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The financial techniques and strategies are necessary for the efficient operation of an international business

Question 1

  1. Journalize the following transactions and post them to ledger.From the following                    transactions of Phoenix Inc for Oct ,2016.

(i)Journalize the below transactions

(ii)Post the Journal entries in to ledger accounts

Date Transactions
2016 Oct 1 Niel started business with cash $ 800,000
         Oct 2  purchased goods worth $ 3000
         Oct 15 Sold goods for  $ 25000
        Oct 18 Purchased stationeries $4000
        Oct 23 Purchased furniture for $ 24,000
Oct 25 Paid electricity charges with cash $3000
Oct 26 Paid Salary $18000
Oct 28 Paid rent $500

 

(10 Marks)

  1. “Bookkeeping is synonymous to accounting”Analyse this statement.

(10 marks)

Question 2

  1. Prepare income statement and balance sheet of Indus Corp as on 31st Dec,2016.
Particulars Amount ($ ‘000)
Sales 37,436
Cash 4,895
Cost of goods sold 26,980
Accounts Payable 7,156
Accounts Receivable 5,714
Selling, general, and administrative expense 3,624
Inventories 8,517
Research and Development expense 1,982
Plant and Equipment 7,154
Interest expense 450
Long term liability 20105
Land 981
Income tax expense 1,100

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(10 Marks)

  1. Why are financial statements are so important for a business ?

(10 Marks)

Question 3

  1. ABC Industries is in the Business of manufacturing agro equipment.            Prepare the cash budget for the quarter April to June, based upon the following data and additional information.
Month Sales Purchases Wages Selling Overheads Office Overheads Mfg.
Overheads
$ $ $ $ $ $
January 60,000 36,000 9,000 4,000 2,000 4,000
February 62,000 38,000 8,000 5,000 1,500 3,000
March 64,000 33,000 10,000 4,500 2,500 4,500
April 58,000 35,000 8,500 3,500 2,000 3,500
May 56,000 39,000 9,000 4,500 1,000 4,000
June 60,000 34,000 8,000 4,500 1,500 3,000

Additional Information :

  1. The Cash balance at 1 April is $ 800000.
  2. Sales: 40% cash sales and 60% is collected in the month following sales.
  3. Purchases are all on credit and are paid after 2 months.
  4. A plot of land was purchased in December (Previous year) and $ 87,000 is payable in April.
  5. Wages are paid two month in arrear and all overheads are settled after a month  they are incurred.
  6. ABC Industries is due to repay a loan of $ 16,000 in May.
  7. A dividend of $ 80,000 is expected to be received in May.

(10 Marks)

  1. “With zero-based budgeting,each expenditure item must be justified for the new budget period.” Explain.

(10 Marks

Question 4

A.(i)  Moment Inc. provides the following data for June 2016 when 15,000 Units are manufactured:

Standard Material Cost (Per Unit)

8.50 kg @ $ 7.50/kg

Actual Material Cost (Per Unit)

6.75 kg @ $ 13.5/kg

StandardLabor cost (Per Unit)

5.5 hrs @ $ 15/hr

Actual Labor cost (Per Unit)

6.5 hrs @ $ 12.2/hr

Calculate:

Direct Material Price Variance

Direct Material Quantity/Usage Variance

Total Material Cost Variance

Direct Labor Rate Variance

Direct Labor Efficiency Variance

Total Labor Cost Variance

(ii) Calculate Variable Overhead Spending Variance if actual labor hours used are 260,standard variable overhead rate is $10.40 per direct labor hour and actual variable overhead rate is $9.30 per direct labor hour. Also specify whether the variance is favorable or unfavorable.

(iii)  Calculate the variable overhead efficiency variance using the following figures:

              Number of Units Produced 620
Standard Direct Labor Hours Per Unit 0.2
              Actual Direct Labor Hours Used 260
              Standard Variable Overhead Rate $10.40
  1. “Managers of most organizations continually plan for the future, and after the plan is implemented, managers assess whether they achieved their goals. What are the two functions that enable management to go through the process of continually planning and evaluating?

(20 Marks)

Question 5

  1. Robest Industries produces only one product. The following revenues and cost have   been estimated for the forthcoming month:

Selling price, $ 250 per unit (SP)

Variable cost, $ 100 per unit (VC)

Fixed Cost, $ 56000

The managers of the firm wish to know the following:

  1. Calculate contribution margin per unit
  2. Calculate contribution margin ratio.
  3. BEP in units
  4. Calculate BEP in sales.
  5. “Good Managers must not only be able to understand the conceptual underpinnings of cost behaviour,but they must also be able to apply those concepts to real world data           that do not always behave in the expected manner.”Explain cost behaviour analysis.

(20 marks)

Question 6

  1. Sandersen, Inc., sells minicomputers. The firm’s taxable income is $1,225,000. Calculate the corporation’s tax liability.
Corporate Tax Rates
15% $ 0–$50,000
25% $ 50,001–$75,000
34% $75,001–$10,000,000
35% over $10,000,000
Additional surtax:
•5% on income between $100,000 and $335,000.
•3% on income between $15,000,000 and $18,333,333.

 

  1. “Originally, the sole objective of the federal government in taxing income was to generate financing for government expenditures. Although this purpose continues to be important, social and economic objectives have been added.” Substantiate the statement with enough explanations.

Question 7                                                                                                    

  1. Friedman Manufacturing, Inc. has prepared the following information regarding two investments under consideration. Which investment is better, based on risk (as measured by the standard deviation) and return?
Common Stock A Common Stock B
Probability Return Probability Return
.20 12% .10   4%
.50 18% .30   6%
.30 27% .40 10%
.20 15%

 

  1. “ More can be said about risk, especially as to its nature, when we own more than one asset in our investment portfolio.” Define risk and explain how risk is affected if we diversify our investment by holding a variety of securities?

Question 8                                                                                           

  1. J and S Corporation is evaluating its financing requirements for the coming year. The firm has only been in business for 1 year, but its CFO predicts that the firm’s operating expenses, current assets, net fixed assets, and current liabilities will remain at their current proportion of sales.Last year J and S Corp. had $15 million in sales with net income of $1.5 million. The firm anticipates that next year’s sales will reach $18 million with net income rising to $3 million. Given its present high rate of growth, the firm retains all its earnings to help defray the cost of new investments.The firm’s balance sheet for the year just ended is found below:
  J and S Corporation
Balance Sheet
12/31/2000 % of Sales
Current assets $6,000,000 40%
Net fixed assets 9,000,000 60%
   Total $15,000,000
Liabilities and Owners’ Equity
Accounts payable $3,750,000 25%
Long-term debt 4,250,000 NAa
   Total liabilities $8,000,000
Common stock 2,000,000 NA
Paid-in capital 2,800,000 NA
Retained earnings 2,200,000
Common equity 7,000,000
   Total $15,000,000
aNot applicable. This figure does not vary directly with sales and is assumed to remain constant for purposes of making next year’s forecast of financing requirements.

Estimate J and S corp. total financing requirements (i.e., total assets) for 2001 and its net funding requirements (DFN).

  1. Give a brief summary of forecasting to determine additional (discretionary) funding (financing) needed.

Question 9

The balance sheet and income statement for the McDonald’s are as follows.

  McDonald’s Corporation 2016 Income Statement ($ Millions)
Sales $11,508
Cost of goods sold   6,537
Gross profits $ 4,971
Marketing expenses and general
    and administrative expenses $ 1,832
Depreciation expense    345
Total operating expenses $ 2,177
Operating profits $ 2,794
Interest expenses      387
Earnings before taxes $ 2,407
Income taxes      765
Net income before preferred stock dividends $ 1,642
Preferred stock dividends        25
Net income available to common stockholders $ 1,617

 

  McDonald’s Corporation December 31, 2016 Balance Sheet ($ Millions) Assets
Cash $ 341
Accounts receivables 484
Inventories 71
Prepaid expenses      247
   Total current assets $ 1,143
Gross fixed assets $20,088
Accumulated depreciation    5,127
   Net fixed assets $14,961
Investments 702
Other assets    1,436
   Total assets $18,242
Liabilities and Equity
Liabilities (debt):
   Short-term notes payable $ 1,629
   Accounts payable 651
   Taxes payable 53
   Accrued expenses      652
       Total current liabilities $ 2,985
   Long-term debt   6,325
       Total liabilities $ 9,310
Equity:
   Preferred stock $ 80
   Common stock:
   Par value and paid in capital $ 708
   Retained earnings 11,927
   Treasury stock (3,783)
   Total common equity $ 8,852
       Total equity $ 8,932
       Total liabilities (debt) and equity $18,242

 

  1. Calculate the following ratios:

 

RATIO INDUSTRY NORM
Current ratio 0.70
Inventory turnover 90
Average collection period 6.5 days
Debt ratio 50%
Total asset turnover 1.5
Fixed asset turnover 2
Operating profit margin 21%
Return on common equity 15%

 

  1. Calculate the future sum of $5,000 given that it will be held in the bank 5 years at an annual interest rate of 6 percent.
  2. Knutson Products, Inc., is involved in the production of airplane parts and has the following inventory, carrying, and storage costs:
    • Orders must be placed in round lots of 250,000 units.
    • The carrying cost for 1 unit of inventory is $ 10
    • The ordering cost is $100 per order.
  2. Determine the optimal EOQ level.
  3. Determine the average inventory when the safety stock is 2000 units.

Question 10

“Some of the financial techniques and strategies are necessary for the efficient operation of an international business. Problems inherent to these firms include multiple currencies, differing legal and political environments, differing economic and capital markets, and internal control problems. The difficulties arising from multiple currencies are stressed here, including the dimensions of foreign exchange risk and strategies for reducing this risk.” Elucidate.

Question 11

Explain the financial Axioms

  1. Risk – return trade-off
  2. Time value of money
  3. Cash is king
  4. Incremental cash flows
  5. The agency problem
  6. Taxes bias business decisions
  7. All risk is not equal
  8. Ethical dilemmas are everywhere in finance
  9. The Curse of Competitive Markets
  10. Efficient Capital Markets

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