ACCOUNTING AND FINANCIAL MANAGEMENT-PROJECT

FORMATIVE ASSESSMENT 2

SECTION A

1.1.

1.1.1.

R
Cash flows from operating activities (920 000)
Add; Dividends paid 400 000
Add; interest paid 100 000
Less Cash generated from operations (180 000)
Company tax paid 600 000

1.1.2. Proceeds from machinery sold R180 000

Less profit on disposal on machinery (R20 000)

Carrying value of machinery sold R160 000

1.2.

 Increase in long term borrowings

 Increase in payables

1.3.

R
Cash flows from operating activities (920 000)
Cash flows from investing activities (420 000)
Net cash decrease in cash and cash equivalents 540 000
Cash flows from financing activities 800 000

R
Cash flows from financing activities 800 000
Less increase in long term borrowings (800 000)
Proceeds from issue of ordinary shares nil

Therefore no ordinary shares were issued during the year

1.4.

1.4.1. The net cash outflow from operating activities of R920 000 was caused by large
cash payments incurred in paying dividends and company tax because the company
had a positive cash generated from operations of R180 000.

1.4.2. The increase in inventory of R1 800 000 shows a cash outflow during year which
was caused by the company increasing its inventory.

1.4.3. The increase in receivables of R1 000 000 during the year reflects a cash outflow
which could have been caused by the company relaxing its credit terms or poor
collection efforts of debtors.

1.4.4. Non-current assets purchased of R600 000 led to a cash outflow which is caused
by the need to replace worn out assets or need to buy extra assets to increase
operating capacity.

1.4.5. The increase in long term borrowings led to a cash inflow as the company engage
in long term financing options to fund the purchase of fixed assets through acquiring
more long term loans.

2.1. Calculation of expected Operating profit/loss for each proposal

Proposal A
R
Sales [R30 x200 000] 6 000 000
Total variable costs [R20 x 200 000] (4 000 000)
Total fixed costs [R1 600 000+R360 000] (1 960 000)
Operating profit 40 000

Proposal B
R
Sales [R27 x 176 000] 4 752 000
Total variable costs[ R18x176000] (3 168 000)
Total fixed costs [R1 600 000-R240 000] (1360 000)
Operating profit 224 000
2.2. Sales=Operating profit+Fixed Costs+Variable costs

=R600 000+R600 000+R800 000

=R2 000 000

To increase operating profit by 10%;

Contribution margin=800 000/2 000 000x100=40%

Contribution per unitx Units sold- Fixed Cost= 1.1x600 000

[SP- R8]x100 000=R660 000+ R600 000

100 000SP-800 000=R1 260 000

100 000SP=R2 060 000

SP=R2 060 000/100 000

=R20.60

Percentage increase in selling price=(20.60-20)/20x100=3%

2.3.

2.3.1. Variable expenses=Total expenses-Fixed expenses

=R1 760 000-R800 000

=R960 000

Contribution= Sales – Variable expenses

=R1 600 000-R960 000

=R640 000

Contribution ratio=contribution/sales

= R640 000/R1 600 000

=0.4

Break even Value=Fixed expenses/Contribution ratio

=R800 000/0.4

=R2 000 000
2.3.2. Sales value-Variable cost= Fixed cost + Operating profit

Sales value –Variable cost=R1 200 000+ R80 000

Contribution= R1 280 000

If Contribution is R1 280 000 and given a contribution ratio of 0.4 then

Sales value will be = R1 280 000/0.4

=R3 200 000

3.1. Debtors collection schedule

August September
Receipts from debtors-1 month 57 600 63 360
-2 months 19 200 38 400
Total receipts from debtors 76 800 101 760

3.2. Cash Budget of Warner Ltd for the months of August and September 2023

August September
Receipts:
Cash sales 158 400 174 240
Receipts from debtors 76 800 101 760
Receipts from loan 100 000
Total Receipts 235 200 376 000

Payments:
Payments to creditors 80 000 160 000
Salaries and wages 44 000 48 400
Rent expense 4 000 4 000
Insurance 36 000
Rates 27 000
Administration costs 18 000 18 000
Advertising expenses 14 400 15 840
Purchase of machinery 40 000 32 000
Interest on loan 1 250
Total Payments 227 400 315 490
Net receipts 7 800 60 510
Balance b/d (22 500) (14 700)
Balance c/d (14 700) 45 810
4.1.

4.1.1. Depreciation for the year=(Cost-Estimated residual value)/ Expected useful life

=(1 400 000-0)/4

=R350 000

Expected cash flows of Project B

Year Profit Cash Flow

1 270 000 270 000+350 000=620 000
2 280 000 280 000+350 000=630 000
3 650 000 650 000+350 000=1 000 000
4 710 000 710 000+350 000=1 060 000

Year Cash flow Balance

0 (1 400 000) (1 400 000)
1 620 000 (780 000)
2 630 000 (150 000)
3 1 000 000 850 000

Payback period of project B= 2 + 150 000/1000 000

= 2 years + 0.15x12 months

=2 years 1 month 24 days

4.1.2. Average annual profit= Total Annual profit/ number of years

=R1 890 000/4

=R472 500

Accounting rate of return= Average annual profit/Initial Investmentx100

=R472 500/R1 400 000x 100

=33.75%

4.1.3. Depreciation for the year; Project A=(1 400 000-400 000)/4

=R250 000
Year Profit
1 670 000
2 540 000
3 410 000
4 270 000
Cash flow
670 000 +250 000=920 000
540 000 +250 000=790 000
410 000 + 250 000=660 000
270 000+ 250 000=520 000

Calculation of NPV of Project A

Year Cash flow Discounting Factor Present Values

R at 15% R
0 (1 400 000) 1 (1 400 000)
1 920 000 0.8696 800 032
2 790 000 0.7561 597 319
3 660 000 0.6575 433 950
4 520 000 0.5718 297 336
Net Present value 728 637

Calculation of NPV of Project B

Year Cash flow Discounting factor Present Values

R at 15% R
0 (1 400 000) 1 (1 400 000)
1 620 000 0.8696 539 152
2 630 000 0.7561 476 343
3 1 000 000 0.6575 657 500
4 1 060 000 0.5718 606 108
Net Present Value 879 103

4.1.4. Since both projects have a positive NPV, they can both accepted but if the
company has to select one project only, they will choose the one with higher NPV which
is Project B.
4.2.1. Annual cashflow=R450 000-R250 000=R200 000

PVIFA for 5 years Present Value Net Present Value

At 15%=3.3522 3.3522 x 200 000=670 440 670 440-700 000=(29 560)

At 12%=3.6048 3.6048 x 200 000=720 960 720 960-700 000=20 960

IRR= 12 + 20960/50520x 3

=12 + 1.24

=13.24%

4.2.2. The machine should not be purchased because the cost of capital of 15% is
higher than the IRR of 13.24%

5.1

5.1.1. Operating Margin=Operating profit/salesx100

=65 802/216 486 x 100

=30.40%

5.1.2. Debtor collection period = Accounts receivables/ credit sales x 365

= 38 829/216 486 x 365

=65.47days

5.1.3. Turnover to net assets = 216 486/(315 633-46 035)

=216 486/269 598

= 0.80:1

5.1.4. Return on capital employed= Operating profit/Capital employed x100

= 65 802 / 269 598 x 100

= 24.41%

5.1.5. Retention ratio= Retained profit for the year/ total earning for the year

=36 599-22 232/36 599x 100

=39.26%
5.1.6. Current ratio = current assets/ current liabilities

= 84 399/46 035

=1.83:1

5.1.7. Debt to assets ratio= Total debt/Total assets x 100

=138 837/315 633 x 100

=43.99%

5.2.

 The company with a return on capital employed of 24.41% which is above the
interest on loan of 18%, the company is generating an additional reward to its
shareholders which is above the payment to debt holders.
 The company by having a retention ratio of 39.26, it is retaining sufficient profits
of 60% for future needs or to maintain future dividends even when profits are low
 A current ratio of 2:1 is considered to be safe for the organisation, however it
may be allowed to fall to 1.5:1 and therefore the company with a current ratio of
1.83:1 may be sufficient to pay short term debts using its current assets.