Learning outcomes Knowledge:
- An understanding of fundamental models, concepts, and techniques used within financial accounting.
- An understanding of fundamental models, concepts, and techniques used within management accounting.
- An understanding of the role of finance at a local and international level.
- Application of theoretical concepts to a range of practical scenarios enabling production of solutions to business problems.
Part A – Racca Limited
Racca Limited is a new business that started trading on 1 January 2019. You have recently been appointed as an account manager within the accounting department and have been presented with the following summary of transactions that have occurred during the first year of trading:
1) The owners introduced £180,000 of equity, which was paid into a bank account opened in the name of the business.
2) Premises were rented from 1 January 2019 at an annual rate of £90,000. During the year, rent of £112,500 was paid to the owner of the premises.
3) Rates (a tax on business premises) were paid during the year as follows:For the period 1 January 2019 to 31 March 2019 £2,400 For the period 1 April 2019 to 31 March 2020 £4,500
4) A delivery van was bought on 1 January 2019 for £60,000. This is expected to be used in the business for five years and then to be sold for £12,000.
5) Wages totalling £117,000 were paid during the year. At the end of the year, the business owed £2,175 of wages for the last week of the year.
6) Electricity bills for the first three quarters of the year were paid totalling £5,700. After 31 December 2019, but before the financial statements had been finalised for the year, the bill for the last quarter arrived showing a charge of £2,025.
7) Inventories totalling £486,000 were bought on credit.
8) Inventories totalling £39,000 were bought for cash.
9) Sales revenue on credit totalled £504,000 (cost of sales £243,000).
10) Cash sales revenue totalled £129,000 (cost of sales £54,000).
11) Receipts from trade receivables totalled £438,000.
12) Payments to trade payables totalled £393,000. 13) Van running expenses paid totalled £33,600.
At the end of the year it was clear that a credit customer (trade receivables) who owed £1,500 would not be able to pay any part of the debt. All of the other trade receivables were expected to settle in full.
The business uses straight-line depreciation for non-current assets.
Prepare for Racca Limited, a Statement of Income for the year ended 31st December 2019 and a Statement of Financial Position as at 31 December 2019. (20 marks)
Part B – Stockstone Limited
Stockstone Limited makes electric kettles that they currently sell at £13 each. The management believes that the company's equipment could currently produce up to 70,000 units of electric kettles per year. However, the budget for the coming year is 53,000 units of electric kettles and costs are estimated as follows:
- What is the contribution that each electric kettle makes towards covering fixed costs if it is sold for £13? (2 marks)
- What is the break-even point and margin of safety in terms of both units and revenue if each electric kettle is sold for £13 (4 marks)
- Calculate the profit Stockstone Ltd. makes if it produces and sells 48,000 electric kettles at £13 per kettle. (4 marks)
- Stockstone Ltd. is considering whether to spend £45,000 on marketing and advertising but consequently raising the selling price by 9%. At this new sales price and with the advertising, sales (in units of electric kettles) will increase by 17%. Analyse whether this is a good strategy for Stockstone Ltd? (7 marks)
- Identify and explain the underpinning assumptions attached to the break-even model including analysing whether the model can successfully be utilised by a range of differing businesses. (13 marks)
Part C – Rockham Plc.
You have recently joined the finance team at Rockham Plc a manufacturer of components for the motor industry. On the first day, you heard a few colleagues talking about a potential investment of a new machine and the importance of budgeting as a successful tool within the overarching strategic planning process. As these areas are of particular interest you request to be part of the project team that assesses the viability of the investment. You are provided with the following details: The purchase cost of the new machine is £40,000,000. The machine will produce an expected annual cash inflow of £17,000,000, with an annual cash outflow of £6,400,000. It is expected the machine will have a useful life of 5 years after which it can be sold for £5,000,000. The machine will be depreciated using the straight-line method. Rockham Plc currently has a cost of capital of 7%.
- Calculate the Payback Period, the Accounting Rate of Return, and the Net Present Value of the machine, and provide recommendations as to whether Rockham Plc should buy the machine. (10 marks)
- Produce a report that explains and analyses the key merits and limitations of the differing investment appraisal techniques. (20 marks)
- Produce a report that identifies and explains the key benefits and limitations of using budgets as a tool for strategic planning. (20 marks)