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CERTIFIED ACCOUNTING TECHNICIAN Paper FFM

Foundations in Financial Management

EXAM KIT

PAPER FFM : FOUN DATIONS IN FINANCIAL MANAGE MENT

P.2 KAPLAN PUBLISHIN G

British Library Cataloguing-in-Publication Data

A catalogue record for this book is available from the British Library.

Published by Kaplan Publishing UK

Unit 2 The Business Centre

Molly Millar’s Lane

Wokingham

Berkshire

RG41 2QZ

978-1-78740-062-7

© Kaplan Financial Limited, 2017

Printed and bound in Great Britain.

The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties. Please consult your appropriate professional adviser as necessary. Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials.

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Acknowledgements

The past ACCA exam questions are the copyright of the Association of Chartered Certified Accountants. The original answers to the questions from June 2006 onwards were produced by the examiners themselves and have been adapted by Kaplan Publishing.

We are grateful to the Chartered Institute of Management Accountants and the Institute of Chartered Accountants in England and Wales for permission to reproduce past exam questions. The answers have been prepared by Kaplan Publishing.

KAPLAN PUBLISHIN G P.3

INTRODUCTION

This new edition of the ACCA Foundation Exam Kit is packed with exam-type questions, to help you to prepare for your exam successfully.

• Questions are grouped by syllabus topics and provide extensive coverage of all syllabus areas.

• All questions are of exam standard and format – this enables you to master the exam techniques.

Past exam questions have been incorporated into the main body of questions within the kit and are grouped by syllabus area.

PAPER ENHANCEMENTS We have added the following enhancements to the answers in this exam kit:

Key answer tips

All answers include key answer tips to help your understanding of each question.

Tutorial note

All answers include more tutorial notes to explain some of the technical points in more detail.


CONTENTS

Page

Index to questions and answers P.7

Syllabus and revision guidance P.11

The exam P.19

Mathematical tables P.21

Section

1 Multiple-choice questions 1

2 Practice questions 43

3 Answers to multiple-choice questions 125

4 Answers to practice questions 145

5 2011 Specimen Paper questions 281

6 Answers to 2011 Specimen Paper questions 287

Quality and accuracy are of the utmost importance to us so if you spot an error in any of our products, please send an email to [email protected] with full details.

Our Quality Co-ordinator will work with our technical team to verify the error and take action to ensure it is corrected in future editions.


INDEX TO QUESTIONS AND ANSWERS

Page number Question Answer

MULTIPLE-CHOICE QUESTIONS (MCQs) Cash receipts and payments 1 125 Cash balances and working capital management 4 127 Credit granting and debt collection 8 129 Sources of finance 12 131 Relevant costs 16 133 Capital investments 20 135 Legal issues 23 136 June 2009 sample multiple-choice questions (published by ACCA) 25 137 June 2009 Exam Paper multiple-choice questions 28 138 December 2009 Exam Paper multiple-choice questions 30 138 Selected June 2010 Exam Paper multiple-choice questions 33 140 December 2010 Exam Paper multiple-choice questions 36 142 June 2012 Pilot Paper multiple-choice questions 39 143

PRACTICE QUESTIONS Cash receipts and payments 1 Automotive 43 145 2 Antipodean Enterprises 45 147 3 Aida plc 46 149 4 CF 47 150 5 Budgeted cash flow 48 151 6 Harrow Credit 49 153 7 Treasury department 49 153 8 Chocoholics 50 155 9 Williams 51 157 10 Cash management 52 158 11 Bathroom company 52 158 12 Cleanly 52 159 13 Health Foods Company 54 160 14 Porky’s Ltd 55 162 15 Cool Ski Co 57 163 16 Alan Webb 1 58 166 17 Print Co 59 167 18 Rich Co 61 169 19 Tastee Co (June 10 exam) 62 170 20 Joe (June 2012 Pilot Paper) 64 173




Cash balances and working capital management 21 Golf balls 65 174 22 Victory (1) 65 176 23 Victory (2) 66 177 24 Bags 66 178 25 PRT 67 181 26 East Meets West 68 184 27 Rant 69 185 28 Pooch 70 186 29 Shoes for You 71 187 30 Camp Company 72 188 31 All Weather Windows Co 73 189 32 The Kitchen Co 74 191 33 Brush Co 75 192 34 Choc Co 76 194 35 Expand Co (Dec 10 exam) 77 195 36 I Co (June 2012 Pilot Paper) 78 197

Credit granting and debt collection 37 Slowpayer (1) 78 199 38 Slowpayer (2) 79 200 39 Ontime plc 79 202 40 Painter 80 204 41 Books (2) 81 205 42 Expander 82 206 43 Credit control policy (1) 82 207 44 Credit control policy (2) 83 208 45 G 83 210 46 AAD 83 211 47 Lace 84 212 48 Skint 85 214 49 Duel Fuel 86 215 50 Fibre Clean 87 216 51 Noise 87 218 52 Jay 88 219 53 Waste Co 89 220 54 Light Co 89 221 55 Curtain Co 90 222 56 D Co (June 2012 Pilot Paper) 91 223

INDE X TO QUESTION S AND ANSWERS



Sources of finance 57 Bugs 91 224 58 Loan Inc 92 225 59 DEB plc 92 226 60 Hobble plc 94 227 61 DF 94 229 62 Clean Lens 95 231 63 Gym Jam 96 232 64 AIM 96 233 65 Financial matters 97 234 66 Financial analysts 97 235 67 Zimmer plc 97 238 68 Banks and money markets 98 240 69 Slim Jim Co 98 242 70 Long term finance 98 244 71 Bake Co (Dec 10 exam) 99 246 72 Financial Intermediation (June 2012 Pilot Paper ) 99 248 73 L Co (June 2012 Pilot Paper – amended) 99 249

Relevant costs 74 Publishing company 100 250 75 ZCC 101 251 76 John Robertson 102 252

Capital investments 77 Soke plc 103 253 78 Law plc 104 255 79 Jairzinho plc 105 256 80 Computer update 107 258 81 Rainbow 107 259 82 Paradise 108 260 83 Taxi 110 261 84 Silly Filly 111 263 85 Weavers 113 264 86 Nippers 114 265 87 Go Green 115 266 88 Alan Webb 2 117 269 89 Wicker Co 118 270 90 Painless Co 120 272 91 King Edward’s Hospital (June 10 exam) 121 273 92 Mr Food (Dec 10 exam) 122 276 93 Hockey Club (June 2012 Pilot Paper) 124 278 94 Capital budgeting 124 279


SYLLABUS AND REVISION GUIDANCE

SYLLABUS CONTENT

Study Guide A WORKING CAPITAL MANAGEMENT 1 Working capital management cycle

(a) Define working capital.[k] (b) Explain why working capital management is important.[k] (c) Explain the relationship between cash flows and the working capital cycle.[s] (d) Demonstrate the calculation of the working capital cycle (also known as the cash

operating cycle) .[s] (e) Outline the possible relationships between inventory levels and sales.[s] (f) Define and explain over-trading and over-capitalisation.[s] (g) Identify and calculate over-trading and over-capitalisation financial indicators.[s]

2 Inventory control (a) Discuss the key considerations when developing an inventory ordering and storage

policy.[s] (b) Define and explain work in progress.[k] (c) Define economic order quantity (EOQ) .[k] (d) Apply the EOQ model.[s] (e) Discuss the effects of just-in-time on inventory control.[s] (Note: Economic Batch Quantities, where all items in a batch do not arrive simultaneously, will not be examined)

3 Accounts payable and receivables control (a) Explain the role of accounts payables in the working capital cycle.[k] (b) Explain the role of accounts receivables in the working capital cycle.[k] (c) Explain the need to monitor accounts payables.[s] (d) Explain accounts payables control operations and the importance of accounts

payables management.[s] (e) Describe the various types and form of accounts payables.[k] (f) Describe the various accounts payables payment methods and procedures (for

example, direct debit, cheque).[s] (g) Evaluate and demonstrate the issues involved with early payment and settlement

discounts.[s] (h) Identify the risks of taking increased credit and buying under extended credit

terms.[s]



B CASH BUDGETING 1 Nature and sources of cash

(a) Define cash, cash flow and funds.[k] (b) Explain the importance of cash flow management and its impact on liquidity and

company survival.[s] (c) Outline the various sources and applications of finance.[k]

(i) Regular revenue receipts and payments (ii) Capital receipts and payments (iii) Drawings or dividends and disbursements (iv) Exceptional receipts and payments

(d) Distinguish between the cash flow patterns of different types of organisations.[s] (e) Explain the importance of cash flow for sustainable growth of such organisations.[s] (f) Define “cash accounting” and “accruals accounting” .[k] (g) Explain the difference between cash accounting and accruals accounting.[k] (h) Reconcile cash flow to profit.[s]

2 Cash budgeting and forecasting (a) Explain the objectives of a cash budget.[k] (b) Explain and illustrate statistical techniques used in forecasting cash flows.[s] (c) Explain inflation and the impact on cash flow and profit.[k] (d) Prepare a cash budget, including adjustments for timing of receipts and payments.[s] (e) Discuss and illustrate how cash budgets can be used as a mechanism for monitoring

and control.[s] (f) Carry out simple sensitivity analysis on a cash budget or forecast.[s] (g) Prepare a simple cleared funds forecast.[s]

C MANAGING CASH BALANCES 1 Treasury function

(a) Outline the basic treasury functions.[k] (b) Discuss the advantages and disadvantages of a centralised treasury function.[k] (c) Discuss the advantages and disadvantages of centralised cash control.[k] (d) Describe cash handling procedures (including recording practises.[k] (e) Describe the issues to be considered when attempting to hold optimal cash

balances.[s] (f) Outline the statutory and the other regulations relating to the management of

cash.[k]

2 Overview of financial markets (a) Explain the role and functions of various types of banks (including the structure of

the banking system) [k] (b) Identify the major financial intermediaries.[k] (c) Outline the general roles of financial intermediaries.[k] (d) Outline the key benefits of financial intermediation .[k]

SYLLABUS AND RE VISION GUIDANCE


(e) Outline the relationships between financial institutions.[k] (f) Explain the purpose and main features of: .[s]

(i) Bank deposits (ii) Certificates of deposit (iii) Government stocks (iv) Local authority bonds (v) Bills of exchange

(g) Explain the purpose and main features of: .[s] (i) Equity (ii) Preferred shares (iii) Debentures (iv) Unsecured loan stock (v) Convertible and redeemable debts (vi) Warrants

(h) Explain the basic nature of a money market.[k] (i) Describe the way in which a stock market (both main and second tier) operates.[k] (j) Discuss ways in which a company may obtain a stock market listing and the

advantages and disadvantages of having a stock market listing.[s]

3 Managing deficit cash balances (a) Discuss situations where it may be appropriate to raise short-term finance.[s] (b) Describe the different forms of bank loans and overdrafts, their terms and

conditions.[s] (c) Explain the legal relationship between bank and customer.[k] (d) Explain the nature of trade credit and its use as a short-term source of finance.[s] (e) Evaluate the risks associated with increasing the amount of short-term finance in an

organisation.[s] (f) Discuss the relative merits and limitations of short term finance.[s]

4 Managing surplus cash balances (a) Define what is meant by “surplus funds” .[k] (b) Explain how surplus funds may arise.[k] (c) Discuss the objectives to be considered in the investment of surplus funds.[s] (d) Invest surplus funds according to organisational policy and within defined financial

authorisation limits.[s] (e) Define the risk-return trade-off.[k] (f) Outline what is meant by risk of default, systematic risk and unsystematic risk.[k] (g) Outline how the Baumol cash management model works. (Note: Calculations are not

required) .[k] (h) Discuss the limitations of the Baumol cash management model.[k] (i) Suggest appropriate liquidity levels for a range of different organisations.[s]



D FINANCING DECISIONS 1 Money in the economy

(a) Define what is meant by “money supply” in an economic context.[k] (b) Outline how money supply may be controlled in an economy.[k] (c) Outline the basic relationship between the demand for money and interest rates.[k] (d) Explain briefly and illustrate the interaction between inflation and interest rates.[s] (e) Discuss the possible consequences of inflation in an economy and its effect on

organisations in general .[k] (f) Describe how the application of different monetary policies can affect the

economy.[k]

2 Medium term financing (a) Discuss situations where it may be appropriate to raise medium-term finance.[s] (b) Describe the main features of hire purchase, and leases.[k] (c) Compare and contrast the main features of hire purchase, and leases (NB – lease or

buy decisions are not examinable) .[s] (d) Discuss the relative merits and limitations of medium term finance.[s]

3 Long term financing (a) Discuss situations where it may be appropriate to raise long-term finance.[s] (b) Describe key factors to be considered when deciding on an appropriate source of

long term finance (debt or equity) .[s] (c) Calculate relative gearing and earnings per share under different financial

structures.[s] (d) Discuss the relative merits and limitations of long term finance.[s] (e) Describe the key factors that should be considered in deciding the mix of

short/medium/long term finance in an organisation.[s] (f) Discuss the nature and importance of internally generated funds.[k] (g) Outline the major sources of government funds e.g. grants, regional and national

schemes.[k]

4 Financing for small and medium sized enterprises (a) Outline the requirements for finance of SMEs (purpose, how much, how long) .[k] (b) Describe the nature of the financing problem for SMEs in terms of the funding gap,

maturity gap and inadequate security.[s] (c) Discuss the contribution of lack of information in SMEs to help explain the problems

of SME financing.[k] (d) Describe and discuss the response of government agencies and financial institutions

to the SME financing problem.[s] (e) Describe the main features of venture capital.[k] (f) Describe the key areas of concern to venture capitalists when evaluating an

application for funding.[s] (g) Explain how the use of such measures as credit suppliers, hire purchase, factoring

and second tier listing can help to ease the financial problems of SMEs.[s] (h) Outline appropriate sources of finance for SMEs.[s]



E INVESTMENT DECISIONS 1 Financing concepts

(a) Explain the differences between simple and compound interest.[k] (b) Calculate future values.[s] (c) Discuss the concept of time value of money.[s] (d) Discuss the concept of discounting.[s] (e) Calculate present values, making use of present value tables to establish discount

factors.[s]

2 Capital budgeting (a) Discuss the importance of capital investment planning and control.[k] (b) Outline the issues to consider and the steps involved in the preparation of a capital

expenditure budget.[s] (c) Define and distinguish between capital and revenue expenditure.[k] (d) Compare and contrast investment in non-current assets and investment in working

capital.[k] (e) Describe capital investment procedures (authorisation and monitoring) .[k]

3 Capital investment appraisal (a) Calculate the payback and discounted payback of a project and assess its usefulness

as a method of investment appraisal.[s] (b) Calculate the accounting rate of return of a project and assess its usefulness as a

method of investment appraisal.[s] (c) Discuss the concept of relevant cash flows for decision making.[k] (d) Identify and evaluate relevant cash flows for individual investment decisions.[s] (e) Explain the concept of net present value and how it can be used for project

appraisal.[k] (f) Calculate net present value and interpret the results.[s] (Note: NPV calculations will

not include adjustments for inflation, tax or working capital) (g) Outline the concept of internal rate of return and how it can be used for project

appraisal.[k] (h) Calculate internal rate of return and interpret the results.[s] (i) Discuss the relative merits of NPV and IRR, including mutually exclusive projects and

multiple yields.[k] (j) Explain the superiority of DCF methods over payback and accounting rate of

return.[k]

F CREDIT MANAGEMENT 1 Legal issues

(a) Explain the key elements of a basic contract (offer, acceptance, remedies for breach of contract etc) [k]

(b) Briefly outline specific terms and conditions that may be included in contracts with credit customers (e.g. length of credit period, amount of interest on late payments, retention of title.[s]

(c) Outline the basic legal procedures for the collection of debts.[k]



(d) Identify the main data protection issues that should be considered when dealing with accounts receivables records.[k]

(e) Explain bankruptcy and insolvency.[k]

2 Credit granting (a) Explain the importance of credit management, including the level of trade credit, the

role of the credit control function and the activities of the credit control function.[k] (b) Explain the need to establish a credit policy and outline the steps involved, including

setting maximum credit amounts and periods and total credit levels.[s] (c) Explain the key categories that should be considered when assessing the credit-

worthiness of a customer.[k] (d) Outline the various internal sources of information that may be used in assessing the

credit-worthiness of a customer.[s] (e) Outline the various external sources of information that may be used in assessing the

credit-worthiness of a customer. [s] (f) Define and explain credit scoring.[k] (g) Identify possible reasons for rejecting an application for credit or extending credit.[s] (h) Describe how the financial statements of a customer can be used to assess the

credit-worthiness of a customer.[s] (i) Identify and apply the common ratios that may be used to analyse the financial

statements of a customer in order to assess their credit-worthiness.[s] (j) Evaluate the usefulness and limitations of ratio analysis in assessing credit-

worthiness.[s]

3 Monitoring accounts receivables (a) Identify the main contents of accounts receivables records.[s] (b) Describe the main internal sources that may be used to monitor accounts receivables

(including aged trade receivables analysis, average periods of credit, incidence of bad debts). [s] Note: You may be required to prepare an aged accounts receivables analysis

(c) Describe the main external sources that may be used to monitor accounts receivables (including credit rating agencies, industry sources, financial reports, press coverage, official publications, bank or supplier reference,) [s]

4 Debt collection (a) Identify the main methods used to identify potential problems with credit customers

meeting their payment obligations.[k] (b) Describe ways in which credit customers could be encouraged to pay promptly

including effects of offering discounts[s] (c) Describe the main techniques and methods that may be used to assist in the

collection of overdue debts.[s] (d) Identify debt recovery methods appropriate to individual customers.[s] (e) Explain procedures for writing off debts (double entry recording is excluded) .[k] (f) Describe how factoring works and the main types of service provided by factors.[s] (g) Define invoice discounting and outline how this form of factoring works.[s] (h) Calculate the cost of factoring arrangements, invoice discounting and changes in

credit policy.[s]



PLANNING YOUR REVISION

Begin by asking yourself two questions:

How much time do I have available for revision?

What do I need to cover during my revision?

Remember to take into account: • times of the day when you

work most effectively • other commitments • time definitely unavailable (e.g.

holidays) • relaxation time.

Remember to take into account that:• all syllabus areas are equally

examinable • you need more time when revising

areas of the syllabus you feel least confident about

• question practice is the best form of revision.

Make a timetable/plan to remind yourself how much work you have to do and when you are free to do it.

Allow some time for slippage.

REVISION TECHNIQUES • Go through your notes and textbook highlighting the important points.

• You might want to produce your own set of summarised notes.

• List key words for each topic to remind you of the essential concepts.

• Practise exam-standard questions, under timed conditions.

• Rework questions that you got completely wrong the first time, but only when you think you know the subject better.

• If you get stuck on topics, find someone to explain them to you (your tutor or a colleague, for example).

• Read recent articles on the ACCA website or in the student magazine.

• Read good newspapers and professional journals.


THE EXAM

FORMAT OF THE EXAMINATION Two-hour written paper: Number of marks Section A: 10 multiple-choice questions, worth 1, 2 or 3 marks each 20

Section B: 6 compulsory longer questions

Q1 (20 marks) 20

Q2, 3 & 4 (10 marks each) 30

Q5 & 6 (15 marks each) 30 ––––

100 ––––

Sitting the examination Spend the first few minutes of the examination reading the paper, deciding which question to answer first.

Unless you know exactly how to answer the question, spend some time planning your answer. Stick to the question and tailor your answer to what you are asked.

Fully explain all your points but be concise. Set out all workings clearly and neatly, and state briefly what you are doing. Don’t write out the question.

If you do not understand what a question is asking, state your assumptions. Even if you do not answer precisely in the way the examiner hoped, you should be given some credit, if your assumptions are reasonable.

If you get stuck with a question, leave space in your answer book and return to it later.

Answering the questions Discussion questions: Make a quick plan in your answer book and under each main point list all the relevant facts you can think of. Then write out your answer developing each point fully. Be concise. It is better to write a little about a lot of different points than a great deal about one or two points.

Computations: It is essential to include all your workings in your answers. Many computational questions require the use of a standard format: company profit and loss account, statement of financial position (balance sheet) and cash flow statement for example. Be sure you know these formats thoroughly before the examination and use the layouts that you see in the answers given in this book and in model answers. If you are asked to comment or make recommendations on a computation, you must do so. There are important marks to be gained here. Even if your computation contains mistakes, you may still gain marks if your reasoning is correct.

Reports, memos and other documents: Some questions ask you to present your answer in the form of a report or a memo or other document. Read the instructions carefully and use the correct format.


MATHEMATICAL TABLES

PRESENT VALUE TABLE Present value of 1 i.e. n)r+1( –

where r = discount rate

n = number of periods until payment

Periods Discount rate (r) (n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 1 2 3 4 5

0.990 0.980 0.971 0.961 0.951

0.980 0.961 0.942 0.924 0.906

0.971 0.943 0.915 0.888 0.863

0.962 0.925 0.889 0.855 0.822

0.952 0.907 0.864 0.823 0.784

0.943 0.890 0.840 0.792 0.747

0.935 0.873 0.816 0.763 0.713

0.926 0.857 0.794 0.735 0.681

0.917 0.842 0.772 0.708 0.650

0.909 0.826 0.751 0.683 0.621

1 2 3 4 5

6 7 8 9

10

0.942 0.933 0.923 0.914 0.905

0.888 0.871 0.853 0.837 0.820

0.837 0.813 0.789 0.766 0.744

0.790 0.760 0.731 0.703 0.676

0.746 0.711 0.677 0.645 0.614

0.705 0.665 0.627 0.592 0.558

0.666 0.623 0.582 0.544 0.508

0.630 0.583 0.540 0.500 0.463

0.596 0.547 0.502 0.460 0.422

0.564 0.513 0.467 0.424 0.386

6 7 8 9

10 11 12 13 14 15

0.896 0.887 0.879 0.870 0.861

0.804 0.788 0.773 0.758 0.743

0.722 0.701 0.681 0.661 0.642

0.650 0.625 0.601 0.577 0.555

0.585 0.557 0.530 0.505 0.481

0.527 0.497 0.469 0.442 0.417

0.475 0.444 0.415 0.388 0.362

0.429 0.397 0.368 0.340 0.315

0.388 0.356 0.326 0.299 0.275

0.350 0.319 0.290 0.263 0.239

11 12 13 14 15

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%

1 2 3 4 5

0.901 0.812 0.731 0.659 0.593

0.893 0.797 0.712 0.636 0.567

0.885 0.783 0.693 0.613 0.543

0.877 0.769 0.675 0.592 0.519

0.870 0.756 0.658 0.572 0.497

0.862 0.743 0.641 0.552 0.476

0.855 0.731 0.624 0.534 0.456

0.847 0.718 0.609 0.516 0.437

0.840 0.706 0.593 0.499 0.419

0.833 0.694 0.579 0.482 0.402

1 2 3 4 5

6 7 8 9

10

0.535 0.482 0.434 0.391 0.352

0.507 0.452 0.404 0.361 0.322

0.480 0.425 0.376 0.333 0.295

0.456 0.400 0.351 0.308 0.270

0.432 0.376 0.327 0.284 0.247

0.410 0.354 0.305 0.263 0.227

0.390 0.333 0.285 0.243 0.208

0.370 0.314 0.266 0.225 0.191

0.352 0.296 0.249 0.209 0.176

0.335 0.279 0.233 0.194 0.162

6 7 8 9

10 11 12 13 14 15

0.317 0.286 0.258 0.232 0.209

0.287 0.257 0.229 0.205 0.183

0.261 0.231 0.204 0.181 0.160

0.237 0.208 0.182 0.160 0.140

0.215 0.187 0.163 0.141 0.123

0.195 0.168 0.145 0.125 0.108

0.178 0.152 0.130 0.111 0.095

0.162 0.137 0.116 0.099 0.084

0.148 0.124 0.104 0.088 0.074

0.135 0.112 0.093 0.078 0.065

11 12 13 14 15



ANNUITY TABLE

Present value of an annuity of 1 i.e. ( )

rr+11 n––

where r = discount rate

n = number of periods

Periods Discount rate (r) (n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

1 2 3 4 5

0.990 1.970 2.941 3.902 4.853

0.980 1.942 2.884 3.808 4.713

0.971 1.913 20829 3.717 4.580

0.962 1.886 2.775 3.630 4.452

0.952 1.859 2.723 3.546 4.329

0.943 1.833 2.673 3.465 4.212

0.935 1.808 2.624 3.387 4.100

0.926 1.783 2.577 3.312 3.993

0.917 1.759 2.531 3.240 3.890

0.909 1.736 2.487 3.170 3.791

1 2 3 4 5

6 7 8 9

10

5.795 6.728 7.652 8.566 9.471

5.601 6.472 7.325 8.162 8.983

5.417 6.230 7.020 7.786 8.530

5.242 6.002 6.733 7.435 8.111

5.076 5.786 6.463 7.108 7.722

4.917 5.582 6.210 6.802 7.360

4.767 5.389 5.971 6.515 7.024

4.623 5.206 5.747 6.247 6.710

4.486 5.033 5.535 5.995 6.418

4.355 4.868 5.335 5.759 6.145

6 7 8 9

10

11 12 13 14 15

10.37 11.26 12.13 13.00 13.87

9.787 10.58 11.35 12.11 12.85

9.253 9.954 10.63 11.30 11.94

8.760 9.385 9.986 10.56 11.12

8.306 8.863 9.394 9.899 10.38

7.887 8.384 8.853 9.295 9.712

7.499 7.943 8.358 8.745 9.108

7.139 7.536 7.904 8.244 8.559

6.805 7.161 7.487 7.786 8.061

6.495 6.814 7.103 7.367 7.606

11 12 13 14 15

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%

1 2 3 4 5

0.901 1.713 2.444 3.102 3.696

0.893 1.690 2.402 3.037 3.605

0.885 1.668 2.361 2.974 3.517

0.877 1.647 2.322 2.914 3.433

0.870 1.626 2.283 2.855 3.352

0.862 1.605 2.246 2.798 3.274

0.855 1.585 2.210 2.743 3.199

0.847 1.566 2.174 2.690 3.127

0.840 1.547 2.140 2.639 3.058

0.833 1.528 2.106 2.589 2.991

1 2 3 4 5

6 7 8 9

10

4.231 4.712 5.146 5.537 5.889

4.111 4.564 4.968 5.328 5.650

3.998 4.423 4.799 5.132 5.426

3.889 4.288 4.639 4.946 5.216

3.784 4.160 4.487 4.772 5.019

3.685 4.039 4.344 4.607 4.833

3.589 3.922 4.207 4.451 4.659

3.498 3.812 4.078 4.303 4.494

3.410 3.706 3.954 4.163 4.339

3.326 3.605 3.837 4.031 4.192

6 7 8 9

10

11 12 13 14 15

6.207 6.492 6.750 6.982 7.191

5.938 6.194 6.424 6.628 6.811

5.687 5.918 6.122 6.302 6.462

5.453 5.660 5.842 6.002 6.142

5.234 5.421 5.583 5.724 5.847

5.029 5.197 5.342 5.468 5.575

4.836 4.988 5.118 5.229 5.324

4.656 4.793 4.910 5.008 5.092

4.486 4.611 4.715 4.802 4.876

4.327 4.439 4.533 4.611 4.675

11 12 13 14 15

KAPLAN PUBLISHIN G 1

Section 1

MULTIPLE-CHOICE QUESTIONS

CASH RECEIPTS AND PAYMENTS

1 A cash budget prepared for the forthcoming three months shows a substantial cash surplus in the first two months. Suitable actions would be to:

(i) pay suppliers early to receive a cash discount

(ii) buy new plant and machinery

(iii) invest in treasury bills.

A (i) and (ii)

B (i) and (iii)

C (ii) and (iii)

D (i) only (2 marks)

2 Vincent is preparing a cash budget for July. His credit sales are as follows. $ April (actual) 40,000 May (actual) 30,000 June (actual) 20,000 July (estimated) 25,000

His recent debt collection experience has been as follows.

Current month’s sales 20% Prior month’s sales 60% Sales two months prior 10% Cash discounts taken 5% Irrecoverable debts 5%

How much may Vincent expect to collect from credit customers during July?

A $18,000

B $20,000

C $21,000

D $24,000 (3 marks)


2 KAPLAN PUBLISHIN G

3 DRF’s projected revenue for 20X9 is $28,000 per month. All sales are on credit. Receivables’ accounts are settled 50% in the month of sale, 45% in the following month, and 5% are written off as irrecoverable debts after two months.

What are the budgeted cash collections for March?

A $24,500

B $26,600

C $28,000

D $32,900 (2 marks)

4 A company anticipates that 10,000 units of product z will be sold during January. Each unit of z requires 2 litres of raw material w. Actual stocks as of 1 January and budgeted inventories as of 31 January are as follows. 1 January 31 January Product z (units) 14,000 12,000 Raw material w (litres) 20,000 15,000 1 litre of w costs $4.

If the company pays for all purchases in the month of acquisition, what is the cash outlay for January purchases of w?

A $84,000

B $80,000

C $44,000

D $12,000 (3 marks)

5 A company has a two-month receivables’ cycle. It receives in cash 45% of the total gross sales value in the month of invoicing. Irrecoverable debts are 20% of total gross sales value and there is a 10% discount for settling accounts within 30 days.

What proportion of the first month’s sales will be received as cash in the second month?

A 25%

B 30%

C 35%

D 55% (2 marks)

MULTIPLE -CHOICE QUESTION S : SECTION 1


6 Spears makes gross sales of $40,000 per month, of which 10% are for cash, the rest on credit.

Experience shows the following.

Receivables paying within one month 40% within two months 50% Settlement discounts (for payment within one month) 4%

Total expected cash receipts in any month will be:

A $35,824

B $36,400

C $38,560

D $40,000 (2 marks)

7 Selected figures from a firm’s budget for next month are as follows. Sales $450,000 Gross profit on sales 30% Decrease in trade payables over the month $10,000 Increase in cost of inventory held over the month $18,000

What is the budgeted payment to trade payables?

A $343,000

B $323,000

C $307,000

D $287,000 (2 marks)

8 A company has a current cash balance of $7,000, trade receivables of $15,000 and trade payables of $40,000. The company can sell goods costing $50,000 for £$70,000 next month. One half of all sales are collected in the month of sale and the remainder in the following month. All purchases are made on credit and paid during the following month. Inventory levels will remain constant during the month. General cash expenses will be $60,000 during the month.

The cash balance at the end of the month is

A $25,000 overdrawn

B $26,000 overdrawn

C $33,000 overdrawn

D $43,000 overdrawn (3 marks)



9 Jasper has budgeted the following for a month. $000 Accounting profit after tax 100 Increase in receivables 35 Increase in inventory 20 Increase in trade payables 20 Depreciation 70 Increase in provisions Taxation 40

What is the budgeted increase in cash balances for the month?

A $55,000

B $125,000

C $175,000

D $225,000 (2 marks)

10 Which of the following is an example of a revenue payment?

A payment into the business by the owner

B payment of a dividend

C payment to purchase a new machine

D payment to purchase some inventory (2 marks)

11 Which of the following is NOT an example of a liquid asset?

A receivables

B an investment in government securities

C raw material inventory for a manufacturer

D inventory for a retailer (2 marks)

CASH BALANCES AND WORKING CAPITAL MANAGEMENT

12 A business has an average inventory holding period of 80 days, receives payment from its customers in 40 days and pays its payables in 45 days.

What is the cash operating cycle in days for the business?

A 165 days

B 75 days (1 mark)

13 A business receives payment from its customers in 30 days and pays its payables in 25 days. It has an average inventory holding period of 10 days.


A 45 days

B 15 days (1 mark)



14 A business holds its inventory for 25 days on average. It allows its customers to take 20 more days’ credit than it takes from its suppliers.


A 45 days

B 5 days (1 mark)

15 Extracts from a company’s accounts show the following balances: $000 Inventories 114 Receivables 216 Cash 42 Payables 180 Overdraft 60

Which of the following is the company’s quick ratio, calculated to the nearest two decimal places?

A 1.55

B 1.08

C 2.07

D 1.43 (2 marks)

16 Which of the following are assumptions used when calculating the economic order quantity (EOQ) for inventory?

(i) Lead time is constant

(ii) Demand is constant

(iii) Purchase costs are constant

A All three

B (i) and (ii) only

C (i) and (iii) only

D (ii) and (iii) only (2 marks)

17 A company determines its order quantity for a component using the Economic Order Quantity (EOQ) model.

What would be the effects on the EOQ and the total annual ordering cost of an increase in the annual cost of holding one unit of the component in inventory?

EOQ Total annual ordering cost

A Lower Higher

B Higher Lower

C Lower No effect

D Higher No effect (2 marks)



18 A company uses the Economic Order Quantity (EOQ) model to establish reorder quantities. The following information relates to the forthcoming period:

Order costs = $25 per order

Purchase price = $40 per unit

Holding costs = 10% of purchase price = $4/unit

Annual demand = 20,000 units

EOQ = 500 units

No safety inventory is held.

What are the total annual costs of inventory (i.e. the total purchase cost plus total order cost plus total holding cost)?

A $22,000

B $33,500

C $802,000

D $803,000 (3 marks)

The following information applies to Questions 19, 20 and 21.

Point uses the economic order quantity (EOQ) model to establish the reorder quantity for raw material Y.

The company holds no buffer inventory. Information relating to raw material Y is as follows: Annual usage 48,000 units Purchase price $80 per unit Ordering costs $120 per order Annual holding costs 10% of the purchase price

19 The EOQ for raw material Y is:

A 438

B 800

C 1,200

D 3,795 (2 marks)

20 The total annual cost of purchasing, ordering and holding inventory of raw material Y is:

A $3,849,600

B $3,850,400

C $3,853,600

D $3,854,400 (2 marks)



21 The supplier has offered Point a discount of 1% on the purchase price if each order placed is for 2,000 units.

The total annual saving to Point of accepting this offer is:

A $29,280

B $30,080

C $37,200

D $38,000 (2 marks)

22 The following are items from XYZ Inc’s opening and closing statement of financial position and statements of profit or loss for the year 20X8. 1 January 31 December $000 $000 Receivables 800 900 Inventory 600 700 Payables 200 250 Credit sales $10,000,000 Cost of goods sold $6,000,000

What is the approximate length of the operating cycle?

A 53 days

B 57 days

C 71 days

D 84 days (3 marks)

23 Working capital is most likely to increase when

A work in progress falls

B selling prices increase

C credit period allowed to customers is reduced

D credit period taken from suppliers is increased (2 marks)

24 A company has a liquidity ratio (receivables divided by payables and bank overdraft) equal to 0.5. The directors believe that the company has to reduce its bank overdraft and have agreed to alter the company’s credit terms to customers from two months to one month.

What would be the effects on the company’s cash operating cycle and liquidity ratio if this change were to be achieved?

Cash operating cycle Liquidity ratio

A Decrease Decrease

B Decrease No change

C Decrease Increase

D Increase Increase (2 marks)



25 What is the definition of overtrading?

A when business operations are being conducted with too little capital

B when a business has a surplus of capital (1 mark)

26 Which of the following is NOT an indicator that a business may be overtrading?

A increased gearing

B increased asset turnover

C increased quick ratio

D increased receivables collection period (2 marks)

27 Bob Co has cash of $30,000, receivables of $40,000, payables of $50,000 and inventory of $25,000.

What is Bob Co’s quick ratio?

A 0.5

B 0.8

C 1.4

D 1.9 (2 marks)

CREDIT GRANTING AND DEBT COLLECTION

28 Why is liquidity management important?

A Liquidity management is important to ensure that a company does not make a loss.

B Liquidity management is important so that the company can ensure that cash is available to discharge commitments. (1 mark)

29 Which of the following information could be used to assess the credit status of a new customer?

(i) Financial accounts

(ii) Aged receivable analysis

(iii) Copies of outstanding invoices

(iv) Draft contract for trade

(v) Trade references

(vi) Bank references

Options:

A All items

B (i), (ii) and (iii) only

C (i), (iv) and (v) only

D (i), (v) and (vi) only (2 marks)



30 Which of the following is a reason for offering discounts for prompt payment?

A To make the customer feel that they have received a bargain

B To improve the cash flow of a business

C To make more profit

D To decrease the cost of loans (2 marks)

31 A company is offering a cash discount of 2% to credit customers if they settle within one month rather than the normal two months.

What is the annual interest cost of the discount?

A 24.0%

B 26.8%

C 27.4%

D 28.0% (2 marks)

32 A company is considering increasing its credit period to customers from one month to two months. Annual revenue is currently $1,200,000. It is expected that the increased credit period would increase sales by 25% and result in an increase in profit of $45,000, before any INCREASE in finance charges have been taken into account. The company’s cost of capital is 10%.

What is the financial effect of this proposal, after taking into account any increase in finances charges?

A Increase in profit of $35,000

B Decrease in profit of $35,000

C Increase in profit of $30,000

D Decrease in profit of $30,000 (2 marks)

33 Spruce Ltd is considering methods to speed up receipts from credit customers and has been offered a without-recourse factoring arrangement.

Which of the following is NOT likely to be an advantage of such an agreement?

A Insurance against irrecoverable debts

B Improved relationship with customers

C Managers can spend more time running the company rather than credit control

D Reduced overdraft (2 marks)



34 A company is offering a cash discount of 2.5% to credit customers if they settle within one month rather than the normal two months.

What is the effective annual compound interest cost to the company if a customer accepts the discount and pays one month earlier?

A 30.0%

B 30.8%

C 34.5%

D 35.5% (2 marks)

35 A company has available to it a cash discount of 4% for immediate payment of supplier’s invoice. The only alternative open to the company is to pay the full invoice value in two months’ time.

What is the implied monthly interest rate of not taking the supplier’s discount?

A 2.062%

B 2.083%

C 2.000%

D 1.980% (2 marks)

36 A company is considering factoring its receivables and expects the average time taken for customers to pay to fall from 75 to 45 days. Administration savings are expected to be $100,000. Credit sales are $16m per annum and the company has a cost of capital of 8%.

What is the financial effect of this proposal?


B Increase in profit of $205,205


D Increase in profit of $257,808 (2 marks)

37 F plc has been offered a factoring agreement that should reduce its average receivables’ collection period from 90 to 30 days. The factor would charge F plc 2% of turnover (currently $10m p.a.). F plc has a cost of capital of 10%.

What is the net financial effect of this proposal?


B Decrease in profit of $35,616


D Decrease in profit of $117,808 (2 marks)



38 NG plc is owed $4,000 by a customer who refuses to pay, despite NG having secured a County Court Judgement against them. NG has gone back to the Court and a court bailiff has been given authority to take goods from the customer’s home or business.

What is this arrangement known as?

A A warrant of execution

B An attachment of earnings order (1 mark)

39 BK Inc is unable to meet all of its outstanding liabilities and debts and has negotiated revised payments and terms with each of its major creditors.

What is this arrangement known as?

A An administration order

B A company voluntary arrangement (CVA) (1 mark)

40 Some organisations use the ‘3Cs’ as a starting point to assess a potential client’s credit worthiness.

Which of the following is NOT one of the 3Cs in this context?

A Credit history

B Capacity (1 mark)

41 Alpha Limited has sold goods on credit to Beta Limited. The following information is available.

(i) Aged receivable analysis

(ii) Copies of outstanding invoices

(iii) Copies of contractual documents

(iv) Copies of trade references

(v) Copies of bank references

Which of the above documents will be needed to aid the collection of the outstanding amounts owed by Beta Limited?

A All items

B (i), (ii) and (iii) only

C (i), (iv) and (v) only

D (iv) and (v) only (2 marks)

42 Invoice discounting is a method where:

A Discounts are given for early payment of invoices

B A finance house lends money against invoices issued (1 mark)

43 Credit insurance allows a company to claim for:

A Amounts owed by a customer who has defaulted on payment

B Amounts owed to a bank on a mortgage (1 mark)



44 Organisations often use debt collection agencies because:

A Debt collection agencies have a right to seize goods from customer

B Debt collection agencies get results because customers take more notice and are more likely to pay (1 mark)

45 Which of the following is NOT a suitable external source of information that can be used to monitor the status of a debtor?

A Credit reference

B Bank reference

C Press reports

D Aged debt analysis (2 marks)

SOURCES OF FINANCE

46 The following statements have been made about the benefits of debt finance compared to equity finance:

Statement 1: Interest payments on debt attract tax relief.

Statement 2: Control of the company is diluted.

Which of the above statements is true?

A Both of them

B Statement 1 only

C Statement 2 only

D Neither of them (2 marks)

47 The following statements have been made about inflation:

Statement 1: Inflation leads to a distribution of income and wealth.

Statement 2: If a country has a higher rate of inflation than its partners, its imports become relatively more expensive and its exports become relatively cheaper.


A Both of them

B Statement 1 only

C Statement 2 only




48 GYH plc has just taken out a loan that involves repaying some of the capital during the life of the loan with the bulk of the capital being repaid on maturity.

What type of repayment pattern is being described here?

A Bullet

B Balloon

C Mortgage-style (amortising)

D Irredeemable (2 marks)

49 Which of the following are ALL money market instruments?

A Bills, certificates of deposit and deposits

B Cheques, certificates of deposit, deposits

C Cash, cheques and bills

D Bills, certificates of deposit and cash (2 marks)

50 Which of the following, if either, is an assumption on which Baumol’s model of cash management is based?

Assumption 1: Amounts of cash required in future periods cannot be predicted with certainty.

Assumption 2: The opportunity cost of holding cash is known and it does not change over a period of time.

A NEITHER Assumption 1 NOR Assumption 2

B Assumption 1 ONLY

C Assumption 2 ONLY

D BOTH Assumption 1 and Assumption 2 (2 marks)

51 'A Central Bank acts as lender of the last resort.'

Is this statement true or false?

A True

B False (1 mark)

52 'An unconditional order in writing to pay the addressee a specified sum of money either on demand or at a future date'.

What does the above definition describe?

A Bill of Exchange

B Loan stock. (1 mark)



53 Which of the following statements are true/false?

Statement 1: The security of local authority bonds is always considered to be as good as that of central government bonds.

Statement 2: A bond always offers a fixed rate of interest

Statement 1 Statement 2

A False False

B False True

C True False

D True True (2 marks)

54 ADY Inc is looking to invest surplus funds so that the deposit can be withdrawn on demand at any time without penalty

What type of deposit is most suitable here?

A Sight deposit

B Time deposit

C Certificate of deposit

D Repo (2 marks)

55 A bank is offering 6% interest on a deposit account. Inflation is currently 3%.

What is the real rate of return on the account?

A 9%

B 6%

C 3%

D 2.91% (2 marks)

56 The CAMPARI framework is often used when assessing a lending decision.

What does the C stand for in the CAMPARI mnemonic?

A Capability

B Character (1 mark)



57 MM Inc has decided to issue new shares to existing shareholders instead of a normal cash dividend.

What type of share issue is being described here?

A Rights issue

B Bonus issue

C Scrip dividend

D Share split (2 marks)

58 UNQ Ltd is a small unquoted company looking to raise further equity finance.

Which of the following sources of finance is LEAST suitable?

A Rights issue

B Business Angel

C Venture Capital

D Public Issue (2 marks)

59 Thunder plc has 1 million £0.50 par value shares in issue. Its gross profit was £1.5 million last year and its profit after tax was £0.8 million.

What is Thunder plc’s earnings per share?

A £1.50

B £0.80

C £0.75

D £0.40 (2 marks)

60 Which of the following is NOT a source of government funds for small and medium sized businesses?

A Regional selective assistance

B Enterprise grant

C Business angel investment

D Regional innovation grant (2 marks)



RELEVANT COSTS

61 A company is considering undertaking a contract for a new client. The contract requires 100kg of material A. It has 200kg in inventory, which it bought last year at a cost of $10 per kg. The current resale value is $8, although to replace the material today would cost $15 per kg. There is no other use for the material, except as a substitute for material B, which costs $14 per kg.

What is the relevant price per kg of material A?

A $10

B $14

C $8

D $15 (2 marks)

62 A farmer grows carrots, which he currently digs up and sells in 10kg sacks, without washing the carrots or preparing them in any other way. He is considering whether to trim them, wash them and package them up in 1kg cartons instead of continuing to sell them in sacks.

Which of the following are relevant to his decision?

(i) The cost of growing the carrots

(ii) The sales value of the unprepared sacks of carrots

(iii) The costs of trimming and washing the carrots

(iv) The sales value of the new trimmed cartons of carrots

A All of them

B (i), (iii) and (iv) only

C (ii), (iii) and (iv) only

D (iii) and (iv) only (2 marks)

63 A contract is under consideration that requires 400 labour hours to complete. There are 150 hours of spare labour capacity.

The remaining hours for the contract can be found either by weekend overtime working paid at double the normal rate of pay or by diverting labour from the manufacture of product QZ. If the contract is undertaken and labour is diverted, then sales of product QZ will be lost. Product QZ takes three labour hours per unit to manufacture and makes a contribution of $12 per unit. The normal rate of pay for labour is $9 per hour.

What is the total relevant cost of labour for the contract?

A $3,250

B $3,600

C $4,500

D $4,600 (2 marks)



64 A company purchased a machine four years ago at a cost of $25,000. It is to be depreciated on a straight line basis over five years.

It is no longer used on normal production work and has a scrap value of $2,000.

A one-off contract is being considered which would make use of this machine for six months. The contract would require adjustments to be made to the machine costing $800. At the end of the contract it is estimated that the scrap value would be $1,500.

What is the relevant cost of the machine to the contract?

A $1,300

B $3,300

C $4,300

D $23,500 (2 marks)

65 A company has an asset that originally cost $58,000, but would now cost just $37,000 to replace. The asset could be sold for scrap to earn $11,000. Alternatively, it could be used in a small project that would earn net income of $17,500. The asset has no other use.

What is the relevant value of the asset?

A $6,500

B $11,000

C $17,500

D $37,000 (2 marks)

66 A company has just secured a new contract that requires 500 hours of labour.

There are 400 hours of spare labour capacity. The remaining hours could be worked as overtime at time-and-a-half or labour could be diverted from the production of product X. Product X currently earns a contribution of $4 in two labour hours and direct labour is currently paid at a rate of $12 per normal hour.

What is the relevant cost of labour for the contract?

A $200

B $1,200

C $1,400

D $1,800 (3 marks)



67 A company is evaluating a project that requires two types of material (T and V).

Data relating to the material requirements are as follows:

Material type

Quantity needed for

project

Quantity currently in inventory

Original cost of quantity in inventory

Current purchase

price

Current resale price

kg kg $/kg $/kg $/kg T 500 100 40 45 44 V 400 200 55 52 40

Material T is regularly used by the company in normal production. Material V is no longer in use by the company and has no alternative use within the business.

What is the total relevant cost of materials for the project?

A $40,400

B $40,900

C $43,400

D $43,900 (2 marks)

68 A company is evaluating a project that requires 4,000 kg of a material that is used regularly in normal production. 2,500 kg of the material, purchased last month at a total cost of $20,000, are in inventory. Since last month the price of the material has increased by 2.5 per cent.

What is the total relevant cost of the material for the project?

A $12,300

B $20,500

C $32,300

D $32,800 (2 marks)

69 A contract is under consideration that requires 800 labour hours to complete. There are 450 hours of spare labour capacity for which the workers are still being paid the normal rate of pay. The remaining hours required for the contract can be found either by overtime working paid at 50% above the normal rate of pay or by diverting labour from the manufacture of product OT. If the contract is undertaken and labour is diverted, then sales of product OT will be lost. Product OT takes seven labour hours per unit to manufacture and makes a contribution of $14 per unit. The normal rate of pay for labour is $8 per hour.

What is the total relevant labour cost to the contract?

A $3,500

B $4,200

C $4,500

D $4,900 (2 marks)



70 All of a company’s skilled labour, which is paid $8 per hour, is fully employed manufacturing a product to which the following data refer: $ per unit $ per unit Selling price 60 Less variable costs: Skilled labour 20 Others 15 ––– (35) ––– Contribution 25 –––

The company is evaluating a contract that requires 90 skilled labour hours to complete. No other supplies of skilled labour are available.

What is the total relevant skilled labour cost of the contract?

A $720

B $900

C $1,620

D $2,160 (3 marks)

71 A company requires 600 kg of raw material Z for a contract it is evaluating. It has 400 kg of material Z in inventory that was purchased last month. Since then the purchase price of material Z has risen by 8% to $27 per kg. Raw material Z is used regularly by the company in normal production.

What is the total relevant cost of raw material Z to the contract?

A $15,336

B $15,400

C $16,200

D $17,496 (2 marks)

72 Equipment owned by a company has a net book value of $1,800 and has been idle for some months. It could now be used on a six months contract that is being considered. If not used on this contract, the equipment would be sold now for a net amount of $2,000. After use on the contract, the equipment would have no saleable value and would be dismantled. The cost of dismantling and disposing of it would be $800.

What is the total relevant cost of the equipment to the contract?

A $1,200

B $1,800

C $2,000

D $2,800 (2 marks)



CAPITAL INVESTMENTS

73 The net present value of a proposed project is $20,000 at a discount rate of 5% and $(28,000) at 10%.

What is the internal rate of return of the project, to the nearest one decimal place?

A 7.1 %

B 7.5 %

C 2.3 %

D 8.6% (2 marks)

74 A company is considering purchasing a new machine for $25,000. This would increase the annual cash flow of the company by $6,500 in each of the next six years. If the cost of capital is 9 per cent per annum, the net present value of this investment is:

A $4,159

B $10,780

C $10,901

D $14,000 (2 marks)

75 Investment is possible in one or more of three projects. A B C $ $ $ Outlay 10,000 7,000 1,250 Expected returns (t1 – t4) 4,000 2,500 325

The firm can borrow the finance at 10% pa.

Which project(s) should be undertaken?

A A only

B A and B

C A and C

D A and B and C (3 marks)

76 The internal rate of return is the interest rate that equates the present value of expected future net cash receipts to

A the initial cost of the investment outlay

B the firm’s cost of capital (1 mark)



77 A company has identified two mutually-exclusive projects which have an equivalent effect on the risk profile of the company. Project I Project II Discounted payback period 2.8 years 3.2 years Net present value $17,200 $15,700 Internal rate of return 18% 22% Average accounting rate of return 19% 21%

Cost of capital is 15%.

Assuming that the directors wish to maximise shareholder wealth and no shortage of capital is expected, which project should the company choose?

A Project I because it has the shorter payback period

B Project I because it has the higher net present value

C Project II because it has the higher internal rate of return

D Project II because it has the higher accounting rate of return (2 marks)

78 A project has a normal pattern of cash flows (i.e. An initial outflow followed by several years of inflows).

What would be the effects on the internal rate of return (IRR) of the project and its discounted payback period (DPP) of a decrease in the company’s cost of capital?

IRR DPP

A Decrease Decrease

B Decrease Increase

C No change Decrease

D No change Increase (2 marks)

79 A project has a normal pattern of cash flows (i.e. An initial outflow followed by several years of inflows).

What would be the effects on the internal rate of return (IRR) of the project and its payback period of an increase in the company’s cost of capital?

IRR Payback period

A Increase Increase

B Increase No change

C No change Increase

D No change No change (2 marks)



80 Consider the following graph.

NPV

Discount rate0 15%

Project X

Project Y

Which statement is true?

A Project Y has a higher internal rate of return than project X

B At discount rates of less than 15%, project Y is preferred to project X

C Project X is preferred to project Y irrespective of discount rate

D Project Y is preferred to project X irrespective of discount rate (2 marks)

81 Details of a new machine are as follows. Capital cost $120,000 Expected operating life 5 years Expected scrap value at the end of five years $20,000 Annual depreciation $20,000 Expected annual cash inflows from operations $40,000

What is the payback period?

A 6 years

B 5 years

C 3 years

D 2½ years (2 marks)

82 Details of a new machine are as follows. Capital cost $500,000 Expected operating life 5 years Expected scrap value at the end of five years $100,000 Expected annual cash inflows from operations $100,000

What is the accounting rate of return, based on initial investment?

A 20%

B 33.3%

C 100%

D 166.7% (2 marks)



83 Which of the following statements about payback period is true?

A It will minimises the effects of risk by giving greater weight to earlier cash flows

B It is easy to set a target

C It takes account of all the cash flows arising from a project

D It takes account of the overall profitability of the project (2 marks)

84 Details of a new machine are as follows. Capital cost $210,000 Expected scrap value at the end of five years $10,000 Annual depreciation $40,000 Expected annual profit from operations $50,000

What is the payback period?

A 5 years

B 4.20 years

C 2.33 years

D 2 years (2 marks)

LEGAL ISSUES

85 The Data Protection Act applies to:

A All records held by the company

B Only manual records (1 mark)

86 Which of the following is/are correct?

(i) A person who signs a contract is deemed to have read it.

(ii) A person who signs a contract is bound by all its terms.

(iii) A person who has not read a contract cannot be bound by it.

Options:

A (i) only

B (ii) only

C (iii) only

D (i) and (ii) only (2 marks)

87 The essential features of a valid simple contract are:

A Offer, acceptance and consideration only

B Offer, acceptance, consideration, intention to create legal relations and certainty of terms only

C Offer and acceptance only

D Offer, acceptance, intention to create legal relations only (2 marks)



88 Which of the following is not an essential element of a valid simple contract?

A The contract must be in writing

B The parties must be in agreement

C Each party must provide consideration

D Each party must intend legal relations (2 marks)

89 Alan shops at a supermarket.

A contract is formed when:

A Alan pays for his shopping

B Alan puts his selection in the trolley

C The checkout assistant takes Alan’s goods

D Alan picks up items from the shelves (2 marks)

90 Retention of title is:

A The right of the purchaser to retain ownership of the goods received.

B The right of the seller to retain ownership of the goods until a cheque has been posted.

C The right of the seller to retain ownership of the goods until payment is made.

D The right of the purchaser to expect that title is retained by the seller even when payment has been received. (2 marks)

91 The Data Protection Act applies to:

A Data about individuals only

B Data about individuals, companies and government departments

C Data about companies only

D Data about individuals and companies only (2 marks)

92 Which of the following is the first stage in a bankruptcy procedure?

A A statutory demand for payment is issued

B A petition is made to the court (1 mark)

93 The following statement has been made about an essential element of a contract: `All contracts need to be in a strict legal form in order to be binding'

Is this true or false?

A True

B False. (1 mark)



94 Which of the following statement(s) about contracts is/are true?

Statement 1: An offer can be made orally or in writing.

Statement 2: An offer can expire after a set period of time.

A Statement 1 only

B Statement 2 only

C Neither of them

D Both of them (2 marks)

95 Which of the following is NOT a responsibility of a customer to its bank?

A to ensure safety and security of the cheque book

B to give responsible financial advice

C to keep authorisations current

D to provide safeguards for electronic communications (2 marks)

96 What is a garnishee order?

A a legal document that prevents a customer who owed money from taking money out of a bank or building society account

B a legal document that gives the court bailiff the authority to take goods from the customer’s home or business (1 mark)

JUNE 2009 SAMPLE MULTIPLE-CHOICE QUESTIONS (PUBLISHED BY ACCA)

1 The following statements have been made about the benefits of debt finance compared to equity finance:

Statement 1: Interest payments on debt attract tax relief.

Statement 2: Control of the company is diluted.


A Both of them

B Statement 1 only

C Statement 2 only


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