Accounting and Financial Management – Formative Assessment Questions

1.2

REQUIRED

Use the information provided below to calculate the percentage return on sales (expressed to two decimal places). 

INFORMATION

Savoy Limited intends entering a new market and market research has revealed that its sales would increase by 20 000 units if the product is sold on credit. The cost price of the product that it intends selling to this market is R60 per unit and a profit mark-up of 40% would be applied. A provision for bad debts of 10% of the sales would be made. Collection costs on the new accounts are estimated at 6% of sales. The tax rate of the company is 27%.

1.3

Use the information provided below to calculate the following:

• Economic order quantity                     

• Total ordering costs and carrying costs.                                              

INFORMATION

The monthly demand for a product sold by Donna Stores is 600 units. The purchase price is R40 per unit.
The carrying cost of inventory amounts to 5% of the purchase price. The ordering cost is R50 per order.

Question 2     

REQUIRED

Use the information provided below to answer the following questions. Note: Use the formulas provided in the formula sheet only (that appear after QUESTION 5). The answers to the ratios must be expressed to two decimal places and be fully stated e.g. 2.15:1; 24.67%.

• Use the appropriate ratio to determine whether Rustic Limited will be able to settle its short-term debts when business conditions are unfavourable.                                            (3 Marks)

1. Is Rustic Limited efficient in the collection of its debts? Motivate your answer(3Marks)

• Will the shareholders of Rustic Limited be satisfied with the return on investment? Motivate your answer with the relevant calculation.                                                                         (3 Marks)

1. Is Rustic Limited taking advantage of the credit terms offered by creditors? Motivate your answer by using a relevant ratio.                                                                                              (3 Marks)

• Use the relevant ratio to determine the percentage of debt to the assets of the company. Comment on your answer.                                                                                                                 (4 Marks)

• Compare the dividend per share with the earnings per share of Rustic Limited. What conclusions may be drawn from this comparison?                                                                   (4 Marks)

Note:

• Inventories amounted to R360 000 and R300 000 on 31 December 2025 and 31 December 2024 respectively. All purchases of inventories were on credit. Fifty percent (50%) of the sales was on credit.The amount owed by debtors on 31 December 2025 was R240 000. Credit terms to debtors are 30 days.The suppliers of Rustic Limited allow credit terms of 60 days.The ordinary share capital consisted of 500 000 shares.The total dividends for the year ended 31 December 2025 amounted to R540 000.

Question 3                                                                                                                     (20 Marks)

REQUIRED

Prepare the Pro Forma Statement of Financial Position as at 31 December 2026 from the information provided below.

INFORMATION

The Statement of Financial Position of Orbit Ltd as at 31 December 2025 is as follows:

Orbit Ltd provided the following additional financial data to assist in the preparation of the Pro Forma Statement of Financial Position as at 31 December 2026:

• Sales for 2026 are estimated to be R15 000 000, R5 000 000 greater than the sales for 2025. All the sales for 2026 will be on credit.Accounts receivable would be based on a collection period of 36.5 days.Inventory and Accounts payable must be calculated using the percentage-of-sales method.Vehicles and equipment that cost R2 000 000 will be purchased during 2026.

Equipment with a cost

price of R100 000 and accumulated depreciation of R60 000 is expected to be sold for R50 000. Total depreciation for 2026 is estimated to be R1 000 000.

• The authorised share capital consists of 500 000 shares. Fifty percent (50%) of the unissued shares are expected to be sold at R20 each during July 2026.The business predicts a net profit margin of 12%.A final dividend of 180 cents per share is expected to be declared at the end of 2026, payable during 2027. All the shares in issue qualify for the final dividend.An amount of R300 000, including R40 000 for interest on loan, will be paid to Jen Bank during 2026.The cash balance must be determined (balancing figure).

Question 4                                                                                                                      (20 Marks)

Note: The expanded contribution margin model MUST be used to answer questions 4.2, 4.3 and 4.4.

REQUIRED

Refer to the information given below and answer each of the following questions independently:

• Calculate the margin of safety (in units).                                                                   (4 Marks)

• Calculate the total Contribution Margin and Operating Profit/Loss if the variable manufacturing costs increase by 10%.                                                                                                              (4 Marks)

• Suppose Minstrel Limited set the sales price at R1 728 per unit. If sales drop to 3 500 units, how much more can the company spend on advertising and be able to generate an operating profit of R1 000 000?                                                                                                                           (4 Marks)

• Should management consider a drop of R60 per unit in the selling price if the sales volume is expected to increase to 4 400 units? Motivate your answer with the relevant calculations.                                                                                                                                  (4 Marks)

• Determine the selling price per unit that will enable the company to break even.

INFORMATION

Question 5                                                                                                                   (20 Marks)

Note: Where discount factors are required, use only the four decimals present value tables (Appendix 1 and Appendix 2) that appear after the formula sheet.

REQUIRED

Use the information provided below to answer the following questions:

• Calculate the Payback Period of both projects (expressed in years, months and days).

1. Is the Accounting Rate of Return (expressed to two decimal places) on initial investment of Project Pax satisfactory? Motivate your answer with the relevant calculations.        (5 Marks)

• Calculate the Net Present Value of Project Max. Your answer must include the calculation of the present values and NPV.                                                                                      (4 Marks)

• Calculate the Internal Rate of Return of Project Max (expressed to two decimal places).         Your answer must include two net present value calculations (using consecutive cost of capital rates) and interpolation.                                                                                                   (5 Marks)

INFORMATION

Minnie Ltd had to choose between two projects, Project Max and Project Pax, for which the following sales volumes have been forecasted for their four-year economic lifetimes:

The selling price of the product generated from each project is R40 per unit. The cash expenses amount to R16 per unit. Project Max requires an investment of R2 800 000 for the purchase of machinery and R400 000 for its installation. Project Pax requires an investment of R3 200 000 for the purchase of machinery only. No scrap values are anticipated for the projects. Depreciation is calculated using the straight-line method. The cost of capital is 15%.

Experts Answer on Above Questions on Financial Management

Credit Management returns and inventory

Profit that parkside stores can make – selling price is R8400 and the price is cost plus 40%, so it is R6000. A settlement discount of 2.5% is allowed which will reduce the receipt to R8190. This is followed by the deduction of a 12 day financing cost at 18.25% from the cash profit.

Loss if the account is written off the 90 days

The calculation of loss is performed on the basis of R6000 cost along with the financing cost that is incurred for 90 days because the entire credit sales becomes irrecoverable.

Savoy’s limited percentage return on sales

Sales is 20000*R84= R1680000. The return on sales is 3.69% after making the deduction of variable costs, bad debt of 10%, collection cost of 6% and tax @27%. Donna stores EOQ and ordering/carrying cost The annual demand is 7200 units and the carrying cost is 5% of R40 which is R2 per unit. The economic order quantity is 600 units, the annual ordering cost is R600 and annual carrying cost is R600 which accounts to a total of inventory cost of R1200 per year. Financial ratio analysis Can Rustic settle short term debts? The information given is the inventory at R360000 and current liabilities are R360000. This indicates the possibility of meeting short term obligations effectively. Efficiency in collecting debts The collection period is calculated as 36.5 days which is slower than the 30 day credit terms and it implies inefficiency in the collection process. Return to shareholder The shareholders are getting a return of 8.76% as indicated from R613200/R7000000100

Percentage of assets financed by debt

The total liability is R780000 and debt ratio is R780000/R2580000*100=30.23%

Comparison of dividend with earning per share

Earning per share is R613200/R500000 = 1.23
Dividend per share is R540000/R500000 = R1.08
It implies that the company is distributing most of its earnings to the shareholders.

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