Question: As Financial Controller of Kensington Holographics Limited, your prime responsibilities are the accurate maintenance of the company’s accounting records and the preparation of its regular financial statements
25 Oct 2022,9:38 PM
Case Study 1
As Financial Controller of Kensington Holographics Limited, your prime responsibilities are the accurate maintenance of the company’s accounting records and the preparation of its regular financial statements.
At 28 February 2021, you have prepared the following Balance Sheet
At the company Board Meeting in March, considerable concern is expressed by the directors at the continuing loss-making operation and the cash flow problems evident in the rising
bank overdraft, which is over the £20,000 limit agreed with the bank.
After some discussion, the directors agree to make personal loans to the company totalling £5,000 – to be paid into the company’s bank account in March. The directors agree that these loans are repayable as soon as the company’s cash flow problems are resolved.
In addition, the directors agree to accept the offer of £20,000 loan finance from the Bank of Glasgow. The loan will be repayable over four years, with the first capital repayment due to take place on 1 April 2022. Since the directors have been negotiating this finance for some months, acceptance of the bank’s offer will allow the loan funds to be deposited into the company’s bank account on 6 March 2021.
During March 2021, the following transactions also occur:
1.Monthly salaries of £3,000 are paid.
2.Plant and machinery, costing £5,000, is purchased and paid for by cheque.
3.Cash of £12,580 is paid to creditors.
4.Insurance premiums of £6,000 are paid (for twelve months to 31 December 2021).
5.Inventory, costing £3,000, is sold for £6,500, on credit.
6.Cash of £10,500 is received from debtors.
7.Inventory is purchased for £9,500, on credit terms.
8.Inventory, costing £6,500, is sold for £13,250 for cash.
You are requested to prepare the financial statements for March 2021 as soon as possible after 31 March 2021. However, you are aware of other items which may require to be reflected in the March financial statements.
These are:
1.A vehicle repairs bill of £400 for March 2021 will be paid in April 2021
2.A customer, owing £1,200, has gone into liquidation in early April 2021.
3.An adjustment is required for the prepaid amount of the insurance premium.
4.Quarterly depreciation charges require to be provided – 20% on plant and 25% on motor vehicles on a straight-line basis.
Required:
1.Prepare the Accounting Equation as at 31 March 2021, detailing the impact of each
of the transactions in March on the accounting records.
(14 marks)
2.Prepare the Profit and Loss Account for March 2021.
(5 marks)
3.Prepare the Balance Sheet as at 31 March 2021.
(6marks)
Total 25 marks
Case Study 2
The telephone rang out in Norman Edgeley’s office. As he stretched across the desk, it stopped ringing and his office door burst open.
‘You’ll never guess who I had dinner with last night!’ exclaimed Emma Smedhurst. Emma was Chief Executive of Pinehurst Dairies Limited.
Before Norman could attempt a guess, Emma continued excitedly.
‘It was John Danvers, the Chairman of Edgware Creameries – our main competitors. The family want to sell. They’re all closing in on retirement and don’t want any more trouble with running the business. Isn’t it great news?’
Norman was the Finance Manager of Pinehurst Dairies, a position that he had held for nearly ten years. During the entire period, Edgware Creameries had always been their principal competitors. At one time, relations were so bad that the local press had featured articles about the ‘milk wars’.
If they wanted to sell, it could be a great opportunity for Pinehurst, enabling it to assume almost total local market dominance in the supply of milk and milk-based products. Such a prominent position would enable them to boost profits through market dominance.
‘How strong are they financially?’ asked Emma.
‘I’ve just received their last set of Accounts to October 2021,’ explained Norman. ‘I’ve not had a chance as yet to review them.’
‘Well, get on with it immediately,’ ordered Emma. ‘I’ve arranged another meeting for Tuesday morning and we both need to be well briefed on their financial strengths and weaknesses before then.’
As quickly as she had arrived, Emma departed the room, leaving Norman to commence a review of Edgware’s Accounts, key extracts of which are set out below.
EDGWARE CREAMERIES LIMITED
SUMMARY PROFIT AND LOSS ACCOUNTS
Required:
1.In advance of Tuesday’s meeting, compute the following ratios for Edgeware for both 2021 and 2020. Show all workings.
a)Current ratio
b)Quick ratio
c)Gross Profit Margin
d)Profit Margin
e)Return on Capital Employed
f)Return on Owner’s Equity
g)Fixed to Current Asset ratio
h)Average Collection Period
i)Times Interest Earned
j)Dividend Cover
(10 marks)
2.From your ratio analysis, identify Edgware’s financial strengths and weaknesses.
(10 marks – 300 word )
3.From the perspective of a possible purchase by Pinehurst, comment on any unusual
movements in the accounts of Edgeware between 2020 and 2021.
(5 marks – 200 word )
Total 25 marks
Case Study 3
‘It’ll be tight!’ exclaimed Doug Nelson, the chief executive of Montana Engineering Limited. He was referring to the company’s expected cash flow over the next quarter to 30
November. Although the company had good relations with its bankers, South Island Provincial, he was concerned that the company’s recent operational losses plus its planned capital expenditure in October would strain the company’s overdraft limit.
The company plans to purchase a new digital lathe in September, costing £200,000. The payment terms on the order are that 25% will be payable on delivery in October with the remaining 75% payable in November.
‘I’ll have a detailed look at the funding requirement,’ responded Jim O’Halloran, the company’s chief financial officer. ‘You’re probably right, but I’ll see what it looks like on a month-by-month basis.’
The following information is available to assist the preparation of the cash budget for the three months to 30 November 2021:
1.The opening cash balance is £93,400 at 1 September 2021.
2.The production manager expects direct labour costs to run at £22,000 per month, rising to £25,000 in November due to the overtime necessary to install the new equipment.
3.Monthly overheads (excluding salaries, but including £4,000 of depreciation) are expected to be £17,000.
4.Trade debtors at 1 September 2021 are £225,000 with the following age profile: From June sales £10,000
From July sales £100,000
From August sales £115,000
Customers settle their debts in line with the following pattern – 20% in the month after invoicing, 70% in the second month after invoicing and 10% in the third month after invoicing. All sales are credit sales.
5.The company is due to pay £35,000 of corporate tax in September.
6.Trade creditors at 1 September 2021 are £117,000 with the following age profile: From July purchases £52,000
From August purchases £57,000
The company has a policy of paying it suppliers within 60 days.
- Projected sales for the next quarter are:
September £220,000
October £145,000
November £165,000
8.Projected purchases for the next quarter are:
September £80,000
October £60,000
November £55,000
9.Monthly salaries for sales and marketing staff are £8,500 with quarterly commissions earned by the sales staff in September and payable in September of £12,000.
10.Monthly salaries for general and administration staff are £7,800.
11.The company’s current overdraft limit is £42,000.
Required:
1.Prepare the profit and loss account forecast for the quarter to 30 November 2021.
Show all workings.
(8 marks)
2.Prepare the cash budget for the quarter to 30 November 2021. Show all workings.
(10 marks)
3.In view of the funding requirements highlighted by the cash budget, outline the
actions that the chief financial officer can take to ensure that the company does not breach its overdraft limit.
(7marks – 200 word)
Total 25 marks
Case Study 4
The avionics division of Scottish Aeropspace Systems Limited manufactures a single product – the Alpha 1, which is sold exclusively to the Ministry of Defence for integration into Royal Airforce cockpit controls.
The company has always operated with a full standard costing system, providing full variance analysis of all variable costs and sales revenue.
The standard cost of Alpha 1 unit is made up of the following costs:
Direct materials £
Raw material A5 – 6 kg at £7 per kg 42.00
Raw material K9 – 3 kg at £4 per kg 12.00
Direct labour – 4 hours at £10 per hour 40.00
Variable overheads – 4 hours at £16 per direct labour hour 64.00
The company’s annual budget envisages sales of 20,000 units of the Alpha 1 product at £320.00 each, spread evenly over the year.
For the financial year just completed, the company achieved the following results:
The board of directors is reasonably satisfied with the operating performance but is
surprised that there are considerable differences between budgeted and actual performance levels.
Required:
1.Prepare a full variance analysis, reconciling actual performance with budget for the
financial year just ended. Show all workings.
(15 marks)
2.Identify possible explanations for each of the variances computed.
(10 marks – 400 word limit)
Total 25 marks
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