for the delegates. This will involve writing a formal report including the following information.
In the report you should;
(This provides evidence for 2.2, 2.3, 2.4)
Finance costs: tangible costs e.g. interest, dividends; opportunity costs e.g. loss of alternative projects when using retained earnings; tax effects
Financial planning: the need to identify shortages and surpluses e.g. cash budgeting;
implications of failure to finance adequately; overtrading
Decision making: information needs of different decision makers
Accounting for finance: how different types of finance and their costs appear in the financial statements of a business; the interaction of assets and liabilities on the balance sheet and on international equivalents under the International Accounting Standards (IAS)
The Financial Accountant of North Seaton Engineering Company has recently resigned and left his post with immediate effect. The Directors decide to advertise for a replacement but realize that the recruitment process may take up to three months. In the short term they decide to bring in a financial consultant to tide them over until a permanent appointment is made. You are asked by your line manager to take on this role – initially for three months.
On your first morning in early January 2012 the Directors present you with two budgets prepared by the departed financial accountant. You are given the cash flow forecast for the twelve months from January 2012 and the sales budget covering the twelve month period from July 2011 to June 2012 – the first six months of which include actual sales figures and variances between budgeted and actual sales.
The directors are concerned about the likely cash deficits shown in the cash flow forecast and the sales performance from July to December 2011. They are also concerned that they are very unlikely to meet their budgeted sales targets for January to June 2012.
Sales Budget – North Seaton Engineering CompanyLtd. – July 2011– June 2012
Cash Flow Forecast for a new business– North Seaton Engineering Company–Jan 2012– Nov 2012(Thousands of pounds)
With this in mind they ask you to:-
You are required to present your findings and recommendations as a formal Report to the Directors of Northfield Components Ltd.
(This provides evidence for assessment criteria 3.1)
Information concerning Magic and Sparkle company’s single product is as follows.
Z Plc has approached the business and requested to purchase 1500 units of our company’s product and has offered a price of £14 000. Should this one off contract be accepted?
(This provides evidence for assessment criteria 3.2)
The Directors of North Seaton Engineering Company are considering two alternative business projects of each involve an initial investment of £ 450,000. In your role as financial consultant you are asked to advise the Directors which of the two projects would be the more financially viable.
Project ‘A’ involves the introduction of modern, hi-tech machinery into the company’s main production unit. This will result in significant increases in output and substantial savings in production and maintenance costs. This in turn will result in a net increase in turnover to the company of:
Year 1 – £ 180,000
Year 2 -£ 230,000
Year 3 -£ 280,000
Year 4 -£ 120,000
Project ‘B’ involves an increase in the company’s marketing activities. The Directors would employ one of the region’s most prestigious marketing companies to manage a massive national campaign. They feel that business could be increased without, necessarily, updating production processes. It is anticipated that the net effect of their campaign would bring in additional annual turnovers of:
Year 1 -£ 60,000
Year 2 -£ 120,000
Year 3 -£ 250,000
Year 4 -£ 250,000
Financial consultant, you are asked to carry out a full investment appraisal of the two projects. In order to fully assess the pros and cons of the two alternatives you decide to employ a number of appraisal techniques:
For calculation purposes, you assume that the cost of capital will remain fairly static at around 6% per annum over the four year period. Your appraisal should be presented in the form of a Formal report to the Directors and include all financial computations and a summary of the conclusions which can be drawn from the results of the appraisal and relevant calculations– including recommendations as to which project should be taken on board.
(This provides evidence for assessment criteria 3.3)
Discuss and compare the different formats of financial reports for sole traders and Companies.
(This provides evidence for assessment criteria 4.1 and 4.2)
Victular is a public company that would like to acquire (100% of) a suitable company. It has obtained the following draft financial statements for two companies, Grappa and Merlot. They operate in the same industry and their managements have indicated that they would be receptive to a takeover.
Income statement for the year ended 30 September 2013
Revenue 12,000 20,500
Cost of Sales (10,500) (18,000)
Gross Profit 1500 2500
Operating Expenses (240) (500)
Finance Cost – loan (210) (300)
-overdraft nil (10)
-lease nil (290)
Profit Before Tax 1,050 1,400
Tax (150) (400)
Profit After tax 900 1,000
Statement of Financial Position as at 30 September 2013
Property ,Plant and Equipment 9,400 7500
Current Assets :
Inventory 2000 3600
Trade Receivables 2,400 3700
Bank 600 nil
Total Assets 14,400 14,800
Equity & Liabilities
Ordinary shares of 1$ each 2,000 2,000
Property Revaluation Reserve 900 nil
Retained Earnings 2,600 800
Total Equity 5,500 2,800
Non-Current Liabilities 4,800 6,300
Bank overdraft nil 1,200
Trade Payables 3,100 3,800
Government Grant 400 nil
Finance Lease obligation nil 500
Tax 600 200
Total Current Liabilities 4,100 5,700
Total Equity and Liabilities 14,400 14,800
The following ratios have been calculated for Grappa and can be taken to be correct:
Return on year end capital employed (ROCE) 2012: 13.60% 2013: 12.3%
Net asset (total assets less current liabilities) turnover 2012: 1.1 times 2013: 1·2 times
Gross profit margin 2012: 14.10 2013: 12·5%
Operating profit margin 2012: 9.50% 2013 : 10·5%
Current ratio 2012 : 1.1:1 2013 : 1·2:1
Closing inventory holding period 2012 : 72 days 2013 : 70 days
Trade receivables’ collection period 2012: 80 days 2013 : 73 days
Trade payables’ payment period (using cost of sales) 2012 : 100 days 2013 : 108 days
Gearing: 2012: 40% 2013: 35%
Interest cover: 2012: 5 times 2013: 6 times
Calculate for Merlot the ratios equivalent to all those given for Grappa and assess the relevant performance of both companies in order to advise Victural in their acquisition decision in no more than 800 words. You are also required to do the internal analysis of Grappa, using ratios provided.
(This provides evidence for assessment criteria 4.3)
Sufficient library resources should be available to enable learners to achieve this unit.
Particularly relevant texts are:
Cox, D. and Fardon, M. — Management of Finance (Osborne Books, 2003) ISBN: 1872962238
Dyson, J. R. — Accounting for Non-Accounting Learners (Pitman, 2003) ISBN: 0273646834
Journals and newspapers
The financial and mainstream press can provide useful background reading, and can also be auseful source of case studies and financial information. Copies of published financial reports are available from companies themselves, or via The Financial Times(a free online ordering service is available).