Topic: Working Capital Management

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FM – May 2019 – L3 – Q7 – Working Capital Management

Evaluate the financial viability of accepting a new customer order and provide considerations for granting credit.

Question

V Plc. manufactures engineering equipment. The company has received an order from a new customer for five machines at N5,000,000 each. V Plc.’s terms of sale are 10 percent of the sales value payable with the order. The deposit has been received from the new customer. The balance is payable 12 months after acceptance of the order by V Plc.

V Plc.’s past experience has been that only 60 percent of similar customers pay within 12 months. Customers who do not pay within 12 months are referred to a debt collection agency to pursue the debt. The agency has in the past had a 50 percent success rate of obtaining immediate payment once they became involved. When they are unsuccessful, the debt is written off by V Plc. The agency’s fee is N500,000 per order, payable by V Plc. with the request for service. This fee is not refundable if the debt is not recovered.

As an accountant in V Plc.’s credit control department, and based on the company’s past experience and on discussions with the sales and credit managers, you do not expect the pattern of payment and collection to change.

Incremental costs associated with the new customer’s order are expected to be N3,600,000 per machine, 70 percent of these costs are for materials and are incurred shortly after the order has been accepted. The remaining 30 percent is for all other costs, which you can assume are paid shortly before delivery, i.e., in 12 months’ time. The company is not at present operating at full production capacity.

A credit bureau has offered to provide error-free credit information about the new customer if the price is right.

V Plc.’s opportunity cost of capital is 16 percent. Ignore taxation.

Required:

a. Evaluate, from a purely financial point of view, if V Plc. should accept the order from the new customer based on the above information. (12 Marks)

b. Comment on what other factors should be considered before a decision to grant credit is taken. (3 Marks)

Answer

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Tags: Credit control, Customer Order Evaluation, Financial Analysis, Risk Assessment
Level: Level 3

Topic: Working Capital Management

FM – May 2018 – L3 – SB – Q3 – Working Capital Management

Calculate the optimal re-order quantity, compare suppliers, and evaluate limitations in Kehinde's inventory management.

Question

Kehinde is a wholesaler who buys and sells a wide range of products, including electrical component TK. Kehinde sells 24,000 units of TK each year at a unit price of N2,000. Sales of TK normally follow an even pattern throughout the year. To prevent stock-outs, Kehinde keeps a minimum inventory of 1,000 units. Further supplies of TK are ordered whenever the inventory falls to this minimum level, and the time lag between ordering and delivery is small and can be ignored.

At present, Kehinde buys all his supplies of TK from Ajoke Limited and usually purchases them in batches of 5,000 units. His most recent invoice from Ajoke Limited was as follows:

Item	Amount (N’000)
Basic price: 5,000 units of TK at N1,500 per unit	7,500
Delivery charges:
– Transport at N50 per unit	250
– Fixed shipment charge per order	100
Total	7,850

Kehinde also estimates an ordering cost of N50,000 per order, comprising administrative costs and sample checks, which does not vary with the order size.

Kehinde stores TK in a warehouse rented at N500 per square metre per annum, with excess capacity sublet at N400 per square metre annually. Each unit of TK in inventory requires 2 square metres of space. Other holding costs are estimated at N1,000 per unit per annum.

Kehinde has recently learned that another supplier, Ema Limited, offers discounts for large orders. Ema Limited’s pricing structure is as follows:

Order Size	Price per unit (N)
1 – 2,999	1,525
3,000 – 4,999	1,450
5,000 and over	1,425

In other respects (delivery charges and order lead time), Ema Limited’s terms match those of Ajoke Limited.

Required:

a. Calculate the relevant:
i. Cost per order
ii. Holding cost per unit per annum (4 Marks)

b. Irrespective of your answers in (a) above and assuming a cost per order of N150,000 and holding cost per unit per annum of N1,800, calculate the optimal re-order quantity for TK and the associated annual profit Kehinde can expect from the purchase and sale, assuming that he continues to buy from Ajoke Limited. (6 Marks)

c. Prepare calculations to determine if Kehinde should buy TK from Ema Limited instead of Ajoke Limited, and in what batch size. (7 Marks)

d. Discuss the key limitations of the method of analysis you used. (3 Marks)

Answer

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Tags: Economic Order Quantity, Holding costs, Inventory Management, Order Costs, Supplier Analysis
Level: Level 3

Topic: Working Capital Management
Series: MAY 2018

PM – May 2017 – L2 – SA – Q1 – Working Capital Management

Calculate KPIs for Kardex’s products, perform a PEST analysis, and comment on KPI effectiveness in external conditions.

Question

Kardex Industries Nigeria Limited is a subsidiary of a large manufacturing company based in China (Kardex International). The company manufactures washing machines, table gas cookers, and refrigerators which are being sold by the subsidiary in Nigeria. Demand for the company’s product is growing, especially among the growing middle-class population, until recently when the company started experiencing some hiccups due to the economic recession and stiff competition.
- The company currently sells two types of washing machines in Nigeria:
  - Wash Up: A basic product comparable to local competitors.
  - Perfect Wash: A premium product similar to Kardex’s offerings in developed countries.
- The competitive environment in Nigeria is evolving quickly. Apart from Kardex, two other companies offer similar machines in the market. One competitor produces machines similar to “Wash Up” locally with tax incentives, while the other is planning to set up a plant for specialized washing machines akin to Kardex’s “Perfect Wash.”
- Kardex International’s mission is to be the “industry leader.” The Kardex Board has identified critical success factors (CSFs) for the Nigerian subsidiary:
  - Market leadership.
  - Profit maximization and shareholder wealth within acceptable risk.
  - Brand image maintenance as a top-of-the-range product.
- The Board suggests using the following KPIs for each product:
  - Total profit, average sales price per unit, contribution per unit, market share, margin of safety, return on capital employed (ROCE), and total quality costs.

Appendix 1
Financial Year Data for Nigerian Subsidiary:

Requirements:

a. Calculate the Key Performance Indicators (KPIs) for Kardex, including:

Total Profit
Average Sales Price per Unit
Contribution per Unit
Market Share
Margin of Safety
Return on Capital Employed (ROCE)
Quality Costs (20 Marks)

b. Use a PEST Analysis to identify external environmental issues affecting Kardex and discuss the effectiveness of the KPIs in addressing these issues.

Answer

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Tags: KPI, Margin of Safety, Market Share, Profitability analysis, Quality Costs, ROCE
Level: Level 2

Topic: Working Capital Management
Series: MAY 2017

PM – May 2023 – L2 – SA – Q1 – Working Capital Management

Calculate Vestapricy Ltd's cost of goods sold, analyze the working capital cycle, and apply decision rules for inventory management in Owerri.

Question

Vestapricy and Company Limited is a manufacturing outfit located in Port Harcourt. It produces a tracking device that is attached to motor vehicles. The device is designed to help locate the whereabouts of stolen motor vehicles within the country. The company’s capital (or cash operating cycle) is the length of time between the payment for purchased materials and the receipt of payment from selling the goods made with the materials.

The table below gives information extracted from the annual accounts of Vestapricy and Company Limited for the past three years.

Extracts from Vestapricy and Company Limited annual accounts for 31st December 2020 to December 2022:

	2020	2021	2022
Inventory:
Raw materials	108,000	145,800	180,000
Work in progress	75,600	97,200	93,360
Finished goods	86,400	129,600	142,875
Purchases	518,400	702,000	720,000
Sales	864,000	1,080,000	1,188,000
Trade receivables	172,800	259,200	297,000
Trade payables	86,400	105,300	126,000

Other information is as follows:

All purchases and sales are on credit.
Direct wages:
- 2021: ₦300,000
- 2022: ₦250,000
Production expenses:
- 2021: ₦72,600
- 2022: ₦171,995
The company’s policy is that any data that will be used from the statement of financial position in determining the working capital cycle period will be average based.

Required:

a.
i. Compute the cost of goods sold for 2021 and 2022. (3 Marks)
ii. Calculate the length of the working capital cycle (assuming 365 days in the year) for 2021 and 2022. (7 Marks)
iii. List the actions that the management of the company might take to reduce the length of the working capital cycle. (5 Marks)

b. In 2023, the company (Vestapricy) decided to open a new small apple shop in Owerri to be managed by a shopkeeper. The shopkeeper is deciding on the number of boxes of special apples it hopes to buy each day. A box of apples earns a contribution of ₦400 and costs ₦250.

Demand for apples is uncertain and could vary from 30 boxes to 10 boxes. Any apple that is purchased but not sold will be thrown away at the end of the day.

The shopkeeper has decided that he will buy 10 boxes, 20 boxes or 30 boxes each day, and these are the only three options he wants to consider.

Required:

i. Construct the Pay-off table for this business in Owerri. (7 Marks)
ii. How many boxes should the storekeeper purchase if the decision is based on:

The Maximax decision rule.
The Maximum decision rule.
The Minimax regret decision rule.
Give reasons for your decisions. (8 Marks)

Answer

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Tags: Decision Rules, Maximax, Minimax, Pay-off Table, Working Capital, Working Capital Cycle
Level: Level 2

Topic: Working Capital Management
Series: MAY 2023

PM – Nov 2018 – L2 – Q3 – Working Capital Management

Prepare cash forecast, profitability, and liquidity ratio for Omegboeji Nigeria Ltd from 2015-2017.

Question

Omegboeji Nigeria Limited is a trading company that specialises in buying and selling of bulk oil. The company is financed by a capital base of N24 million inclusive of reserves in a mix of 30% and 70% of debt and equity respectively. The company has been in the trading business for the past six years and has consistently adhered to its corporate policy on sales, purchases, and inventory management.

The company’s policy on sales is to ensure that sales proceeds are collected as follows:
(i) Cash Sales is 30% of the monthly sales.
(ii) The balance of the month’s sales is to be collected in the month following sales.

The policy on monthly purchases, which is in agreement with the supplier’s policy, is to pay for all supplies in the month following the month of purchase. The general policy of the company is that purchase cost for bulk oil represents 60% of the corresponding annual sales value while its inventory policy is to reserve 30% of the month’s purchases as closing inventory.

The following information is available for the five years 2013 to 2017:

Year	Monthly Sales (N’000)	Monthly Salaries (N’000)	Monthly Rent (N’000)	Monthly Expenses (N’000)
2013	12,000	800	400	350
2014	15,000	800	400	370
2015	16,800	960	400	390
2016	18,000	960	400	390
2017	24,000	1,080	400	380

Additional information:
(i) The company will purchase a motor vehicle in July 2016, which will be paid for in two instalments as follows:

First payment: 60% of cost in September 2016
Balance: To be paid in November 2016
The cost of the motor vehicle is expected to be N7,500,000.

(ii)Annual depreciation for the motor vehicle will be 20% on a straight-line basis. Monthly expenses include annual depreciation for the motor vehicle.

(iii) The cash balance as of December 31, 2014, was N2,500,000.

(iv) The company’s salaries, rent, and expenses will be paid in the month during which they are due.

Required:
a. Prepare a cash forecast for 2015, 2016, and 2017, showing the closing cash balance at each year-end. (10 Marks)

b. Prepare a forecast profitability statement for 2015, 2016, and 2017. (7 Marks)

c. Determine and comment on the forecast liquidity ratio (current ratio) for 2017. (3 Marks)

Answer

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Tags: Cash Forecast, Financial Analysis, Liquidity Ratio, Profitability
Level: Level 2

Topic: Working Capital Management
Series: NOV 2018

FM – May 2021 – L2 – Q3d – Working Capital Management

Discuss one merit and one demerit of engaging the services of a debt factoring agency.

Question

Discuss ONE (1) merit and ONE (1) demerit of engaging the services of a debt factoring agency. (3 marks)

Answer

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Tags: Debt Collection, Factoring Agency, Financial risk, Receivables Financing
Level: Level 2

Topic: Working Capital Management
Series: MAY 2021

FM – May 2021 – L2 – Q3c – Factoring Agency

Define what a factoring agency is and explain its role.

Question

What is a factoring agency?

Answer

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Tags: Accounts Receivable, Factoring Agency, Short-term Finance
Level: Level 2

Topic: Working Capital Management
Series: MAY 2021

FM – DEC 2023 – L2 – Q3 – Discounted cash flow | Sources of finance: debt | Working Capital Management

Identification of cash flow patterns, present value calculation for two payment strategies, and explanation of the benefits and factors related to credit rating.

Question

a) TekApps is a small technology company that develops financial technology (FinTech) applications for mobile devices. The company is selling one of its highly rated FinTech apps to a financial institution. The financial institution has proposed the following strategic payment options for TekApps’ consideration:

Strategy 1: An immediate payment of GH¢1.2 million followed by payments of GH¢50,000 at the end of each quarter during the next five years.

Strategy 2: Payment of GH¢55,000 at the beginning of each month for the next five years.

TekApps’ required rate of return is 25% per annum.

Required:
i) Identify the type of cash flow pattern described under each option. (3 marks)
ii) Compute the present value of the cash flows for each strategy and advise TekApps on the best payment option. (7 marks)

b) BKB Entertainment Ltd (BKB) currently borrows at an average rate of 24% per annum. The Treasury Manager of the company believes that BKB can borrow at a lower interest rate if its creditworthiness is assessed and rated by a rating agency. He has therefore recommended to the Board of Directors to consider requesting a credit rating.

Required:
i) Explain TWO (2) benefits of credit rating to BKB. (4 marks)
ii) Advise the directors on THREE (3) factors rating agencies will consider in determining the company’s credit rating. (6 marks)

Answer

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Tags: Annuity, Cash Flow Patterns, Financial Decision-Making, Payment Options, Present Value
Level: Level 2

Topic: Discounted cash flow, Sources of finance: debt, Working Capital Management
Series: DEC 2022

FM – May 2020 – L2 – Q5b – Working Capital Management

Evaluate the impact of introducing credit sales on total profit before tax for a company and provide management advice.

Question

Innovate Ghana Ltd is a dealer in household consumables in Ghana. It currently sells on a cash-only basis. The company’s current annual sales are GH¢10 million. The operating cost structure is as follows:

Cost of sales: 55% of sales
Staff cost: 10% of sales
Marketing and distribution cost: 15% of sales

Management in a meeting concluded that introducing credit sales will help boost sales in the light of the current tightness in liquidity in the market, the drive by other competitors, and pressure from the sales team.

It is projected that total sales will grow by 50% solely from the credit sales. The customers are offered 1-month credit, and a new credit department is set up to assess and monitor these credit sales. The monthly cost of running this credit department is GH¢20,000, and bad debts are expected to be 4% of the credit sales.

To finance this credit, Innovate Ghana Ltd will borrow at an interest rate of 25% per annum.

Required:

i) Calculate the total profit before tax before the introduction of the new policy.
(4 marks)

ii) Calculate the total profit before tax after the introduction of the new policy.
(6 marks)

iii) Advise management whether the initiative should be undertaken.
(3 marks)

Answer

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Tags: Credit Policy, Profitability analysis, Receivables Management, Working Capital Management
Level: Level 2

Topic: Working Capital Management
Series: MAY 2020

FM – MAY 2017 – L1 – Q4 – Management of receivables and payables | Working Capital Management

Differentiate between factoring and invoice discounting and advise ATA Ghana Ltd on whether to take on new customers based on the proposed credit policy.

Question

a) Factoring and Invoice Discounting are both financial services that can release the funds tied up in your unpaid invoices, involving a provider who agrees to advance money against outstanding debtor balances. However, factoring is not the same as invoice discounting.

Required:
Differentiate between factoring and invoice discounting.
(5 marks)

b) ATA Ghana Ltd is a company in Ghana engaged in the trading of commodities. The annual sales are GH¢24 million. The average age of debtors is one month, and the percentage of bad debts is 1%.

A new Marketing Director has been hired by the company to improve its sales. The new Marketing Director proposed that sales could be increased up to GH¢30 million if new customers were taken on. Taking on new customers will lengthen the average credit period to 2 months and increase bad debts to 1.5% of sales.

The Finance Manager provided that the variable cost is 70% of the selling price and the company’s cost of capital is 20%.

Required:
Advise whether the company should take on the new customers.
(10 marks)

Answer

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Tags: Credit Policy, Factoring, Invoice Discounting, Working Capital
Level: Level 2

Topic: Management of receivables and payables, Working Capital Management
Series: MAY 2017

FM – May 2019 – L3 – Q7 – Working Capital Management

Evaluate the financial viability of accepting a new customer order and provide considerations for granting credit.

Question

A credit bureau has offered to provide error-free credit information about the new customer if the price is right.

V Plc.’s opportunity cost of capital is 16 percent. Ignore taxation.

Required:

a. Evaluate, from a purely financial point of view, if V Plc. should accept the order from the new customer based on the above information. (12 Marks)

b. Comment on what other factors should be considered before a decision to grant credit is taken. (3 Marks)

Answer

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Tags: Credit control, Customer Order Evaluation, Financial Analysis, Risk Assessment
Level: Level 3

Topic: Working Capital Management

FM – May 2018 – L3 – SB – Q3 – Working Capital Management

Calculate the optimal re-order quantity, compare suppliers, and evaluate limitations in Kehinde's inventory management.

Question

At present, Kehinde buys all his supplies of TK from Ajoke Limited and usually purchases them in batches of 5,000 units. His most recent invoice from Ajoke Limited was as follows:

Item	Amount (N’000)
Basic price: 5,000 units of TK at N1,500 per unit	7,500
Delivery charges:
– Transport at N50 per unit	250
– Fixed shipment charge per order	100
Total	7,850

Kehinde also estimates an ordering cost of N50,000 per order, comprising administrative costs and sample checks, which does not vary with the order size.

Kehinde has recently learned that another supplier, Ema Limited, offers discounts for large orders. Ema Limited’s pricing structure is as follows:

Order Size	Price per unit (N)
1 – 2,999	1,525
3,000 – 4,999	1,450
5,000 and over	1,425

In other respects (delivery charges and order lead time), Ema Limited’s terms match those of Ajoke Limited.

Required:

a. Calculate the relevant:
i. Cost per order
ii. Holding cost per unit per annum (4 Marks)

c. Prepare calculations to determine if Kehinde should buy TK from Ema Limited instead of Ajoke Limited, and in what batch size. (7 Marks)

d. Discuss the key limitations of the method of analysis you used. (3 Marks)

Answer

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Tags: Economic Order Quantity, Holding costs, Inventory Management, Order Costs, Supplier Analysis
Level: Level 3

Topic: Working Capital Management
Series: MAY 2018

PM – May 2017 – L2 – SA – Q1 – Working Capital Management

Calculate KPIs for Kardex’s products, perform a PEST analysis, and comment on KPI effectiveness in external conditions.

Question

Kardex Industries Nigeria Limited is a subsidiary of a large manufacturing company based in China (Kardex International). The company manufactures washing machines, table gas cookers, and refrigerators which are being sold by the subsidiary in Nigeria. Demand for the company’s product is growing, especially among the growing middle-class population, until recently when the company started experiencing some hiccups due to the economic recession and stiff competition.
- The company currently sells two types of washing machines in Nigeria:
  - Wash Up: A basic product comparable to local competitors.
  - Perfect Wash: A premium product similar to Kardex’s offerings in developed countries.
- The competitive environment in Nigeria is evolving quickly. Apart from Kardex, two other companies offer similar machines in the market. One competitor produces machines similar to “Wash Up” locally with tax incentives, while the other is planning to set up a plant for specialized washing machines akin to Kardex’s “Perfect Wash.”
- Kardex International’s mission is to be the “industry leader.” The Kardex Board has identified critical success factors (CSFs) for the Nigerian subsidiary:
  - Market leadership.
  - Profit maximization and shareholder wealth within acceptable risk.
  - Brand image maintenance as a top-of-the-range product.
- The Board suggests using the following KPIs for each product:
  - Total profit, average sales price per unit, contribution per unit, market share, margin of safety, return on capital employed (ROCE), and total quality costs.

Appendix 1
Financial Year Data for Nigerian Subsidiary:

Requirements:

a. Calculate the Key Performance Indicators (KPIs) for Kardex, including:

Total Profit
Average Sales Price per Unit
Contribution per Unit
Market Share
Margin of Safety
Return on Capital Employed (ROCE)
Quality Costs (20 Marks)

b. Use a PEST Analysis to identify external environmental issues affecting Kardex and discuss the effectiveness of the KPIs in addressing these issues.

Answer

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Tags: KPI, Margin of Safety, Market Share, Profitability analysis, Quality Costs, ROCE
Level: Level 2

Topic: Working Capital Management
Series: MAY 2017

PM – May 2023 – L2 – SA – Q1 – Working Capital Management

Calculate Vestapricy Ltd's cost of goods sold, analyze the working capital cycle, and apply decision rules for inventory management in Owerri.

Question

The table below gives information extracted from the annual accounts of Vestapricy and Company Limited for the past three years.

Extracts from Vestapricy and Company Limited annual accounts for 31st December 2020 to December 2022:

	2020	2021	2022
Inventory:
Raw materials	108,000	145,800	180,000
Work in progress	75,600	97,200	93,360
Finished goods	86,400	129,600	142,875
Purchases	518,400	702,000	720,000
Sales	864,000	1,080,000	1,188,000
Trade receivables	172,800	259,200	297,000
Trade payables	86,400	105,300	126,000

Other information is as follows:

All purchases and sales are on credit.
Direct wages:
- 2021: ₦300,000
- 2022: ₦250,000
Production expenses:
- 2021: ₦72,600
- 2022: ₦171,995
The company’s policy is that any data that will be used from the statement of financial position in determining the working capital cycle period will be average based.

Required:

Demand for apples is uncertain and could vary from 30 boxes to 10 boxes. Any apple that is purchased but not sold will be thrown away at the end of the day.

The shopkeeper has decided that he will buy 10 boxes, 20 boxes or 30 boxes each day, and these are the only three options he wants to consider.

Required:

i. Construct the Pay-off table for this business in Owerri. (7 Marks)
ii. How many boxes should the storekeeper purchase if the decision is based on:

The Maximax decision rule.
The Maximum decision rule.
The Minimax regret decision rule.
Give reasons for your decisions. (8 Marks)

Answer

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Tags: Decision Rules, Maximax, Minimax, Pay-off Table, Working Capital, Working Capital Cycle
Level: Level 2

Topic: Working Capital Management
Series: MAY 2023

PM – Nov 2018 – L2 – Q3 – Working Capital Management

Prepare cash forecast, profitability, and liquidity ratio for Omegboeji Nigeria Ltd from 2015-2017.

Question

The following information is available for the five years 2013 to 2017:

Year	Monthly Sales (N’000)	Monthly Salaries (N’000)	Monthly Rent (N’000)	Monthly Expenses (N’000)
2013	12,000	800	400	350
2014	15,000	800	400	370
2015	16,800	960	400	390
2016	18,000	960	400	390
2017	24,000	1,080	400	380

Additional information:
(i) The company will purchase a motor vehicle in July 2016, which will be paid for in two instalments as follows:

First payment: 60% of cost in September 2016
Balance: To be paid in November 2016
The cost of the motor vehicle is expected to be N7,500,000.

(ii)Annual depreciation for the motor vehicle will be 20% on a straight-line basis. Monthly expenses include annual depreciation for the motor vehicle.

(iii) The cash balance as of December 31, 2014, was N2,500,000.

(iv) The company’s salaries, rent, and expenses will be paid in the month during which they are due.

Required:
a. Prepare a cash forecast for 2015, 2016, and 2017, showing the closing cash balance at each year-end. (10 Marks)

b. Prepare a forecast profitability statement for 2015, 2016, and 2017. (7 Marks)

c. Determine and comment on the forecast liquidity ratio (current ratio) for 2017. (3 Marks)

Answer

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Tags: Cash Forecast, Financial Analysis, Liquidity Ratio, Profitability
Level: Level 2

Topic: Working Capital Management
Series: NOV 2018

FM – May 2021 – L2 – Q3d – Working Capital Management

Discuss one merit and one demerit of engaging the services of a debt factoring agency.

Question

Discuss ONE (1) merit and ONE (1) demerit of engaging the services of a debt factoring agency. (3 marks)

Answer

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Tags: Debt Collection, Factoring Agency, Financial risk, Receivables Financing
Level: Level 2

Topic: Working Capital Management
Series: MAY 2021

FM – May 2021 – L2 – Q3c – Factoring Agency

Define what a factoring agency is and explain its role.

Question

What is a factoring agency?

Answer

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Tags: Accounts Receivable, Factoring Agency, Short-term Finance
Level: Level 2

Topic: Working Capital Management
Series: MAY 2021

FM – DEC 2023 – L2 – Q3 – Discounted cash flow | Sources of finance: debt | Working Capital Management

Identification of cash flow patterns, present value calculation for two payment strategies, and explanation of the benefits and factors related to credit rating.

Question

Strategy 1: An immediate payment of GH¢1.2 million followed by payments of GH¢50,000 at the end of each quarter during the next five years.

Strategy 2: Payment of GH¢55,000 at the beginning of each month for the next five years.

TekApps’ required rate of return is 25% per annum.

Answer

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Tags: Annuity, Cash Flow Patterns, Financial Decision-Making, Payment Options, Present Value
Level: Level 2

Topic: Discounted cash flow, Sources of finance: debt, Working Capital Management
Series: DEC 2022

FM – May 2020 – L2 – Q5b – Working Capital Management

Evaluate the impact of introducing credit sales on total profit before tax for a company and provide management advice.

Question

Cost of sales: 55% of sales
Staff cost: 10% of sales
Marketing and distribution cost: 15% of sales

To finance this credit, Innovate Ghana Ltd will borrow at an interest rate of 25% per annum.

Required:

i) Calculate the total profit before tax before the introduction of the new policy.
(4 marks)

ii) Calculate the total profit before tax after the introduction of the new policy.
(6 marks)

iii) Advise management whether the initiative should be undertaken.
(3 marks)

Answer

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Tags: Credit Policy, Profitability analysis, Receivables Management, Working Capital Management
Level: Level 2

Topic: Working Capital Management
Series: MAY 2020

FM – MAY 2017 – L1 – Q4 – Management of receivables and payables | Working Capital Management

Differentiate between factoring and invoice discounting and advise ATA Ghana Ltd on whether to take on new customers based on the proposed credit policy.

Question

Required:
Differentiate between factoring and invoice discounting.
(5 marks)

b) ATA Ghana Ltd is a company in Ghana engaged in the trading of commodities. The annual sales are GH¢24 million. The average age of debtors is one month, and the percentage of bad debts is 1%.

The Finance Manager provided that the variable cost is 70% of the selling price and the company’s cost of capital is 20%.

Required:
Advise whether the company should take on the new customers.
(10 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Credit Policy, Factoring, Invoice Discounting, Working Capital
Level: Level 2

Topic: Management of receivables and payables, Working Capital Management
Series: MAY 2017

Topic: Working Capital Management

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FM – May 2019 – L3 – Q7 – Working Capital Management

Evaluate the financial viability of accepting a new customer order and provide considerations for granting credit.

Required:

FM – May 2018 – L3 – SB – Q3 – Working Capital Management

Calculate the optimal re-order quantity, compare suppliers, and evaluate limitations in Kehinde's inventory management.

PM – May 2017 – L2 – SA – Q1 – Working Capital Management

Calculate KPIs for Kardex’s products, perform a PEST analysis, and comment on KPI effectiveness in external conditions.

PM – May 2023 – L2 – SA – Q1 – Working Capital Management

Calculate Vestapricy Ltd's cost of goods sold, analyze the working capital cycle, and apply decision rules for inventory management in Owerri.

PM – Nov 2018 – L2 – Q3 – Working Capital Management

Prepare cash forecast, profitability, and liquidity ratio for Omegboeji Nigeria Ltd from 2015-2017.

FM – May 2021 – L2 – Q3d – Working Capital Management

Discuss one merit and one demerit of engaging the services of a debt factoring agency.

FM – May 2021 – L2 – Q3c – Factoring Agency

Define what a factoring agency is and explain its role.

FM – DEC 2023 – L2 – Q3 – Discounted cash flow | Sources of finance: debt | Working Capital Management

Identification of cash flow patterns, present value calculation for two payment strategies, and explanation of the benefits and factors related to credit rating.

FM – May 2020 – L2 – Q5b – Working Capital Management

Evaluate the impact of introducing credit sales on total profit before tax for a company and provide management advice.

FM – MAY 2017 – L1 – Q4 – Management of receivables and payables | Working Capital Management

Differentiate between factoring and invoice discounting and advise ATA Ghana Ltd on whether to take on new customers based on the proposed credit policy.

FM – May 2019 – L3 – Q7 – Working Capital Management

Evaluate the financial viability of accepting a new customer order and provide considerations for granting credit.

Required:

FM – May 2018 – L3 – SB – Q3 – Working Capital Management

Calculate the optimal re-order quantity, compare suppliers, and evaluate limitations in Kehinde's inventory management.

PM – May 2017 – L2 – SA – Q1 – Working Capital Management

Calculate KPIs for Kardex’s products, perform a PEST analysis, and comment on KPI effectiveness in external conditions.

PM – May 2023 – L2 – SA – Q1 – Working Capital Management

Calculate Vestapricy Ltd's cost of goods sold, analyze the working capital cycle, and apply decision rules for inventory management in Owerri.

PM – Nov 2018 – L2 – Q3 – Working Capital Management

Prepare cash forecast, profitability, and liquidity ratio for Omegboeji Nigeria Ltd from 2015-2017.

FM – May 2021 – L2 – Q3d – Working Capital Management

Discuss one merit and one demerit of engaging the services of a debt factoring agency.

FM – May 2021 – L2 – Q3c – Factoring Agency

Define what a factoring agency is and explain its role.

FM – DEC 2023 – L2 – Q3 – Discounted cash flow | Sources of finance: debt | Working Capital Management

Identification of cash flow patterns, present value calculation for two payment strategies, and explanation of the benefits and factors related to credit rating.

FM – May 2020 – L2 – Q5b – Working Capital Management

Evaluate the impact of introducing credit sales on total profit before tax for a company and provide management advice.

FM – MAY 2017 – L1 – Q4 – Management of receivables and payables | Working Capital Management

Differentiate between factoring and invoice discounting and advise ATA Ghana Ltd on whether to take on new customers based on the proposed credit policy.

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