Official Use Only Q 1 2
SCHOOL OF ACCOUNTING
3 4 5 6 Total (/75)
Accounting and Financial Management 1B
FINAL EXAMINATION November 2007
Time Allowed: Reading Time: Total Number of Questions: Answer ALL questions. The questions are NOT of equal value. • Answers to Questions 1 to 6 must be written in ink on the lines or in spaces provided in this Booklet. • Question 7 must be answered on the separate Generalised Answer Sheet provided using a 2B pencil. This paper is NOT to be retained by the candidate. DO NOT OPEN THIS PAPER UNTIL INSTRUCTED BY THE EXAM SUPERVISOR 3 Hours 10 minutes 7
QUESTION 1 (10 MARKS): CASH FLOW STATEMENTS
The CEO of Jackson Corporation has come to your bank for a loan. He states: “Each of the last three years, our cash has gone down. This year, we need to increase our cash by $7,000 so that we have a $20,000 cash balance at year-end. We have never borrowed any money on a long-term basis and are reluctant to do so. We definitely, however, need to purchase some new and more advanced equipment to replace the old equipment we are selling this year. We received quotes ranging from $25,000 to $35,000 for the new equipment. We also want to buy back some of our own shares because they would be a good investment. In addition, we would like to pay dividends of 50% of net profit instead of our usual 40%. Given our expected net profit of $20,000 and the following estimations of cash flows, I estimate we will have to borrow $12,000 and this is the maximum amount we are willing to borrow.” SCHEDULE OF EXPECTED CASH FLOWS FOR 2007 $ Inflows of cash: Cash collected from customers Gain on sale of old equipment Proceeds from sale of old equipment Proposed bank loan Total inflows Outflows of cash: Depreciation expense Purchase equipment Cash paid to suppliers Pay dividends (50% of net profit) Total outflows Increase in Cash Opening cash balance Closing cash balance
$ 34,000 3,000 8,000 12,000 57,000
6,000 30,000 4,000 10,000 50,000 7,000 13,000 20,000
The CEO explains that the $5,000 expected cost of share buyback was not included because it would involve only a transaction between the company and its existing shareholders and would be of no interest to “outsiders.” After looking at the schedule, you find that there are serious problems and inaccuracies. You need to explain to the CEO why his schedule of cash flows is incorrect and that he will likely need to borrow more than $12,000 to have a $20,000 cash balance at the end of 2007.
Required: (a) Identify and explain three (3) inaccuracies in the Jackson Corporation’s schedule of expected cash flows for 2007. (6 marks) 1.
DO NOT WRITE BEYOND THIS LINE
(b) Give two (2) suggestions which may allow Jackson corporation to maintain its cash balance of $20,000 at the end of 2007 without increasing the loan of $12,000. (4 marks) 1.
DO NOT WRITE BEYOND THIS LINE
QUESTION 2 (10 MARKS): FINANCIAL STATEMENT ANALYSIS
As a senior investment analyst, you have been analysing financial results of Coles Ltd. and Woolworths Ltd. for the last few years. The following table shows a summary of comparative financial results for Coles and Woolworths Ltd. 2006 $ million Income Statement Sales Other income COGS Gross Profit EBIT Interest expense Interest WIN NPBT Tax Expense NPAT continuing operations Profit from discontinued operations NPAT attributable to shareholders Pro forma NPAT Coles 2005 $ million 2004 $ million Woolworths 2006 2005 $ million $ million 37,849.7 31,481.2 (23,678.9) 7,802.3 1,302.1 (150.1) 1,152.0 (334.8) 817.2
34,212.0 33,018.0 32,266.8 91.8 71.9 (26,160.8) (25,305.3) (24,059.5) 8,143.0 7,784.6 8,207.3 850.9 (98.9) 752.0 (215.6) 536.4 627.2 1,163.6 786.6 1,027.2 (55.2) 972.0 (285.9) 686.1 (48.2) 637.9 692.0 616.5 576.0 888.1 (13.5) 874.6 (258.1) 616.5
9,444.6 1,722.2 (249.7)