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Let’s go through each of the multiple-choice questions and find the correct answer.
i) Which of the conventions instructs “The business and its owner(s) are treated as being quite separate and distinct”?
Answer: d. Business Entity Convention
ii) According to the Accounting Standards, financial statements should normally cover how many periods of information?
Answer: a. 1-year period
iii) ………………………is an economic benefit from trading in the period, enjoyed by the buyer. It is calculated using the formula: selling price per unit × units sold.
Answer: c. Sales/Revenue
iv) SOFP stands for:
Answer: d. Statement of Financial Position
v) SOFP is:
Answer: a. A statement that measures what the entity owns and also what it owes in a set period.
vi) …………………..ratio measures the size of profits relative to capital employed - the return on investment.
Answer: a. Return on Capital Employed
vii) Which of the following is not true regarding Digitisation:
Answer: b. Makes it difficult to disenfranchise vulnerable/non-digital savvy stakeholders.
viii) …………represents an overhead cost-driving activity area. It is important to identify which variable causes the overhead cost.
Answer: d. Cost driver
ix) CLR Ltd makes toy machines with fixed costs of £500 and variable costs of £7.00 per machine (raw material £2.00 and labor £5.00), and a selling price of £11.00.
Calculation: Break-even point = Fixed Costs / (Selling Price per Unit - Variable Cost per Unit)
= £500 / (£11 - £7) = £500 / £4 = 125.Answer: b. 125 Cars
x) Tesla Ltd makes Toy cars with fixed costs of £450, variable production costs of raw materials at £3.00 per car, and labor at £5.00 per car. Selling price is £12.00.
a. Contribution per car: Selling price - Variable costs = £12 - (£3 + £5) = £4.
b. Break-even point in sales: Fixed Costs / Contribution per car = £450 / £4 = 112.5 (or 113 cars to cover all costs).
xi) A vehicle has a purchase price of £20,000, a useful life of four years, and a residual/scrap value of £4,000. Calculate the annual depreciation.
Calculation: Depreciation = (Cost - Residual Value) / Useful Life = (£20,000 - £4,000) / 4 = £4,000.
Answer: a. £4,000
xii) Three months’ rental is paid, but the accounting period ended after two months.
Answer: b. Payment in advance
xiii) Which of the following statements refers to Agency Theory?
Answer: b. Managers tend to self-serve and put their own wishes and needs ahead of the organization.
xiv) Operating Leases are:
Answer: b. Short term finances
xv) A secured bond has:
Answer: d. More security and less likelihood of lenders not recovering funding
xvi) If the flex ratio is 0.8 and budgeted fixed costs were £600, what is the flex budget for fixed costs?
Answer: a. £600 (since fixed costs do not change with output)
xvii) Which of the following is associated with Beyond Budgeting (BB)?
Answer: b. Market focus, Team focus, and Long term approach
xviii) Average Rate of Return (ARR), investment appraisal technique, uses which of the following variables to calculate:
Answer: d. Profit
xix) ARR method: if an investment entails £10,000 for a machine with a four-year life and scrap value of £4,000.
Calculation: Average annual investment = (Initial Cost + Residual Value) / 2 = (£10,000 + £4,000) / 2 = £7,000.
Answer: c. £7,000
xx) Blockchain records are more accurate than single ledger systems because:
Answer: a. They use incentives and consensus to promote accuracy
Let’s go through each ratio calculation for Amazon Ltd. based on the information provided.
1. i Ratio Calculations
a. Gross Profit Ratio
The Gross Profit Ratio indicates the percentage of revenue that exceeds the cost of goods sold, which reflects Amazon Ltd’s profitability from its core activities.
Gross Profit Ratio=Gross Profit / Revenue×100
Using the values given:
Gross Profit = £25,200
Revenue = £42,000
Gross Profit Ratio=25,200/42,000×100=60%
b. Net Profit Ratio
The Net Profit Ratio shows the percentage of revenue that remains as profit after all operating expenses are deducted.
Net Profit Ratio=Operating Profit/Revenue×100
Using the values given:
Operating Profit = £13,200
Revenue = £42,000
Net Profit Ratio=13,200/42,000×100=31.43%
c. Current Ratio
The Current Ratio assesses the company’s ability to pay off its short-term liabilities with its short-term assets.
Current Ratio=Current Assets/Current Liabilities
Using the values given:
Current Assets = £9,300
Current Liabilities = £3,900
Current Ratio=9,300/3,900=2.38
d. Quick Ratio (Acid-Test Ratio)
The Quick Ratio measures the company's immediate liquidity by excluding inventory from current assets.
Quick Ratio=Current Assets?Inventory/Current Liabilities ?
Using the values given:
Current Assets = £9,300
Inventory = £1,400
Current Liabilities = £3,900
Quick Ratio=9,300?1,400/3,900 =7,900/3,900 = 2.025
e. Trade Receivable Turnover Ratio
This ratio reflects how efficiently the company collects its receivables within the period.
Trade Receivable Turnover Ratio=Revenue Trade / Receivables
Using the values given:
Revenue = £42,000
Trade Receivables = £7,900
Trade Receivable Turnover Ratio=42,000 / 7,900=5.316
f. Trade Payable Ratio
The Trade Payable Ratio indicates the number of times Amazon Ltd. pays off its trade payables in the period.
Trade Payable Ratio=Cost of Sales/Trade Payables
Using the values given:
Cost of Sales = £16,800
Trade Payables = £3,400
Trade Payable Ratio=16,800/3,400=4.94
g. Stock Turnover Ratio
The Stock Turnover Ratio measures how efficiently Amazon Ltd. uses its inventory or the number of times inventory is sold and replaced over a period.
Stock Turnover Ratio = Cost of Sales/Inventory
Using the values given:
Cost of Sales = £16,800
Inventory = £1,400
Stock Turnover Ratio=16,800/1,400=12
1. ii Profitability Analysis
From the computation above, here is Amazon Ltd's profitability analysis.
Gross Profit Ratio and Net Profit Ratio:
Amazon Ltd's Gross Profit Ratio was 60% and its Net Profit Ratio was 31.43%, therefore it indicates that the company has strong control over the cost that runs on its revenues as well as operational cost.
Liquidity Ratios: Current Ratio and Quick Ratio:
The current Ratio is 2.38 and the Quick Ratio is 2.03, both of which are above the benchmark standard of 1. These ratios indicate that Amazon Ltd has sufficient funds in liquidity to well cover even short-term liabilities without depending upon its inventory (Purnomo, 2018).
Efficiency Ratios - Trade Receivable Turnover, Trade Payable Ratio, and Stock Turnover Ratio:
A Trade Receivable Turnover Ratio of 5.32 states that receivables are collected efficiently; however, the figure can be further enhanced towards cash flows.
The trade Payable Ratio stands at 4.94, which clearly mentions that the payables of Amazon Ltd are regularly settled to increase supplier relationships.
Stock Turnover Ratio stands at 12, meaning that the inventory is managed at an efficient pace since the inventory is turned over quite strongly.
Recommendation
Increase Receivable Collection: Though the Trade Receivable Turnover is good, reducing credit terms or improving collection practices could improve cash flow and working capital (Rebuin, Murti, and Ratnasih, 2023),
Review the management of inventory: The Stock Turnover Ratio is at a reasonable level but with review and optimisation help there is less overstocking or stockouts, especially if demand changes (Upadhyay, 2024).
Leverage High liquidity: Leverage High liquidity means that Amazon Ltd can consider cash re-investment in expansion activities or new product lines as options for growth.
Let’s go through each investment appraisal technique step-by-step for the three proposals.
2.i Investment Appraisal Calculations
For each proposal, we will calculate:
Average Rate of Return (ARR)
Payback Period
Net Present Value (NPV)
Proposal 1
Initial Investment = £120,000
Cash
Flows over 5 Years
= £80,000, £60,000, £40,000, £20,000, £40,000
Scrap
Value
= £4,000
Cost of Capital = 15%
a. Average Rate of Return (ARR)
The Average Rate of Return (ARR) is calculated by dividing the average annual profit by the initial investment and expressing it as a percentage.
Depreciation per Year:
Depreciation=Investment?Scrap Value/Useful Life=120,000?4,000/5=23,200
Total Profit over 5 Years: Profit for each year = Cash flow - Depreciation
Year 1: 80,000?23,200=56,800
Year 2: 60,000?23,200=36,800
Year 3: 40,000?23,200=16,800
Year 4: 20,000?23,200=?3,200
Year 5: 40,000?23,200=16,800
Total profit over 5 years = 56,800+36,800+16,800?3,200+16,800=124,000
? Average Annual Profit:
Average Annual Profit=Total Profit over 5 years /5
=124,000/5=24,800
? ARR:
ARR=Average Annual Profit / Initial Investment×100
= 24,800/120,000×100 =20.67%
b. Payback Period
The Payback Period is the time it takes for the project to recover the initial investment.
Cumulative Cash Flows:
Year 1: £80,000
Year 2: £80,000 + £60,000 = £140,000
The initial investment (£120,000) is recovered during Year 2.
Exact Payback Calculation:
Payback Period=1+Amount Needed to Reach Investment/Cash Flow in Year 2 =1+120,000?80,000 / 60,000
=1+40,000 / 60,000 =1.67 years
c. Net Present Value (NPV)
To calculate NPV, we discount each cash flow at the cost of capital (15%).
NPV Formula:
NPV=?Cash Flow t / (1+r) t ? Initial Investment
For each year’s cash flow:
Year 1: 80,000 / (1+0.15)1 = 69,565.22
Year 2: 60,000 / (1+0.15)2 = 45,368.62
Year 3: 40,000 / (1+0.15)3 = 26,300.64
Year 4: 20,000 / (1+0.15)4 = 11,435.06
Year 5: 40,000 + 4,000/ (1+0.15)5= 19887.06
NPV Calculation:
NPV=69,565.22+45,368.62 +26,300.64 +11,435.06 +19887.06?120,000=52556
Proposal 2
Initial Investment = £95,000
Cash
Flows over 5 Years = £10,000, £40,000, £40,000, £60,000,
£50,000
Scrap Value = £5,000
a. Average Rate of Return (ARR)
Depreciation per Year:
Depreciation=Investment?Scrap Value/Useful Life = 95,000?5,000 / 5=18,000
Total Profit over 5 Years: Profit for each year = Cash flow - Depreciation
Year 1: 10,000?18,000=?8,000
Year 2: 40,000?18,000=22,000
Year 3: 40,000?18,000=22,000
Year 4: 60,000?18,000=42,000
Year 5: 50,000?18,000=32,000
Total profit over 5 years = ?8,000+22,000+22,000+42,000+32,000=110,000
? Average Annual Profit:
Average Annual Profit=Total Profit over 5 years/5 = 110,000/5=22,000
? ARR:
ARR=Average Annual Profit/Initial Investment×100
=22,000/95,000×100=23.15%
b. Payback Period
Cumulative Cash Flows:
Year 1: £10,000
Year 2: £10,000 + £40,000 = £50,000
Year 3: £50,000 + £40,000 = £90,000
Year 4: £90,000 + £60,000 = £150,000
The initial investment (£95,000) is recovered during Year 4.
Exact Payback Calculation:
Payback Period=3+Amount Needed to Reach Investment/Cash Flow in Year 4 =3+95,000?90,000/60,000 =3+5,000/60,000=3.08 years
c. Net Present Value (NPV)
To calculate NPV, we discount each cash flow at the cost of capital (15%).
NPV Formula:
NPV=?Cash Flow t / (1+r) t ? Initial Investment
For each year’s cash flow:
Year 1: 10,000 / (1+0.15)1 = 8,695.65
Year 2: 40,000 / (1+0.15)2 = 30245.75
Year 3: 40,000 / (1+0.15)3 = 26,300.65
Year 4: 60,000 / (1+0.15)4 = 34305.2
Year 5: 50,000 + 5,000/ (1+0.15)5= 27344.72
NPV Calculation:
NPV=8695.65+30245.75+26300.65+34305.2+27344.72=118196.3186
Proposal 3
Initial Investment = £80,000
Cash
Flows over 5 Years
= £30,000, £40,000, £30,000, £30,000, £20,000
Scrap
Value
= £8,000
Cost of Capital = 15%
a. Average Rate of Return (ARR)
Depreciation per Year:
Depreciation=Investment?Scrap Value/Useful Life=80,000?8,000/5=14,400
Total Profit over 5 Years: Profit for each year = Cash flow - Depreciation
Year 1: 30,000?14,400=15,600
Year 2: 40,000?14,400=25,600
Year 3: 30,000?14,400=15,600
Year 4: 30,000?14,400=15,600
Year 5: 20,000?14,400=5,600
Total profit over 5 years = 15,600+25,600+15,600+15,600+5,600 = 78,000
Average Annual Profit:
Average Annual Profit=Total Profit over 5 years / 5= 78,000 / 5 =15,600
ARR:
ARR=Average Annual Profit/Initial Investment×100
=15,600 / 80,000×100 =19.5%
b. Payback Period
Cumulative Cash Flows:
Year 1: £30,000
Year 2: £30,000 + £40,000 = £70,000
Year 3: £70,000 + £30,000 = £100,000
The initial investment (£80,000) is recovered during Year 3.
Exact Payback Calculation:
Payback Period=2+Amount Needed to Reach Investment/Cash Flow in Year 3 =2+80,000?70,000/30,000
=2+10,000/30,000=2.33 years
c. Net Present Value (NPV)
To calculate NPV, we discount each cash flow at the cost of capital (15%).
NPV Formula:
NPV=?Cash Flow t / (1+r) t ? Initial Investment
For each year’s cash flow:
Year 1: 30000/ (1+0.15)1 = 26,086.96
Year 2: 40,000 / (1+0.15)2 = 30245.75
Year 3: 30,000 / (1+0.15)3 = 26,300.65
Year 4: 30,000 / (1+0.15)4 = 17152.6
Year 5: 20,000 + 8,000/ (1+0.15)5= 13920.95
NPV = 26086.96+30245.7467+26300.6493+17152.5998+13920.9499=87619.9457
2. ii Recommendation
After calculating the ARR, Payback Period, and NPV for each proposal:
Proposal 1 has the highest NPV (£52,556), indicating it provides the greatest return on investment when considering the time value of money.
Proposal 2 has the highest ARR (23.16%), showing a good return relative to the initial investment.
Proposal 3 has the shortest payback period (2.33 years), which reduces risk by recovering the investment quickly (Gorshkov et al., 2018).
Recommendation: Given the highest NPV, Proposal 1 is the most financially viable option for Vipers Ltd, as it maximises shareholder wealth.
References
Gorshkov, A.S., Vatin, N.I., Rymkevich, P.P. and Kydrevich, O.O., (2018). Payback period of investments in energy saving. Magazine of Civil Engineering, (2 (78)), pp.65-75.
Purnomo, A., (2018). Influence of the ratio of profit margin, financial leverage ratio, current ratio, quick ratio against the conditions and financial distress. Indonesian Journal of Business, Accounting and Management, 1(1), pp.9-17.
Rebuin, E., Murti, W. and Ratnasih, C., (2023), July. The Effectiveness of The Measurement of Trade Receivables Through The Ratio of The Turnover of Receivables And The Average Age Ratio of Receivables. In Proceedings of the 3rd International Conference on Law, Social Science, Economics, and Education, ICLSSEE 2023, 6 May 2023, Salatiga, Central Java, Indonesia.
Upadhyay, Y., (2024). A Plan to Improve the Ordering Strategies as a Step to Improve Inventory Management in Unit X.
