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									Managing Financial Resources &
Section One - Sources of Finance

The company for which you are a senior accountant has recently won a major
government contract to supply equipment to the health service. While the company
in naturally encouraged by this, it is the biggest contract ever won by them and will
require substantial expansion and changes to operating systems. Your
responsibilities will mean you will need to oversee the management of the increased
working capital needed to respond to the order and to contribute to the appraisals of
new projects required to achieve the necessary expansion.

Requirement for section one

   a. In the company’s current position you are acutely aware of the dangers of
      over trading. Discuss what those dangers are and how they might be

   b. Identify two different sources of short term finance available to the company
      and discuss the strengths and weaknesses of each source, were it to use it to
      finance its proposed expansion.

    c. Explain how the company’s gearing ratio would help measure any increase in
       financial risk that the company might encounter.

                                                                             (LO 1/2)
Section Two - Finance as a Resource

The company’s current long term capital structure consists of 2,000,000 equity
shares issued with a value of £2 each and £1,000,000 of debentures issued two
years ago. The company currently estimates that shareholders require an annual
return on their equity investment of 6%. The debentures were issued with a fixed
interest rate of 4%.

Requirement for section two

     a. Explain the concept of a weighted average cost of capital and calculate the
        company’s existing weighted average cost of capital.

     b. Why might the UK tax system encourage the company to adopt a relatively
        high gearing ratio?

     c. In management meetings you have repeatedly said that fulfilling this order
        will have an opportunity cost for the company. Explain briefly what you
        meant by that.

     d. Consider the cash flow forecast for the company at Appendix A of this

      i) You are required to complete the cash flow forecast. Comment briefly on
      the implications of the cash flow you identify over the period.

      ii) Identify any other groups who would be interested in the above cash flow
      statement and set out briefly what information they would be interested in
       and why.

Section Three Financial Decisions

One of your roles as senior accountant is to contribute to project evaluation. A
proposal for a new manufacturing facility has recently been drawn up and passed to
you. The cash flows forecast to result from this project are attached at Appendix B.

Further relevant information is as follows:
           Company policy is to depreciate all capital assets over their expected
              useful life using straight line depreciation.

   Requirement for section 3

   a. Calculate the following for the above project
              i) payback
              ii) accounting rate of return

   b. Explain the strengths and weaknesses of payback and accounting rate of
      return as methods of investment appraisal. Explain whether either net
      present value or internal rate of return might be better techniques to use.

   c. Summarise the main factors that should be taken into account by any
      company when setting prices.

   d. In year 5 the new investment is expected to produce 800 units of production.
      Including depreciation in your calculation, identify the unit cost of production
      that year.

                                                                                 (LO 3)
Section 4

Your professional institute has asked you to devise a series of short courses on
company financial statements, which it can market to business people. You have
begun to make some notes on this issue and decide to expand those into brief
formal essays to help you prepare the course outlines.

Requirement for section 4

   a. Explain the contents of a balance sheet and profit and loss account.

   b. Discuss the differences in the above financial statements across different
      legal forms of organisation.

   c. Using appropriate examples, explain how ratio analysis can assist in the
      assessment of a firm’s profitability.

   d. Briefly explain books of prime entry, the double-entry bookkeeping system,
      ledgers and the trial balance.

                                                                              (LO 4)

Word limit 4,000 words


Remember you must include five citations or quotations in your answer. Use the
Harvard referencing system.
72fc5ebae0a2%40sessionmgr12&vid=1&hid=17)You can site either books/journals
or websites in your answer. It is best to note sources used as you research the
assignment answer. It need not be five different sources but try to use more than one
                                Appendix A

                      Cash flow forecast for Jan – June 2011

                       Jan        Feb         Mar       April    May      June
                     (£000)      (£000)      (£000)    (£000)   (£000)   (£000)
     Sales            750         1150        1380      1460     1890     2139
  Wages and           430         430         430       640      640      640
   Supplies           160         460         540       540      540      880
 Rent and rates       170         170         170       340      340      340
  Advertising          50          50          50        50      50        50
 Miscellaneous        100         100         100       150      150      150
Receipts minus
Balance brought
    forward           750
Balance carried

                                    Appendix B

Anticipated capital cost (in year zero) £1,000,000

Expected cash flows

       Year               Cash Inflow          Cash Outflow
                            (£000)                (£000)
         1                    635                   449
         2                    998                   766
         3                   1,195                  952
         4                   1,858                 1,407
         5                   1,959                 1,517
                                          Grading Criteria - Module 2 – Managing Financial Resources & Decisions
To achieve a PASS GRADE the evidence must show         To achieve a MERIT GRADE the evidence must   To achieve a DISTINCTION GRADE the evidence must
that the learner is able to meet all of the learning   show that the learner is able to:            Show that the learner is able to:
                                                           M1- Identify and apply strategies to find appropriate   D1 - Use critical reflection to evaluate your own work &
LO1 - Explore the sources of finance available to a
                                                           solutions                                               justify valid conclusions
       Evaluate sources of short term finance                    Effective judgments have been made on the
                                                                   basis of accurate cash flow forecasting
       Appreciate the implications of choice of sources                                                                  A reflective approach will be evident throughout
        for a company’s gearing ratio                             Good knowledge of working capital                       and in particular in areas like evaluation of
                                                                   management in the context of overtrading                sources of business finance, uses /limitations of
LO2 - Analyse the implications of finance as a resource                                                                    ratio analysis and interpretation of cash flow
within a business                                                  has been displayed
       Show an ability to use and draw conclusions
        from a cash flow forecast                                                                        D2 – Take responsibility for managing and organising
                                                        M3 – Select design and apply appropriate
      Appreciate implications of expansion for working methods/techniques                               activities.
        capital management
                                                            Effective use has been made of appropriate
      Assess the information needs of different users
                                                               investment appraisal techniques                 Independent research, outside of what has been
        of a cash flow forecast
                                                                                                                   provided in class, has been utilised to prepare a
Lo3 - Make financial decisions based on financial           An appropriate approach to unit costing has
                                                                                                                   thorough set of answers
information                                                    been used

       Carry out investment appraisals using different
        techniques                                                                                                 D3 – Demonstrate convergent, lateral & creative
       Evaluate different techniques of investment                                                                thinking.
        appraisal                                          M3 – Present and Communicate Findings
                                                                                                                   Ideas are evaluated for their validity & realism in the
       Understand principles of pricing good practice                                                             context of the answers
                                                                  A clear, concise and logical flow has been
       Be able to undertake a practical unit cost                 achieved
                                                             Use of Harvard referencing throughout
Lo4 - Analyse and evaluate the financial performance of                                                                   An attempt is made at an evaluation of optimal
a business                                              Relatively few omissions and confusions exist                      approaches to financial management
       Discuss the contents of financial statements.

       Identify differences in financial reporting
        requirements across different business types                                                                      No real confusions or omissions exist
       Understand and evaluate the use of ratio
        analysis drawing upon a range of ratios
       The work adequately covers the brief but some
        omissions and confusions exist

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