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CAT T10 - 2010 - Dec - A
CAT T10 - 2010 - Dec - A
Section A
1 B
$
Non-current assets as at 31 December X6 250,000
Add back depreciation 30,000
Non-current assets as at 31 December X5 (200,000)
––––––––
80,000
––––––––
––––––––
Distracters:
A Ignore depreciation and look at the change in non-current assets only.
C Take closing assets as at 31 December X6.
D Deduct rather than add back depreciation.
2 A
Payback
Time Cash flow ($) Cumulative cash flow ($)
0 (100,000) (100,000)
2 35,000 (65,000)
3 35,000 (30,000)
4 35,000 5,000
Payback is therefore 3 years and (30,000/35,000) = 3·9 years
Accounting rate of return = average annual accounting profit/initial investment
Accounting rate of return = [(4 x 35,000 – 85,000)/5]/100,000 = 11%
Distracters arise if depreciation is excluded from the accounting rate of return or the timing of the cash flows is incorrect in the
payback calculation.
3 B
4 C by definition
5 C
Cost of not taking the discount = cost/benefit = 2/98 = 0·0204%
Convert to an annual percentage = [{1 + 0·0204}365/20 – 1] = 45%
Distracters
A 2% x 12 = 24%
B [{1 + 2/98}365/30 – 1] = 28%
D [{1 + 2/100}365/30 – 1]=27%
6 D
The transaction is for cash so accounts receivable are not affected.
Inventory is not part of the quick ratio. Cash balances will improve, resulting in the quick ratio increasing.
7 C by definition
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8 B
50% x 25,000 + 30% x 15,000 + 15% x 20,000
Distracters
A Months incorrect and start with March (50% x 20,000 + 30% x 15,000 + 15% x 25,000 = 18,250)
C Accounting for bad debts within the original sales (50% x 25,000 x 0·95 + 30% x 15,000 + 15% x 20,000 = 19,375)
D May’s sales
9 C by definition
10 D
As the material is in frequent use by the company, the current purchase price is used as the relevant cost.
Distracters
A 50 x 7 + 50 x 8 = 750 i.e. NRV is used for the kgs in inventory
B 50 x 6 + 50 x 8 = 700 i.e. original cost is used for the kgs in inventory
C Using the original cost price of $6 to value the 100kgs required
Section B
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W4 Building costs
25% at beginning of the project 0·25 x $200,000 = $50,000
75% at the end of the building work 0·75 x $200,000 = $150,000
W5 Lost income
Year 1 2 3 4 5
10% of $200,000 $20,000
5% of $200,000 $10,000 $10,000 $10,000 $10,000
(c) As inflation rises, so the required rate of return of the investor will also rise.
For example, an investor requires a rate of return of 5%. If $100 was invested now, then in one year’s time the investor would
require $105.
If however, there was inflation of 10% and the investor still required a return of 5% then the situation would be different. The
investor would require his $100 to have become $110 to have the same purchasing power, and then the return of 5% would
still be required. The investor would require $115·50 in one year’s time, an overall return of 15·5%.
2 (a) (i) The just in time inventory management system (JIT) tries to ensure that negligible levels of inventory need to be held at
every stage of the production process. There will be a continuous flow of raw material inventory, into and through the
production process, and finished goods are shipped straight to the customer. JIT can be described as a pull system. The
stock orders and production schedules are based on customer demand, and goods are made in response to customer
demand.
(ii) The requirements for JIT to operate are:
– Guaranteed quality of raw materials – production would be stopped if materials were defective.
– Suppliers and customers are geographically close, to reduce delivery times.
– Suppliers and customers have a close working relationship.
– Flexible workforce, able to expand and contract hours as required to ensure that work-in-progress is kept to a
minimum.
– Efficient production systems, to reduce the production time.
Note only three were required.
(iii) JIT is unlikely to work for Expand Co at the moment because:
– Inefficiencies have arisen in the production process
– They have many different suppliers, weakening the relationship between the supplier and Expand Co
15
20,000 units
$
Cost of purchase 100,000 x $1·5 x 0·95 142,500
Ordering costs {100,000/20,000} x $300 1,500
Holding costs 0·2 x $1·5 x 0·95 x 20,000/2 2,850
––––––––
146,850
––––––––
The order size to minimise costs would be 20,000 units.
(c) Three factors other than price that should be considered before purchasing goods from a new supplier are:
– The reliability of the supplier
– The quality of the goods
– The credit terms available
– Delivery time.
Note only three were required
3 (a) Overdraft
Explanation
An overdraft is a facility that a company can negotiate with their bank. This allows a company to pay more out of their current
account, than there is cash available in the account.
An overdraft should be a temporary form of short-term finance as it is technically repayable on demand.
Usefulness
An overdraft would not be a suitable form of financing for the expansion and re-equipping of the factory, as a form of long-
term finance is required. An overdraft could however be used to cover any temporary shortfall in working capital that could
arise due to the expansion.
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(d) Equity
Explanation
Equity finance can be raised through a number of different channels:
– Bake Co does not have a listing on the stock exchange and is unlikely to be able to obtain one due to its size.
– The family – although it is unknown if the family have sufficient private resources to make an investment of this size.
– Private placing – it is usually difficult to obtain large amounts of investment by this method.
– Business Angel – these are wealthy individuals or groups of individuals who are willing to invest in the company. This
form of financing can however be difficult to set up.
Usefulness
If the family do not have the required funds, then the most likely form of equity financing would be from Business Angels.
Business Angels often have a knowledge of the industry, so the brand and reputation that Bake Co have built up will aid them
in any application made. If a suitable investor can be found, then this would be a reasonable method of financing the
expansion.
4 (a) (i) Total cost = fixed cost + variable cost x number of tourists
$45,000 = fixed cost + variable cost per tourist x 10,000
$67,500 = fixed cost + variable cost per tourist x 25,000
Subtracting one equation from the other
$22,500 = 15,000 x variable cost per tourist
$1·5 = variable cost per tourist
Alternatively the high low method of cost estimation could have been used:
Variable cost per tourist = {($67,500 – $45,000)/(25,000 – 10,000)} = $1·5 per tourist.
Full marks will be awarded whichever method is used.
The variable cost per tourist is $1·5. Substitute this into either of the first equations to give the fixed costs.
$30,000 = fixed cost
Contribution = Sales price – variable cost
Contribution = $4 – $1·5 = $2·5 per tourist
Breakeven Point = Fixed costs/contribution per unit
Breakeven Point = $30,000/$2·5 = 12,000 tourists.
Margin of safety = 15,000 – 12,000 = 3,000 tourists.
This can be represented as 3,000/15,000 = 20%
Either answer gains the mark for margin of safety.
(ii) Units to make a target profit = (fixed costs + target profit)/contribution per unit
Tourists to make a target profit of $6,000 = ($30,000 + $6,000)/$2·5 = 14,400 tourists
(iii) It can be argued that Joe has a large margin of safety as the number of tourists can fall by 20% before nil profit is made.
However, he has a small margin of safety compared with his current income. The number of tourists has only got to
drop by 4% (15,000 – 14,400)/15,000 before he makes less profit than he did fishing.
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(b) and (c) (i)
profit/
(loss)
$’000 Line 1 Line 2
20
18
16
14
12
10
Breakeven
8
point
{
6
4
Profit of $6,000
2
tourists ’000
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
–2
–4
–6
–8
–10
–12
–14
Fixed costs –16
–18
–20
–22
–24
–26
–28
–30
–32
–34
–36
–38
(c) (i) Because the sales and variable costs per unit are not altering, the slope of the P/V line will not alter. The increase in
fixed costs will alter the point of intersection on the y axis, and therefore the breakeven point.
(ii) The new breakeven point is 14,800 units. The margin of safety is now considerably smaller, and the likelihood of Joe
not making a profit much higher.
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ACCA Certified Accounting Technician Examination – Paper T10
Managing Finances December 2010 Marking Scheme
Marks
Section A
2 marks for each of the 10 questions, totalling 20
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Section B
(c) Inflation
Explanation 1
Illustration 2
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3
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20
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19
Marks
3 (a) Each valid point 1 mark 4
20