Budgets, Ratio Analysis & Capital Financing – Accounting Assignment

QUESTION 1   (30 Marks)

BUDGETS

The following information has been projected by the management of GORGEOUS TRADING for the forecast period 01 September 2024 to 31 October 2024.

Information:

• Collections of credit sales from debtors:
• 50 % in the month of sales
• 30 % one month after the sales
• 15 % two months after the sales
• Balance due is irrecoverable and must be written off as bad debts.
• All purchases are on credit and creditors are paid one month after purchase less10% discount.
• A fixed deposit of R15 000 is maturing on 20 September 2024. An interest of R2 000 will also be due on this date.
• Salaries amount to R30 000 per month. However, an increase of 8% will come into effect from 01 October 2024.
• An air-conditioned system costing R25 000 is scheduled to be purchased and installed for cash in October 2024.
• Variable expenses are expected to be R18 000 per month and expected to increase by R2 000 with effect from 01 October 2024.
• The owner withdraws R20 000 cash each month for her personal use.
• A loan repayment of R50 000 is made annually on 01 September.
• The expected Bank balance on 01 September is an unfavorable bank balance of R7 850.

Required:

1.1 Debtors Collection Schedule for the budgeted period, September to October 2024.        (10 marks)

1.2. Statement of Cash Budget for the Budgeted period September to October 2024.     (20 marks)

QUESTION 2         (27 Marks)

RATIO ANALYSIS

The following information was extracted from the records of FLAMBOYANT WHOLESALERS for the year ended 29 February 2024.

Information:

NB: Inventory on 01 March 2023 was, R90 000 Required: Calculate the following ratios.
NB: Where applicable, round off your answers to two decimal places.
Gross margin (3 marks)
Inventory turnover (Use average Inventory) (4 marks)
Debtors’ collection period (4 marks)
Return on assets (4 marks)
Total Debt to equity (4 marks)
Current ratio (4 marks)
Return on own capital (4 marks)

Question 3         (15 Marks)
 
KZN Textiles (Pty) Ltd is a medium-sized manufacturer located in Durban, specialising in school uniforms for primary and secondary schools. The company has experienced consistent demand over the past five years, with sales peaking between November and January each year when parents prepare for the new school year.
To meet growing demand, the company has decided to expand production by purchasing new machinery valued at R1,200,000, which will improve efficiency and reduce production costs over the next 10 years. The machinery is expected to remain in use for its full useful life and requires a permanent capital investment.
In addition to the machinery, the company requires R500,000 in working capital to fund raw materials (fabric, buttons, zippers) and to cover salaries for additional seasonal workers hired during the peak production months. This working capital need is considered variable, as it fluctuates with seasonal demand.
The financial manager must now decide how best to finance these capital requirements. The available financing options are:
Long-term bank loan: Up to R1,200,000 available at 10% interest per annum, repayable over 10 years with fixed instalments.
Short-term overdraft facility: Up to R600,000 available at 14% interest per annum, repayable within 12 months. This facility can be renewed but remains subject to the bank’s discretion.
Retained earnings: R600,000 available for reinvestment. Using this option does not incur interest costs but will reduce the amount of reserves available for other opportunities or emergencies.
The directors of KZN Textiles have expressed caution about taking on too much debt, given that rising interest rates in South Africa may increase financial risk. However, they also wish to preserve some retained earnings as a buffer for unforeseen expenses.
The financial manager must therefore balance the principles of financing:
Matching principle: Long-term needs (fixed assets) should be financed with long-term funds, and short-term needs (working capital) should be financed with short-term funds.
Risk–return principle: Higher risk financing (such as overdrafts) may increase returns but also increases financial vulnerability.
Required:
Distinguish between the permanent capital and variable capital needs of KZN Textiles, using figures from the scenario. (5 marks)
Explain which financing source(s) would be most appropriate for each type of capital requirement, applying the principles of capital financing. (6 marks)
Discuss one potential risk of using excessive short-term finance for variable capital needs. (4 marks)

QUESTION 4 (28 Marks)
CAPITAL EXPENDITURE DECISIONS
Fantastic Construction is investigating the possibility of purchasing a new generator. The research department has submitted the following information.

Required:
The payback period [answer in years, months and days] (6 marks)
The accounting rate of return. (6 marks)
The net present value. (8 marks)

Would the cost of capital of 15% be acceptable when calculating the NPV of the project? Motivate your answer. (8 marks)

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Accounting Assignment Answers: Expert Answers on Above Financial Management Questions

Collection pattern: 50% in month of sale, 30% one month after, 15% two months after; 5% irrecoverable (bad debts).

Credit sales by month: July: R100,000, August: R80,000, September: R60,000, October: R90,000

Collections received in September 2024

From September sales (50% of R60,000) = R30,000, From August sales (30% of R80,000) = R24,000, From July sales (15% of R100,000) = R15,000. Total collections in September = R69,000

Collections received in October 2024

From October sales (50% of R90,000) = R45,000, From September sales (30% of R60,000) = R18,000, From August sales (15% of R80,000) = R12,000. Total collections in October = R75,000

Note on bad debts (irrecoverable)

5% of each month’s credit sales is irrecoverable:

July: 5% of 100,000 = R5,000, August: 5% of 80,000 = R4,000, September: 5% of 60,000 = R3,000, October: 5% of 90,000 = R4,500

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