Pass Paper Practice

By: Eunice, Mark, Helen, ChengTeck

October 13th

Q5. Brownlow Ltda) Profit and loss account for Brownlow Ltd----2003 and 2004

Profit and loss account for Brownlow Ltd----2003 and 2004 ($)

Year20032004

Sales revenue2000024000

Cost of sales900012000

Gross profit1100012000

Overheads30003000

Net profit80009000

b) Balance sheet for Brownlow Ltd----2003 and 2004

Balance sheet for Brownlow Ltd----2003 and 2004 ($)

Balance sheetYear 2003Year 2004

Fixed assets120000120000

Current assets

Stock80009000

Cash in bank20002500

Debtors10000125000

Current liabilities

Creditors2000030000

Net current assets0(6000)

Net assets120000114000

Financed by:Long-term liabilities4000040000

Capital and reserves

Share capital5200052000

Reserves2800022000

Capital employed120000114000

Q3. Delta Ltd Fruit Growers

a) (i) Working capital for Delta Ltd Fruit Growers----2000 and 2001Working capital for Delta Ltd Fruit Growers----2000 and 2001 ($ million)

Year20002001

Current asset

Debtors0.70.6

Stock0.40.2

Cash in hand0.020.01

Current liabilities

Bank overdraft0.230.15

creditors0.240.43

Working capital0.650.23

(ii) Balance sheet for Delta Ltd Fruit GrowersBalance sheet for Delta Ltd Fruit Growers ($ million)

Balance sheetYear 2000Year 2001

Fixed asset1.61.7

Current asset

Debtors0.70.6

Stock0.40.2

Cash in hand0.020.01

Current liabilities

Bank overdraft0.230.15

Creditors0.240.43

Net Current Asset0.650.23

Net Asset2.251.93

Financed by:

Long Term Liabilities1.441.44

Capital and Reserves

Share capital2.241.01

Accommodated profit/loss(1.43)(0.52)

Capital Employed2.251.93

b) Profit and loss account for Delta Ltd Fruit GrowersProfit and loss account for Delta Ltd Fruit Growers ($ million)

Year 2000Year 2001

Sales Revenue0.8321.08

Cost of Sales0.4770.49

Gross Profit0.355

Overheads0.41

Operational profit(0.055)0.148

Non-operational income00

N.B.I.T.(0.055)0.148

Interest paid00

Net profit before tax(0.055)0.148

Tax00

Net profit after tax(0.055)0.148

Dividends00

Retained profits(0.055)0.148

Q1. Cochabamba Academy

a) (i) Cash flow forecast of Cochabamba Academy ($)SeptemberOctoberNovemberDecember

InflowsFees

Registration fee3200032000

48000320000

Total inflows3200080000320000

Outflows

Salaries

Expenses9500

200009500

200009500

200009500

20000

Total outflows29500295002950029500

Net cash flow2500505002500(29500)

Opening balance15000175006800070500

Closing balance17500680007050041000

(ii) The overall cash flow position of Cochabamba Academy is positive which is doing very well. Even though there is no inflow in December due to holiday, Cochabamba Academy still has a positive closing balance. In October, there is a high registration fee which contributes to the rise in inflows which keeps the closing balance in December from being negative. If the amount registration fee in October is much less than they expected then it would be a problem for Cochabamba Academy in December. They would need to find a way to either increase their cash inflows or decrease their cash outflows. They could decrease their expenses which shouldnt be very high in December since there is a holiday. b) (i) Total Revenue - Total Cost = Annual Profit/Loss Total Revenue = 32000 x 10 + 48000 = $368000

Total Cost = [(5500 + 2 x 2000) + 20000] x 12 = $354000

Annual Profit/Loss = $14000 (profit)

(ii) Payback Period = Initial Investment Cost ($) / Contribution per month ($)63000 / (14000/12) = 54 months (4 years and 6months)c) Based on the financial and non-financial factors, there are benefits and drawbacks for Silvia and Daniel to invest in a school called Cochabamba Academy.

From the financial factors, we can see that Cochabamba academy is worth investing in. It does not have any cash flow problems, because it is profitable. The closing balance in December is $41,000 so they are actually making progress in through their cash flows. We can also see from the annual profit/loss that Cochabamba Academy has a profit of $14,000 which is a good thing for Daniel and Silvia. Daniel and Silvia want to invest $63,000 into the school; the payback period is 4 years and 6 months which is a relatively acceptable payback period for a school. The first year, they are making profit which shows that it is a good progress. According to this, we can predict that in the long run they can be even more successful and this will lead them to expansion and promotions.

On the other hand, from the non-financial factors, we can see that there is competition in with other local schools around the area. The Cochabamba Academy is a private school, and it is in competition with other schools and their prices. Usually the other schools are public schools, so they would have lower fees. Parents might be more willing to send their children to be educated in those schools. Cochabamba would either have to lower their fees (Which would reduce its cash inflow) or make their school have a higher quality teaching and facilities to attract customers to gain reputation. (But it obviously will cost a lot more money). Another factor to consider is the economic state in Bolivia. If the economic state is unstable in Bolivia, parents might not be able to afford to pay for education in Cochabamba Academy. This would result in Cochabamba having fewer students than they had expected which would affect their overall sales revenue and profit. Another factor to consider is that if the Cochabamba academy is able to admission more students, they would need to hire more staff and teachers which would mean they need to spend more money on salaries for staff. It could affect their cash flow, since they increase their outflows. They would need to increase their inflows as well, such as increasing school fees. Another factor to consider is the difficulty to find qualified teachers in Bolivia due to Bolivia not as developed as America. Even if there are SOME qualified teachers in Bolivia, those teachers would rather teach in schools in more developed countries like the U.S. for example. Because Cochabamba Academy is a private school, it receives no help from the government, and it costs a huge amount of money on building it within the expenses. So financially, Silvia and Daniel would need bank loans, bank overdraft, and/or debentures. Silvia and Daniel can use bank overdraft to counter the academys minor cash flow problems, and huge outflow; however they have to owe on demand with interest per month, thus overdraft is a current liability to Silvia and Daniel. If they use debentures, they have the benefit to receive interest before shareholders receive any dividend, and it is relatively low risk. However, this action will increase a firms gearing, meaning that it will raise interest repayments, increasing the risks to the business; and debentures are the first to be owed by Silvia and Daniel. Because Bolivia is not as developed as the U.S., the Bolivian government would encourage the people to set up their own private schools so the government doesnt need to spend their money on building the school, otherwise it will increase taxation. So, to conclude, the risks overweigh the benefits, so we recommend that Silvia and Daniel should not open Cochabamba Academy.