Andrew is the owner of a store named Chubs & Hubs Pet Store, which sells dogs and cats.Andrew asked the company accountant to prepare a cash budget for the business covering the following 3 months to 31st March.
2024-06-09 07:15:52
Faculty of Humanities and Social Sciences MN-M001: Managing Financial Resources
Normal Duration: 2 hours Exam Session: January 2024 Level/Year: M / 7
Answer all questions
Calculators: Candidates may use calculators to complete this assessment
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Answer ALL Questions
Question 1
Andrew is the owner of a store named Chubs & Hubs Pet Store, which sells dogs and cats. Andrew asked the company accountant to prepare a cash budget for the business covering the following 3 months to 31st March. Here are the details:
1. Sales of dogs and cats are made on cash as follows:
|
|
Dogs
£
|
Cats
£
|
Total
£
|
|
January
|
3,000
|
6,000
|
9,000
|
|
February
|
5,000
|
7,000
|
12,000
|
|
March
|
7,000
|
8,000
|
15,000
|
2. Suppliers allow two months’ credit. The amount due for dogs purchased in November is £400, £500 in December, £600 in January and £700 in February.
3. An insurance premium of £700 is payable in February to cover the 6 months to July.
4. Wages of £1,500 per month are payable for January and February rising to £2,000 for March.
5. Andrew plans to take £600 from the business each month for his use.
6. Motor expenses of £500 are payable each month.
7. The business regularly runs local radio advertisements costing £500 per month.
8. An equipment hiring expense £100 per month.
Required:
a) Prepare a cash budget for Andrew’s business for the three months ending 31st March.(The bank balance at 1st January is £3,500). [16 marks]
b) Instead of hiring the equipment, Andrew could buy it for £15,000 and this would be far more convenient for the business. Advise Andrew on whether the business can afford to do this. [4 marks]
c) Describe FIVE benefits to a small business that might arise from regularly producing a cash budget. [5 marks]
[Total Question 1: 25 marks]
Question 2
Catrin’s trial balance, drawn up at the end of the first year of trading, is shown below:
|
Catrin
Trial balance as at 31 December 2023
|
|
|
Debit
£
|
Credit
£
|
|
Capital
|
|
30,000
|
|
Loan
|
|
12,000
|
|
Bank overdraft
|
|
3,090
|
|
Sales
|
|
267,700
|
|
Opening inventory
|
20,000
|
|
|
Purchases
|
181,000
|
|
|
Trade receivables
|
15,400
|
|
|
Trade payables
|
|
10,910
|
|
Wages
|
45,000
|
|
|
Rent
|
10,000
|
|
|
Insurance
|
4,100
|
|
|
Loan interest
|
360
|
|
|
Light expenses
|
1,000
|
|
|
Heat expenses
|
940
|
|
|
Drawings
|
21,900
|
|
|
Premises
|
14,000
|
|
|
Office equipment
|
10,000
|
|
|
|
323,700
|
323,700
|
Note: Closing inventories on 31 December 2023 were valued at £18,000.
Required:
a) Prepare the statement of profit or loss for Catrin for the year ended 31 December 2023.[9 marks]
b) Comment on what the statement of profit or loss tells you about Catrin’s business and suggest three ways to Catrin on how to improve the profitability of her business. [5 marks]
c) Prepare the statement of financial position for Catrin for the year ended 31 December 2023. [9 marks]
d) Explain why the amount that the business has paid Catrin is not included with wages. [2 marks] [Total Question 2: 25 marks]
Question 3
Swansea plc runs a chain of restaurants in Wales. The following is an extract of financial statements for Swansea plc for two years, 2022 and 2023:
|
|
2023
£
|
2022
£
|
|
Sales
|
144,524
|
123,873
|
|
Gross profit
|
20,910
|
18,652
|
|
Operating profit
|
17,328
|
16,112
|
|
Interest paid
|
4
|
19
|
|
Non-current assets
|
119,269
|
103,739
|
|
Current assets (including inventories)
|
18,327
|
10,993
|
|
Inventories
|
4,559
|
3,838
|
|
Equity
|
91,703
|
78,807
|
|
Non-current liabilities (long-term loan)
|
9,506
|
8,730
|
|
Current liabilities
|
36,387
|
27,135
|
Required:
a) Using extracts from the financial statements, compute the following profitability ratios for Swansea plc for 2023 and 2012 and interpret your findings, giving a possible reason for any observed changes in each ratio:
i) return on capital employed.
ii) gross profit margin
iii) operating profit margin
iv) use of assets
[16 marks]
b) Use ratios to assess the company`s liquidity at both year-ends and explain what has caused the movement in the ratios between the two year-ends. [8 marks]
c) Explain what the term ‘overtrading’ means. [1 mark] [Total Question 3: 25 marks]
Question 4
Yusef runs a news agency from offices in Cardiff. The business did not need much capital to get started. Still, Yusef is now keen to diversify the business from producing just newspaper and magazine adverts into creating television and radio adverts. To fund this, the business will need to raise a significant amount of capital, £100,000, and Yusef has been advised that the best way to start this process is to convert the business into a limited company.
Required:
a) If Yusef Ltd issues 100,000 £1 ordinary shares at £1.10, what is the effect of the share issue on ordinary share capital and share premium accounts?[2 marks]
b) If Yusef Ltd issues 50,000 ordinary shares of £1 each and raises the remainder by means of a long-term loan carrying interest at 5%, what will the annual interest obligation of the company be?[1 mark]
c) If Yusef Ltd issues 40,000 5% £1 preference shares and 60,000 £1 ordinary shares, and the expected profit before taxation for the first 4 years of trade are as follows:
|
|
Year 1
£
|
Year 2
£
|
Year 3
£
|
Year 4
£
|
|
Profit before taxation
|
20,000
|
25,000
|
30,000
|
40,000
|
What would be the profits per share available to ordinary shareholders in each of the years 1 to 4, assuming that tax charge is 20% of the reported profit before taxation?[16 marks]
d) If Yusef continues his business as a sole trader, he will have unlimited liability. Briefly explain what the term ‘unlimited liability’ means.
[2 marks]
e) Describe TWO advantages and TWO disadvantages to Yusef of forming a limited company. [4 mark] [Total Question 4: 25 marks]
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