Foundation in Financial

Management

Paper FFM
Mock Exam 2 – 9 June 2020

Time allowed: 2 hours

ALL questions in Section A and Section B MUST be attempted.

Do NOT open this paper until instructed by the supervisor.

This question paper must not be removed from the examination hall.

Name :

Student ID :

Group :
SECTION A

SECTION B

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 SECTION A

1. Ratio have their limitations and care must be taken because of:

i. The financial position statement values at a particular time may not be typical
ii Balances used for a seasonal business may not represent average levels
iii Ratio can be subject to window dressing (manipulation)
iv Figures may be distorted by inflation

Which of the above are limitations of ratio?

A I, ii and iii
B I, iii and iv
C Ii, iii and iv
D I, ii, iii and iv

2. The following information relates to a raw material stock item:

Demand 3,000 units per quarter

Cost of holding stock $0.75 per unit per half year
Cost of placing an order $40 per order
Purchase price $25 per unit

What is the economic order quantity for this material?

A 400 units
B 566 units
C 693 units
D 800 units

3. Logo Co. is a retailer of large storage boxes. The company has an annual demand of
120,000 units. The costs incurred each time an order is placed are $200. The carrying
cost per unit of the item each month is estimated at $3. The purchase price of each
units is $4. The economic order quantity formula is:

When using this formula to find the optimal quantity to be ordered, which of the
following amounts are not included in the calculation?

A Cost per order ($200)

B Carrying cost per unit ($3)
C Purchase price per unit ($4)
D Estimated usage of the inventory item over a particular period (120,000 units
per annum)

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4. The Economic Order Quantity (EOQ):

A Is a formula that calculates a realistic purchase price for an item

B Determine the lowest order quantity by balancing the cost of ordering against
the cost of holding inventory
C Is used to calculate how much safety inventory should be carried
D Should be calculated once a year

5. A company determines its order quantity for a component using the EOQ model.

What would be the effects on the EOQ and the total annual ordering cost of an
increase in the annual cost of holding one unit of the component in inventory?

EOQ Total Annual Ordering Cost

A Lower Higher
B Higher Lower
C Lower No effect
D Higher No effect

6. Alex plc manufactures plastic cutlery. The company buys raw materials from
suppliers that allow the company 2.5 months credit. The raw materials remain in
inventory for 2 months and it takes Alex plc 2 months to produce the goods, which
are sold immediately production is completed. Customers take an average of 1.5
months to pay.

What is Alex plc’s cash operating cycle?

A 2 months
B 2.5 months
C 3 months
D 7 months

7. What might a firm have to do to obtain credit from a supplier?

i. A firm would have to provide good references

ii Maintain a good payment record
iii Allow the supplier to pay a visit
iv Have a good credit risk

A i, ii and iii
B i, iii and iv
C ii, iii and iv
D i, ii, iii and iv

8. Which of the following are potential costs of taking trade credit from supplier?

i. Loss of discounts
ii Loss of goodwill

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 A i only
B ii only
C i and ii
D Neither i nor ii

9. Which of the following budgets is NOT prepared using the accruals concept?

A The production budget

B The capital budget
C The cash budget
D The sales budget

10. Which of the following methods of chasing debts is the most expensive?

A Letters
B Personal visit
C Telephone
D Email

11. The following data is available about a product

Cost: $25
Profit: $15
Selling Price: $40

Which of the following represents the product’s mark up?

A 15%
B 37.5%
C 60%
D 62.5%

12. A company makes sales to certain customers of $100,000 with an average collection
period of two months. The managing director is considering whether to introduce a
discount of 3% on sales to these customers in return for immediate cash settlement.
The company normally requires a 15% return on its investments.

What is the cost of the discount and would it be worth introducing?

Cost Introduce or not?

A 20.1% Yes
B 3.1% Yes
C 20.1% No
D 3.1% No

13. Which of the following are all types of float?

A Transmission delay, collection delay, clearance delay

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 B Transmission delay, lodgement delay, clearance delay
C Transmission delay, lodgement delay, collection delay
D Lodgement delay, collection delay, clearance delay

14. Which of the following is not a main role of the credit control department?

A The pursuit of payment

B The despatch of goods
C The initial decision whether to grant credit
D Ongoing checks on credit limits

15. Which of the following statements is/are correct?

1 A statement sent to a customer is part of the ordering cycle

2 Establishing a customer’s credit status is part of the ordering cycle

A Statement 1 only
B Statement 2 only
C Both statements
D Neither statement

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SECTION B

QUESTION 1

Zapper Ltd is an ice cream manufacturing company preparing its accounts to 31 May each year.
The company’s peak season occurs in the months of July, August and September and it always
prepares a profit forecast for this period.

The following cash budget has been prepared for the six months ending 30 November 2019.

Jun Jul Aug Sep Oct Nov

£’000 £’000 £’000 £’000 £’000 £’000
Receipts from sales 1,100 1,250 1,400 1,800 2,200 1,700
Sale of machinery - 45 - - - -
Total receipts 1,100 1,295 1,400 1,800 2,200 1,700

Payments
Ingredients 250 280 360 440 340 340
Labour 350 450 550 425 275 250
Sundry expenses 75 85 95 80 70 65
Purchase of machinery - - 120 - 60 -
Loan repayments 50 - 50 - 50 -
Total payments 725 815 1,175 945 795 655

Receipts less payments 375 480 225 855 1,405 1,045

Opening cash balance b/f 1,400 1,775 2,255 2,480 3,385 4,790
Interest received - - - 50 - -
Closing cash balance c/f 1,775 2,255 2,480 3,385 4,790 5,835

Notes/assumptions made when preparing the cash flow forecast:

1. Customers always take two month’s credit.

2. The machinery to be sold for £45,000 will give rise to a profit on disposal of £3,000.
3. Depreciation of £13,000 will accrue during the three months ending 30 September 2019.
4. One month’s credit is always taken from suppliers of ingredients.
5. There are no stocks of raw materials or finished goods maintained.
6. Labour is paid by BACS on the last day of each month, for that month’s work.
7. Sundry expenses are all paid in the month in which they are incurred.
8. The loan repayment relates to an interest free loan obtained from Zapper Ltd’s parent
company.

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9. Interest is received by Zapper Ltd from the bank twice a year. The interest receivable for the
peak season of July, August and September is expected to be £30,000.
10. All workings should be in £’000.

Required:

a) Prepare a profit forecast for the three months ending 30 September 2019. Show all workings
clearly. Where any items have been excluded from the profit forecast, include a note to
justify your treatment of the item.
(10 marks)

Zapper Ltd’s parent company is considering centralising the treasury function for the whole
group and using cash Baumol model to manage its cash

b) Describe THREE advantages of having a centralised treasury department.

(6 marks)

c) Describe FOUR drawbacks of Baumol cash management model.

(4 marks)
(Total: 20 marks)

QUESTION 2

May Ltd manufactures furniture. It has come under pressure in recent years to reduce prices in
order to compete with some larger competitors in the market. The company’s aim has therefore
been to maintain sales levels, with the effect that trade receivables control has been allowed to
deteriorate. The company has always had a target of keeping the trade receivables period at an
average of 45 days.

Trade receivables as at 31 May 2019 are £323,654. Sales for the year ending 31 May 2019
were £1,581,743. This figure included £14,250 of cash sales. During this time, debts of £26,784
were written off. All £26,784 relates to sales made in the year ending 31 May 2019.

Required:

a) Calculate the current trade receivables collection period, in days, from the above
information. (1.5 marks)

b) How much of the year-end trade receivables’ balance would have to be immediately
recovered in order to reduce the debt collection period to the target level?
(1.5 marks)

c) Calculate the company’s bad debts ratio for the year ended 31 May 2019.
(2 marks)

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QUESTION 3

Tirex Co has carried out some of the procedures to collect debts. One of its major trade
receivables is still refusing to pay on the basis that it was not satisfied with the quality of some of
the goods it received and had to make refunds to its own customers. Tirex Co does not want to
sue the customer but has heard of ‘arbitration’.

Required:

a) Explain what is arbitration is, in this context. (1 marks)

b) State TWO advantages and TWO disadvantages of using arbitration as opposed to taking a
case to court. (4 marks)

QUESTION 4

Discuss the usefulness of sensitivity analysis in forecasting cash balances

(5 marks)

QUESTION 5

Briefly outline TWO advantages and TWO disadvantages of paying by cheque

(5 marks)

QUESTION 6

LEE Co was established in 20X0 to import and distribute a range of office furniture to variety of
small and medium sized businesses. The business has grown rapidly and demand continues to
rise.

The most recent financial accounts of LEE Co are as follows.

STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X7

Cost Depreciation Net book

value
$ $ $
Non-current assets
Land and buildings 200,000 - 200,000
Fittings and equipment 125,000 30,000 95,000
Vehicles 50,000 15,000 35,000
330,000

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Current assets
Inventory 42,000
Receivables 65,000 107,000
437,000
Equity and liabilities
$1 ordinary shares 60,000
Retained earnings 73,750
133,750
Non-current liabilities
15% loan (secured on land and buildings) 130,000

Current liabilities
Payables 128,000
Taxation 13,250
Bank overdraft (limit is $32,000) 32,000 173,250
437,000

STATEMENT OF PROFIT AND LISS FOR THE YEAR ENDED 31 DECEMBER 20X7

$ $
Revenue 960,000
Less: Cost of sales 500,000
Gross profit 460,000
Less: Distribution expenses 260,000
Administration expenses 124,000
Finance cost 23,000 407,000
Profit before taxation 53,000
Less: taxation (25%) 13,250
Profit after taxation 39,750

The company will pay dividends of $27,825 for the year to 31 December 20X7.

The company is a family business and does not have any qualified accountant on its staff.
Management accounts are prepared every three months by the auditors and are briefly
reviewed by the managing director. The managing director has recently become concerned with
the company's cash position. The company has been at its maximum overdraft level for the last
year and cash flow projections show no improvement. The bank manager has indicated that the
bank is unwilling to sanction any increase in the bank overdraft facilities. You have recently
joined LEE Co's auditors as a trainee and you have been asked to determine if LEE Co is
overtrading.

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Required:

a) Calculate and discuss FIVE financial ratios which may be used to determine if LEE Co is
overtrading
(13 marks)

b) State TWO ways in which LEE Co may overcome the problem of overtrading.
(2 marks)
(Total: 15 marks)

QUESTION 7

A company, which uses the EOQ inventory management model, purchases 64,000
units of raw materials per year. The purchase price of the raw material is $10 per unit.
The cost of holding one unit in inventory is $1·20 per year. The cost of reordering and
taking delivery is $150 per order regardless of the size of the order.

Assuming that usage is predictable and spread evenly throughout the year and that
ordering and delivery are simultaneous, calculate for the raw material:

Required:

a) Calculate the total annual cost for the material (EOQ Inventory Management Model)
(3 marks)

b) Past experience has shown that the supplier of the raw material can be unreliable and
that the delivery period can be between one week and three weeks. If the company
wants to hold enough raw material to ensure that it never runs out.

Calculate the lowest inventory level at which raw material should be reordered.
(2 marks)

c) Briefly explain TWO reasons why business need to hold inventory and THREE cost
associated with inventory
(5 marks)

d) Briefly describe FOUR of the main features of a just-in-time system

(5 marks)
(Total: 15 marks)

END OF QUESTIONS PAPER

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