|
|
|
|
|
|
|
Let’s solve the multiple-choice questions.
i) Which of the conventions instructs “The business and its owner(s) are treated as being quite separate and distinct”?
Answer: The chosen option is d. Business Entity Convention
ii) According to the Accounting Standards, financial statements should normally cover how many periods of information?
Answer: The chosen option is 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: The chosen option is c. Sales/Revenue
iv) SOFP stands for:
Answer: The chosen option is d. Statement of Financial Position
v) SOFP is:
Answer: The chosen option is 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: The chosen option is a. Return on Capital Employed
vii) Which of the following is not true regarding Digitisation:
Answer: The chosen option is 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: The chosen option is 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: The chosen option is 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: The chosen option is a. £4,000
xii) Three months’ rental is paid, but the accounting period ended after two months.
Answer: The chosen option is b. Payment in advance
xiii) Which of the following statements refers to Agency Theory?
Answer: The chosen option is b. Managers tend to self-serve and put their own wishes and needs ahead of the organization.
xiv) Operating Leases are:
Answer: The chosen option is b. Short term finances
xv) A secured bond has:
Answer: The chosen option is 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: The chosen option is a. £600 (since fixed costs do not change with output)
xvii) Which of the following is associated with Beyond Budgeting (BB)?
Answer: The chosen option is 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: The chosen option is 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: The chosen option is c. £7,000
xx) Blockchain records are more accurate than single ledger systems because:
Answer: The chosen option is 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 specifies the percentage of revenue that overdoes the cost of goods sold, which reflects Amazon Ltd’s profitability from its essential activities.
Gross Profit Ratio=Gross Profit / Revenue×100
Using the values given:
Gross Profit = £25,200.00
Revenue = £42,000.00
Gross Profit Ratio=25,200/42,000×100=60%
b. Net Profit Ratio
The Net Profit Ratio expresses 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 instant liquidity by not including 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 and Net Profit Ratios
Gross Profit Ratio stood at 60% and Net Profit Ratio stood at 31.43% of Amazon Ltd, representing control over both the cost of sales as well as operating expenses and, at the same time, providing an idea about the good profit structure of the company. These figures talk of healthy margin profit capacity in the cost base management of Amazon Ltd.
Liquidity Ratios: Current Ratio and Quick Ratio
With a Current Ratio of 2.38 and a Quick Ratio of 2.03, Amazon Ltd demonstrates a significant degree of liquidity. Both are significantly above the benchmark for the industry, which is pegged at 1. This indicates that the company has sufficient liquid assets to pay its short-term liabilities without any necessity to sell inventory (Purnomo, 2018). This affords a fine comfort, enabling Amazon Ltd to easily clear all its short-term liabilities.
Efficiency Ratios: Trade Receivable Turnover, Trade Payable Ratio, and Stock Turnover Ratio
With a Trade Receivable Turnover Ratio of 5.32, proper collection of receivables is indicated. However, there is still room for improvement by accelerating collections. The Trade Payable Ratio stands at 4.94, indicating that the company ensures regular payments with suppliers, thereby improving supplier relations and possibly better terms. The Stock Turnover Ratio stands at 12, meaning the inventory products are being cycled through fast, thereby keeping the holding costs due to stock at a minimum and the risk of obsolescence minimised.
Recommendations
Improve Receivable Collection: Although the Trade Receivable Turnover is good, the collection practices can be optimized further for better cash flow and strengthening of the working capital. This may be achieved by decreasing the credit terms or improving the follow-up on outstanding payments (Siele and Tibbs, 2019).
Refine Inventory Management: Although the Stock Turnover Ratio is effective, the consistency of tracking can make it possible to keep track of the fluctuating demands, this way preventing overstocking or even stockout. This will therefore optimize consistent product availability while dealing with inventory cost-effectively (Abu Zwaida, Pham, and Beauregard, 2021).
The liquidity of the company will be high: Given the liquidity of Amazon Ltd, it is always possible to reinvest in key areas of growth. Such diversified trends include an increase in lines of products or a new market segment. This may potentially help enable increased long-term growth prospects by using available cash for potential expansion (Reschiwati, Syahdina, and Handayani, 2020).
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) - divide the average annual profit by the initial investment and express it as %.
Depreciation per Year:
Depreciation is equal to 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=56,800.00
Year 2: 60,000?23,200=36,800.00
Year 3: 40,000?23,200=16,800.00
Year 4: 20,000?23,200=?3,200.00
Year 5: 40,000?23,200=16,800.00
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)
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) =?8,000.00
Year 2: (40,000?18,000) =22,000.00
Year 3: (40,000?18,000) =22,000.00
Year 4: (60,000?18,000) =42,000.00
Year 5: (50,000?18,000) =32,000.00
Total profit over 5 years = ?8,000+22,000+22,000+42,000+32,000=110,000.00
? 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)
NPV Formula:
NPV=?Cash Flow t / (1+r) t ? Initial Investment
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
Calculation of NPV:
NPV=8695.65+30245.75+26300.65+34305.2+27344.72=118196.318
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=15,600.00
Year 2: 40,000?14,400=25,600.00
Year 3: 30,000?14,400=15,600.00
Year 4: 30,000?14,400=15,600.00
Year 5: 20,000?14,400=5,600,00.00
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 delivered the maximum Net Present Value which is £52,556. This means it's the greatest return in terms of investment with the capital honoring the time value of money.
Proposal 2 has the highest Accounting Rate of Return (ARR) at 23.16%, thus proving excellent returns compared to the cost incurred.
The third proposal has the shortest payback period, which is 2.33 years, in which the investment would be recovered, thus reducing exposure to risks.
Recommendation: Based on the better value of the NPV, Proposal 1 is found to be financially the most attractive to Vipers Ltd since it possesses the greatest possibility to create shareholder value.
References
Abu Zwaida, T., Pham, C. and Beauregard, Y., (2021). Optimization of inventory management to prevent drug shortages in the hospital supply chain. Applied Sciences, 11(6), p.2726.
Purnomo, A., (2018). Influence of the ratio of profit margin, financial leverage ratio, current ratio, and quick ratio against the conditions and financial distress. Indonesian Journal of Business, Accounting and Management, 1(1), pp.9-17.
Reschiwati, R., Syahdina, A. and Handayani, S., (2020). Effect of liquidity, profitability, and size of companies on firm value. Utopia y Praxis Latinoamericana, 25(6), pp.325-332.
Siele, K.C. and Tibbs, C.Y., (2019). Accounts receivable management and financial performance of Kericho Water and sanitation company limited, Kericho, Kenya. International Academic Journal of Economics and Finance, 3(3), pp.1-17.
