You are required to conduct a vertical analysis of the Balance Sheet of a public listed company over 2018 and 2019 financial years.
- You can use the public listed company that used in your assignment one.
- You have to attach the Balance Sheets under the section: Appendix One.
Discuss vertical analysis results and provide possible reasons for the significant changes.
The explanation should identify the effect on liquidity and how non-current assets are funded.
Task Two: Internal Accounting Information and Working Capital Management (LO 3)
Boswell Limited is a wholesale business. Extracts from the business’s recent financial statements are as follows:
|Boswell Ltd Income Statement for the year ended 31 May 2020||$000’s|
|Cost of sales||(652)|
|Other operating expenses||(109)|
|Profit before taxation||131|
|Profit for the year||93|
|Boswell Ltd Statement of Financial Position as at 31 May 2020||$000’s|
|Non-current assets at cost||714|
|Borrowings (all bank overdraft)||107|
|Total current liabilities||367|
|Ordinary Share Capital issued at $1.00||200|
|Total liabilities and Equity||813|
Opening inventory was 160.
[i] Calculate cash operating cycle
[ii] Evaluate liquidity of Boswell Ltd
[i] The Operations Manager believes that the current level of inventory should be reduced.
Do you agree with the OM? Explain two factors for and two factors against this decision.
[ii] Discuss three policies to efficiently manage Accounts Receivable.
Task Three: Financing strategy for a business (LO 5)
Use the Boswell financial information and consider the following assumptions to answer the questions:
- Suppliers have been pressing for payment, so the financing director has decided to reduce the level of accounts payable to an average of 60 days outstanding.
- To achieve this, he has decided to ask the bank to increase the overdraft to finance the necessary payments.
- The bank currently charges 12% interest on the overdraft.
Calculate the amount of finance required to reduce accounts payable, as shown on the statement of financial position, to an average of 60 days outstanding.
Discuss two factors that the bank would consider when making a decision about raising overdraft amount.
Evaluate three short term financing options that Boswell can use to manage working capital.
Recommend an option to Boswell and justify your recommendation.
Task Four: Cost-Volume-Profit analysis (LO 4)
Western Appliance Co Ltd manufactures one model of dishwashing for distribution and sale to retailers. This Economy model sells for $700.
Cost information is set out below.
|Fixed Costs (per annum)|
|Manufacturing overheads||$160 000|
|Selling and Distribution||70 000|
|Variable costs (per unit)|
|Selling and Distribution||10% of the selling price|
During 2020 the company sold 2000 “Economy” dishwashing machines.
Western Appliance Co Ltd is considering the manufacture of a second model in 2021.
The “Deluxe” model would sell for $1000. Budgeted variable costs per unit of the “Deluxe” model are $700. Fixed costs are expected to increase by $100000 per annum if the new model is produced.
If the change is made, the company estimates sales for 2021 would total 2400 dishwashing machines.
As some existing customers would now purchase “Deluxe” models, the sales mix is expected to be 1800 “Economy” models and 600 “Deluxe” models. If the proposed change is not implemented, 2021 sales of “Economy” models are expected to remain the same as in 2020.
Use the above information and calculate the yearly break-even sales in units and dollars for 2020 (before the proposed change).
Calculate the 2021 break-even sales in units (of each product) if the proposed change is implemented, assuring a constant sales mix. Use a weighted average contribution margin.
Given the anticipated level of sales in 2021, should Western Appliance Co Ltd begin production of “Deluxe” model dishwashing machines? Show calculations to support your answer.
Task Five: Activity-based costing (LO 4)
Siegel Company manufactures a product that is available in both a deluxe model and a regular model.
Manufacturing overhead is assigned to products on the basis of direct labour hours.
For the current year, the company has estimated that it will incur $900000 in manufacturing overhead cost and produce 5000 units of Deluxe model and 40000 units of the regular model. The deluxe model requires two hours of direct labour hour time per unit, and the regular model requires one hour.
Materials and labour costs per unit are as follows:
Management considering using activity-based costing to apply manufacturing overhead cost to both products.
The activity-based costing system would have the following four activity cost pools:
|Activity cost pool||Activity Measure||Estimated overhead cost|
|Purchasing||Purchase orders issues||$204000|
|Scrap/rework||Scrap/rework orders issued||$379000|
|Shipping||Number of shipments||$135000|
|Purchase orders issues||200||400||600|
|Scrap/rework orders issued||1000||1000||2000|
|Number of shipments||250||650||900|
Using direct labour hours as the base for assigning overhead cost to products, compute the predetermined overhead rate. Using overhead rate and other data which is given above, determine the unit product cost of each model.
Using the above information and compute the activity rates for each activity cost pool and determine the unit product cost of each product according to the activity-based costing system, including direct materials and direct labour.
“Activity-based cost systems yield more accurate product costs than traditional costing systems because they use more cost drivers to assign overheads”. Indicate whether you agree or disagree with this statement and explain at least three reasons supporting your decision