Analysis of Business Internal Accounting Information and Decision Making in Budgeting and Working Ca

Task 1 (50 marks)

LO 3 Analyze business internal accounting information to evaluate working capital management performance of a business

Jason Co is an online computer trader which made annual sales of $15,000,000 last year. The most recent financial statement indicates the company owns $2,466,000 trade receivables, $2,220,000 trade payables and $3,000,000 of overdraft. The customers pay within 60 days on average.

In order to boost sales, Jason Co proposes to increase the credit period to 45 days. But for payment within 30 days, the customer will receive an early settlement discount of 1%. The finance department suggests that, under the new policy, only 20% of customers will carry on paying in 60 days, 30% of customers will pay after 45 days, and 50% of consumers will take the early discount and pay in 30 days. The finance provider charges Jason Co 6% annually for overdraft facility and the new policy is also expected to reduce the cost of finance when the interest rate remains constant.

 

In terms of inventories, Jason Co places an order of 15,000 units with its supplier every month, which costs $150 per order. Last year, the annual cost of materials was $540,000 and the holding cost is $1.2 per unit per year. The supplier could now offer a 2% bulk discount for orders over 45,000 units and the finance department of Jason Co is required to investigate the proposal.

[i] Should Jason adopt the new credit period and early settlement policy? Calculate the net benefit and comment on your findings. Hint: provide your recommendation and evaluate its validity. [20 marks]
 
[ii] Should Jason accept the bulk purchase discount offered by the supplier? Calculate the different costs of inventory (including cost of material, annual ordering cost and annual holding cost before and after taking the discount) and comment on your findings.
Hint: provide your recommendation and evaluate its validity. [15 marks]
 
[iii] Your friend is an accountant. He mentioned that your recommendation in [ii] may change if Jason could control the holding cost and reduce the holding cost by 33%.
Explain the effect of the reduced holding cost on your recommendation and support it with calculations. [15 marks]

 

LO 4 From cost and revenue data, apply techniques in deciding upon alternative courses of action and implements budgets in decision making for an organization

The summarised statement of financial position of Leila Ltd as at 31 May 2020 is as follows:

 

Current assets	Â	Â
Bank	20,000	Â
AR	200,000	Â
Inventory	86,000	Â
Total current assets	306,000	Â
NCA [net of depreciation]	154,000	Â
Total assets	Â	460,000
Current liabilities	Â	Â
AP	72,000	Â
Accruals [wages]	3,800	Â
Accruals [expenses]	2,500	Â
Total current liabilities	78,300	Â
Capital and reserves	381,700	Â
Total liabilities and equity	Â	460,000

 

Accounts payable represent purchases for May, and accounts receivable the sales for April and May at $100,000 per month.

The directors are seeking finance from a bank and have produced the following profit forecast, but the bank, before deciding, has asked for a cash budget for the period showing the maximum anticipated finance needed from month to month. The profit forecast for the next six months is:

 

100071	Jun	Jul	Aug	Sep	Oct	Nov
Sales	180,000.0	220,000.0	240,000.0	262,000.0	262,000.0	260,000.0
Gross profit	45,000.0	55,000.0	60,000.0	65,500.0	65,500.0	65,000.0
Wages and salaries	20,000.0	18,000.0	24,000.0	27,000.0	32,000.0	24,000.0
Rent	1,670.0	1,670.0	1,660.0	1,670.0	1,670.0	1,660.0
Other expenses	8,000.0	10,000.0	12,000.0	12,000.0	10,000.0	15,000.0
Profit	15,330.0	25,330.0	22,340.0	24,830.0	21,830.0	24,340.0
Stock requirement at month end	90,000.0	80,000.0	120,000.0	100,000.0	112,000.0	170,000.0

 

Further information is given below:

1. At each month-end, one-eighth of a month’s wages and salaries, and a quarter of other expenses, would be outstanding.

 

2. Rent at the rate of $20,000 per annum is payable quarterly in arrears on 31 August, 30 November, etc.

 

3. Assume that one month’s credit will be taken on purchases as previously, and that accounts receivable will continue to take two months’ credit.

 

4. New fixed assets (additional) will be delivered in June and must be paid for on 31 August; cost $200,000.

5. If the bank grants finance, it will continue an existing $50,000 overdraft facility, and give a five-year loan of a fixed amount as soon as necessary to maintain the overdraft within its limit for the whole period under review.

[a] Prepare the cash budget for the period of June – November 2020. [15 marks]
 
[b] Prepare a summary statement of financial position as at 30 November 2020. [5 marks]
 
[c] Calculate current ratios at the beginning and at the end of the period.

Discuss if the change in these ratios could affect the firm’s ability to obtain short-term loans from the bank. [5 marks]

Diogo Ltd makes a standard product, which is budgeted to sell at $17 a unit. It is made from a budgeted 0.5 kilograms of material, budgeted to cost $7 per kilogram, and worked on by an employee paid a budgeted $13 per hour, for a budgeted 15 minutes. Monthly fixed overheads are budgeted at $18,000. The output for March was budgeted at 5,100 units.

 

The actual results for March were as follows:

 

Â	$
Sales revenue (5,380 units)	79,500
Materials (2,840 kilograms)	(26,400)
Labour (1,300 hours)	(20,700)
Fixed overheads	(19,100)
Actual operating profit	13,300

 

No inventories existed at the start or end of March.

[i] Deduce the budgeted profit for March. [5 marks]
 
[ii] Reconcile it with the actual profit. [12 marks]
 
[iii] Analyse negative variances and explain an impact of your findings on Diogo’s decision making. [8 marks]