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Write My Essay For MeCOURSEWORK: Perry Rose Plc.
Please attempt all questions
You are employed by Perry Rose Finance Plc. located in Bromsgrove Surrey. You have worked for the company for 17 months after graduating with a 1st class degree from the University of Northern England in Carlisle. Your role is to advise clients on financial matters affecting the operation of their business. In your “in tray” this morning are the following issues/problems that require action and an e-mail response to each of your clients.
In tray Item 1
1 Sally Money, the assistant accountant of your client Munic Ltd has recently been taken ill through overwork. In her absence you have been asked to deal with urgent issues. The assistant accountant has prepared some calculations of the profitability of a project, which are to be discussed soon at a Company board meeting. Her workings, which are set out below, include some errors of principle. (You can assume that the statement below includes no arithmetical errors.)
|
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
Year 6 |
|
£000 |
£000 |
£000 |
£000 |
£000 |
£000 |
Sales revenue |
– |
450 |
470 |
470 |
470 |
470 |
Less Costs |
|
|
|
|
|
|
Materials |
– |
126 |
132 |
132 |
132 |
132 |
Labour |
– |
90 |
94 |
94 |
94 |
94 |
Overheads |
– |
45 |
47 |
47 |
47 |
47 |
Depreciation |
– |
120 |
120 |
120 |
120 |
120 |
Working capital |
180 |
– |
– |
– |
– |
– |
Interest on working capital |
– |
27 |
27 |
27 |
27 |
27 |
Write-off of development costs |
– |
30 |
30 |
30 |
– |
– |
Total costs |
180 |
438 |
450 |
450 |
420 |
420 |
Operating profit/(loss) |
(180) |
12 |
20 |
20 |
50 |
50 |
You ascertain the following additional information:
The cost of equipment contains £100,000, being the carrying amount of an old machine. If it were not used for this project it would be scrapped with a zero net realisable value. New equipment costing £500,000 will be purchased on 31 December Year 0. You should assume that all other cash flows occur at the end of the year to which they relate.
The development costs of £90,000 have already been spent.
Overheads have been costed at 50 per cent of direct labour, which is the business’s normal practice. An independent assessment has suggested that incremental overheads are likely to amount to £30,000 a year.
The business’s cost of capital is 12 per cent.
Required:
(a) Prepare a corrected statement of the incremental cash flows arising from the project. Where you have altered the assistant’s figures you should attach a brief note explaining your alterations. (7 marks)
(b) Calculate:
(i)The project’s payback period.
(ii)The project’s net present value as at 31 December Year 0. ((6 marks)
(c)Write a memo to the board advising on the acceptance or rejection of the project. (7 marks)
Ignore taxation in your answer.
In tray Item 2
Gainsborough Fashions Ltd operates a small chain of fashion shops. In recent months the business has been under pressure from its suppliers to reduce the average credit period taken from three months to one month. As a result, the directors have approached your company on advice of how they would approach the bank to ask for an increase in the existing overdraft for one year to be able to comply with the suppliers’ demands. The most recent financial statements of the business are as follows:
Statement of financial position as at 31 May
ASSETS |
£ |
£ |
Non-current assets |
||
Property, plant and equipment |
||
Fixtures and fittings at cost |
90,000 |
|
Accumulated depreciation |
(23,000) |
67,000 |
Motor vehicles at cost |
34,000 |
|
Accumulated depreciation |
(27,000) |
7,000 |
|
|
74,000 |
Current assets |
|
|
Inventories at cost |
|
198,000 |
Trade receivables |
|
3,000 |
|
|
201,000 |
Total assets |
|
275,000 |
EQUITY AND LIABILITIES |
|
|
Equity |
|
|
£1 ordinary shares |
|
20,000 |
General reserve |
|
4,000 |
Retained earnings |
|
17,000 |
|
|
41,000 |
Non-current liabilities |
|
|
Borrowings – loan notes repayable in just over one year’s time |
|
40,000 |
Current liabilities |
|
|
Trade payables |
|
162,000 |
Accrued expenses |
|
10,000 |
Borrowings – bank overdraft |
|
17,000 |
Taxation |
|
5,000 |
|
|
194,000 |
Total equity and liabilities |
|
275,000 |
Abbreviated income statement for the year ended 31 May
|
£ |
Sales revenue |
740,000 |
Operating profit |
38,000 |
Interest charges |
(5,000) |
Profit before taxation |
33,000 |
Taxation |
(10,000) |
Profit for the year |
23,000 |
A dividend of £23,000 was paid for the year.
Notes:
1 The loan notes are secured by personal guarantees from the directors.
2 The current overdraft bears an interest rate of 12 per cent a year.
Required:
(a) Identify and discuss the major factors that a bank would take into account before deciding whether to grant an increase in the overdraft of a business. (10 marks)
(b) State whether, in your opinion, the bank should grant the required increase in the overdraft for Gainsborough Fashions Ltd. You should provide reasoned arguments and supporting calculations where necessary. (10 marks)
In tray Item 3-Managing director of Sparkrite calls into see you on a pre-arranged appointment
The managing director of Sparkrite Ltd, a trading business, has just received summary sets of financial statements for last year and this year. He shows you the following information:
Sparkrite Ltd Income statements for years ended 30 September last year and this year |
|||||
|
Last year |
This year |
|||
|
£000 |
£000 |
£000 |
£000 |
|
Sales revenue |
|
1,800 |
|
1,920 |
|
Cost of sales |
|
|
|
|
|
Opening inventories |
160 |
|
200 |
|
|
Purchases |
1,120 |
|
1,175 |
|
|
|
1,280 |
|
1,375 |
|
|
Closing inventories |
(200) |
|
(250) |
|
|
|
|
(1,080) |
|
(1,125) |
|
Gross profit |
|
720 |
|
795 |
|
Expenses |
|
(680) |
|
(750) |
|
Profit for the year |
|
40 |
|
45 |
|
Statements of financial position as at 30 September last year and this year |
|||||
|
|
|
Last year |
This year |
|
|
|
|
£000 |
£000 |
|
Non-current assets |
|
|
950 |
930 |
|
Current assets |
|
|
|
|
|
Inventories |
|
|
200 |
250 |
|
Trade receivables |
|
|
375 |
480 |
|
Bank |
|
|
4 |
2 |
|
|
|
|
579 |
732 |
|
Total assets |
|
|
1,529 |
1,662 |
|
Equity |
|
|
|
|
|
Fully paid £1 ordinary shares |
|
|
825 |
883 |
|
Retained earnings |
|
|
509 |
554 |
|
|
|
|
1,334 |
1,437 |
|
Current liabilities |
|
|
195 |
225 |
|
Total equity and liabilities |
|
|
1,529 |
1,662 |
|
The finance director has expressed concern at the increase in inventories and trade receivables levels and needs advice of how to better manage the company working capital.
Required:
(a) Show the managing director, by using the data given, how you would calculate ratios that could be used to measure inventories and trade receivables levels during last year and this year. (6 marks)
(b) Discuss the ways in which the management of Sparkrite Ltd could exercise control over
(i)inventories levels;
(ii)Trade receivables levels. (14 marks)
1. The answers to all three questions need to be written in a professional form an appropriate to the task.
2. A report or memo would be an appropriate format.
3. It is expected that in your answers you have a critical appraisal. This means that you would not list alternatives but offer suggestions as to the best solution. This is required for 2(b) and 3(b) in particular
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